Regulations Amending the Principal Protected Notes Regulations and the Deposit Type Instruments Regulations: SOR/2024-212
Canada Gazette, Part II, Volume 158, Number 23
Registration
SOR/2024-212 October 25, 2024
TRUST AND LOAN COMPANIES ACT
COOPERATIVE CREDIT ASSOCIATIONS ACT
P.C. 2024-1138 October 25, 2024
Her Excellency the Governor General in Council, on the recommendation of the Minister of Finance, makes the annexed Regulations Amending the Principal Protected Notes Regulations and the Deposit Type Instruments Regulations under
- (a) section 444.3footnote a of the Trust and Loan Companies Act footnote b; and
- (b) section 385.28footnote c of the Cooperative Credit Associations Act footnote d.
Regulations Amending the Principal Protected Notes Regulations and the Deposit Type Instruments Regulations
Principal Protected Notes Regulations
1 The title of the English version of the Principal Protected Notes Regulations footnote 1 is replaced by the following:
Principal-protected Notes Regulations
2 The definition principal protected note in section 1 of the Regulations is replaced by the following:
- principal-protected note
- has the same meaning as in subsection 627.01(1) of the Bank Act. (billet à capital protégé)
3 The English version of the Regulations is amended by replacing “principal protected” with “principal-protected”, in the following provisions:
- (a) the definition interest in section 1;
- (b) the portion of section 3 before paragraph (a) and paragraphs 3(e) and (f);
- (c) sections 4 and 5;
- (d) the portion of section 6 before paragraph (a);
- (e) the portion of section 8 before paragraph (a);
- (f) the portion of section 9 before paragraph (a);
- (g) sections 10 and 11;
- (h) the portion of section 12 before paragraph (a); and
- (i) subsection 13(1), the portion of subsection 13(2) before paragraph (a) and subsection 13(3).
Deposit Type Instruments Regulations
4 The title of the English version of the Deposit Type Instruments Regulations footnote 2 is replaced by the following:
Deposit-Type Instruments Regulations
5 (1) The definition deposit type instrument in section 1 of the Regulations is replaced by the following:
- deposit-type instrument
- has the same meaning as in subsection 627.01(1) of the Bank Act. (instrument de type dépôt)
(2) Section 1 of the Regulations is amended by adding the following in alphabetical order:
- interest rate benchmark
- has the same meaning as in subsection 627.01(1) of the Bank Act. (taux d’intérêt de référence)
6 Subparagraphs 3(1)(b)(ii) and (iii) of the Regulations are replaced by the following:
- (ii) the prime lending rate or the interest rate benchmark, as the case may be, that is used for the calculation of the rate of interest,
- (iii) the prime lending rate or the interest rate benchmark in effect when the information is disclosed, and
7 The English version of the Regulations is amended by replacing “deposit type” with “deposit-type”, in the following provisions :
- (a) the definition interest in section 1;
- (b) the heading before section 3;
- (c) the portion of subsection 3(1) before paragraph (a) and subsections 3(2) and (3);
- (d) sections 5 to 7; and
- (g) subsection 8(1) and the portion of subsection 8(2) before paragraph (a).
Coming into Force
8 These Regulations come into force on the day on which they are registered.
REGULATORY IMPACT ANALYSIS STATEMENT
(This statement is not part of the Regulations.)
Issues
The return on variable rate deposit-type instruments (DTIs) issued by financial institutions has historically often been pegged to a bankers’ acceptance rate, the Canadian Dollar Offered Rate (CDOR). Consistent with global benchmark reform efforts to move away from forward-looking bank credit-sensitive benchmark rates to benchmarks based on overnight risk-free rates, CDOR was fully replaced by the Canadian Overnight Repo Rate Average (CORRA) on June 28, 2024.
Definitions in the Deposit Type Instruments Regulations (DTI Regulations) and the Principal Protected Notes Regulations (PPN Regulations) refer to the bankers’ acceptance rate. As a result of the replacement of CDOR by CORRA, amendments are needed to definitions in the DTI Regulations and the PPN Regulations to maintain clear market consumer protection rules for distinct types of term deposit products.
Background
Since the 1980s, the basis for pricing a variety of loans, deposits, and other financial instruments in the Canadian market has been CDOR, a reference interest rate based on yield on bankers’ acceptances.
Bankers’ acceptances are short-term Canadian dollar money market assets and have been an important source of funds for small and medium-sized businesses that may not have access to primary funding markets due to size and/or credit ratings.
CDOR was initially developed to establish a daily benchmark reference rate for bankers’ acceptance borrowing and became the principal interest rate benchmark for calculating the variable-rate component of Canadian-dollar derivative products. CDOR became widely used as the basis for determining interest payments on floating-rate notes. The administrator of CDOR, Refinitiv Benchmark Services (UK) Limited, calculates and publishes CDOR tenors of varying lengths on a daily basis. Tenors set out a benchmark rate based on an average of submitted rates from contributor banks active in the bankers’ acceptance market.
Consistent with global benchmark reform efforts to move from forward-looking bank credit-sensitive benchmark rates to benchmarks based on overnight risk-free rates, the Canadian Alternative Reference Rate Working Group (CARR) was struck in 2018 to ensure Canada’s interest rate benchmark regime was adequately robust and resilient. CARR is made of up firms including banks, pension funds, insurance companies and other corporates.
CARR determined that aspects of CDOR’s architecture posed risks to future robustness and that it was not possible to reform CDOR. As a result, CARR recommended that the publication of CDOR be ceased and that a managed transition to CORRA was the most prudent approach.
Refinitiv Benchmarks Services (UK) Limited ceased publishing CDOR tenors on June 28, 2024. Following the discontinuance of CDOR, cash flows for any product that references CDOR depend on the fallback language in the product agreement.
DTIs and principal protected notes (PPNs) are defined in the regulations. DTIs, such as guaranteed income certificates, are low-risk products, as the holder is either guaranteed a fixed rate of return, or a variable rate of return based on institutions’ prime lending rate or bankers’ acceptance rate. PPNs generally offer greater growth potential than DTIs. However, while PPNs guarantee return of the holder’s principal investment, unlike DTIs, PPNs do not guarantee a rate of return beyond the principal. The return on a PPN may be tied to an index or reference point, such as the market price of a security, commodity, investment fund or other financial instrument. Unlike DTIs, return on a PPN cannot be tied to a bankers’ acceptance rate.
Financial institutions issuing DTIs and PPNs are subject to distinct consumer provisions relative to the two types of products. For example, the DTI Regulations provide DTI holders with a 10-business-day cancellation right in the event their institution automatically renews the DTI upon maturity without a new agreement. This right allows the DTI holder to withdraw their deposit in the event they do not wish to proceed on the terms set out by the institution. There are no equivalent requirements for PPNs.
Also, the PPN Regulations require that institutions issuing PPNs distinguish PPNs and fixed-rate investments with respect to their respective levels of risk and return. Institutions must also describe the circumstances when a PPN could be an appropriate investment and must disclose whether the PPN can be redeemed before maturity and whether such a redemption would result in the investor receiving less than the principal.
The DTI definition in the DTI Regulations uses the term “bankers’ acceptance rate” when describing how interest can be calculated for a variable-rate DTI. The PPN definition in the PPN Regulations also uses the term “bankers’ acceptance rate,” for the purpose of differentiating PPNs from DTIs. In both instances, the term “bankers’ acceptance rate” refers to CDOR. As CORRA is not a bankers’ acceptance rate, variable-rate DTIs bearing interest based on CORRA would not be explicitly captured by the existing DTI definition. Likewise, such products would not be explicitly excluded from the PPN definition. This represents a potential gap in consumer protection, as these regulations could be interpreted as to not apply to DTIs, where the policy intent has not changed.
Budget 2024 announced the Government’s intention to introduce amendments to the Bank Act to clarify the definitions of DTIs and PPNs, to ensure that term deposits issued based on interest rate benchmarks such as CORRA are deposit-type instruments. Legislation implementing that change was included in Division 17 of Part 4 of Bill C-69, which received royal assent on June 20, 2024.
Objective
The objective of the Regulations Amending the Principal Protected Notes Regulations and the Deposit Type Instruments Regulations (the amendments) is to ensure that the DTI and PPN definitions reflect Canada’s benchmark rate reform efforts. The amendments would ensure that variable-rate term deposit products with return based on CORRA remain captured by the DTI definition, as with variable-rate term deposit products whose return had been based on CDOR. The amendments would also ensure that CORRA-based variable-rate term deposit products would not be captured by the PPN definition. Maintaining this distinction will ensure that the appropriate consumer protections designed to apply to each category of product continue to be applied consistently.
Description
The proposal would amend DTI and PPN definitions in the DTI Regulations and the PPN Regulations by introducing a reference to the equivalent Bank Act definitions. The changes made to the Bank Act propose to reflect Canadian interest benchmark rate reform initiatives, replacing the definitions’ reference to a “bankers’ acceptance rate” with a reference to an “interest rate benchmark.” This change will ensure that term deposit products currently distinctly captured by the respective definitions continue to be captured, now that publication of all CDOR tenors ceased and it has been fully replaced by CORRA as of June 28, 2024.
Regulatory development
Consultation
In 2023, banks raised concerns with the Department of Finance (the Department) about the term “bankers’ acceptance rate” in the DTI and PPN definitions in the Bank Act and sought clarity with respect to the continuing application of the definitions following the end of publication of CDOR in June 2024.
Neither trust and loan companies nor cooperative credit associations have cited concerns with the definitions. However, changes to the definitions in the DTI Regulations and the PPN Regulations are required to maintain existing consistency in how products are categorized for the purposes of consumer protection measures, regardless of the type of issuing financial institution.
The amendments to the regulations were not pre-published in the Canada Gazette, Part I. The amendments are technical in nature, and are designed to ensure that financial products continue to be captured by existing consumer protections as intended following the discontinuance of CDOR.
Modern treaty obligations and Indigenous engagement and consultation
The amendments are not expected to impact potential or established Aboriginal or treaty rights, which are recognized and affirmed under section 35 of the Constitution Act, 1982.
Instrument choice
The DTI and PPN definitions are set out in the DTI Regulations and the PPN Regulations, respectively. The only way to amend the definitions is to amend these regulations. As such, no other instruments were considered.
Regulatory analysis
Benefits and costs
Costs
There are no anticipated costs associated with the amendments. The amendments are designed to provide explicit clarity to industry with respect to how certain types of investment products are either captured or not captured by two distinct definitions in the DTI Regulations and the PPN Regulations. The Department does not anticipate that the amendments will lead to significant changes in market conduct by federally regulated financial institutions.
Benefits
The amendments ensure that existing and new investment products intended to be captured separately by the distinct DTI and PPN definitions remain captured as intended, and therefore remain subject to distinct market conduct obligations set out in the DTI Regulations and PPN Regulations. Variable interest rate products with returns pegged to a bank’s prime rate or to CORRA will be treated as DTIs, while variable-rate investment products pegged to any other index or benchmark will be treated as PPNs.
There may be a risk in not undertaking the amendments, as new variable rate investments pegged to CORRA may be treated as PPNs by federally regulated financial institutions (FRFIs), and therefore would be subject to consumer provisions that were not intended for those products. For example, the DTI Regulations provide that DTI holders may cancel new DTI agreements with an FRFI within 10 business days if the FRFI has opted to issue a new DTI following maturity of the holder’s original DTI (see section 9 of the DTI Regulations). There is no equivalent requirement for FRFIs issuing PPNs.
The amendments will align the DTI Regulations and the PPN Regulations with equivalent changes to the Bank Act introduced in the Budget Implementation Act, 2024, No. 1, which received royal assent on June 20, 2024, ensuring consistent application of the DTI and PPN definitions, regardless of the type of FRFI issuing the DTI or PPN (e.g. bank, trust and loan company).
Small business lens
Analysis under the small business lens determined that this initiative will not impact small businesses in Canada.
One-for-one rule
The one-for-one rule does not apply to these amendments, as there is no change in administrative costs or burden to business.
Regulatory cooperation and alignment
Given the technical nature of the amendments, which do not represent a substantive change in policy, there is no regulatory cooperation or alignment component associated with the proposal.
Effects on the environment
In accordance with the Cabinet Directive on Strategic Environmental and Economic Assessment, a preliminary scan concluded that a strategic environmental assessment is not required.
Gender-based analysis plus
No gender-based analysis plus (GBA+) impacts have been identified for this proposal.
Implementation, compliance and enforcement, and service standards
Implementation
The amendments will come into force on the day on which they are registered
Compliance and enforcement
The Financial Consumer Agency of Canada (FCAC) oversees federally regulated financial institutions’ compliance with consumer protection requirements, including the DTI Regulations and the PPN Regulations. Following the amendments, the FCAC will remain responsible for monitoring financial institutions’ market conduct with respect to DTIs and PPNs. The amendments would not be expected to result in new compliance and enforcement requirements related to DTIs or PPNs.
Contact
Mark Radley
Director
Consumer Affairs
Financial Services Division
Financial Sector Policy Branch
Department of Finance Canada
90 Elgin Street
Ottawa, Ontario
K1A 0G5