Few countries can say their market did well during the global financial crisis of 2008. As its neighbours to the south began the rocky road to regain economic growth, Canada was able to retain a stable environment and earn a glittering reputation amongst global investors.
In the aftermath of the crisis there came a regulatory eruption that is still spewing smoke. With the G7 and Financial Stability Board, regulators came together to devise a plan that would create stability and prevent future crashes. As a member of the G7 summit, Canada “is complying and has compliance plans just like Europe has with the European Market Infrastructure Regulation (EMIR),” explains Jean Desgagné, president and CEO of The Canadian Depository for Securities (CDS).
Before the crisis struck, Canada had been in a strong position with no bankruptcies, a point Desgagné believes to be one of the reasons why Canada did so well in the crisis compared to its global peers. But as peers change to align with global and domestic demands, so must Canada.
“With every jurisdiction there is work to do,” says Desgagné. “I think we are in a good shape as we interface with our regulators.”
“There has been a lot of work by all stakeholders to navigate the environment and come to the right solutions for all involved,” adds Alistair Almeida, vice president of business development and relationship management for global financial institutions at CIBC Mellon. “While regulatory goals around the world are often aligned to shared principles—such as strengthening systemic stability and enhancing transparency—the particular requirements prescribed by regulators in Europe or the US do not always perfectly align with the guidance provided here in Canada.”
Though strict requirements have been put in place, Almeida says the regulations are there “to further reinforce the market”, rather than restrict it.
“Canadian regulators have what Canada’s top banking regulator once characterised as a ‘no surprises philosophy’ … regulators generally request comments from market participants on draft legislation, helping all parties identify and navigate challenges in advance,” says Almeida.
Almeida notes that Canadian banks met Basel III requirements “well in advance of the global timeframe”. The no surprise philosophy, along with a focus on the importance of “strong balance sheets and healthy capital ratios”, will help keep Canada moving forward as changes are made around them.
While there are links between Canada and the rest of the world, the biggest source of trading comes from the US where regulations such as the Dodd-Frank Act and the Foreign Account Tax Compliance Act (FATCA) have had an effect on trading compliancy.
For Desgagné in the depository sector, Dodd-Frank does not directly affect the business of his customers, but they are “very focused” on the steps that are being taken to comply with Dodd-Frank.
“Canadian banks and broker-dealers are putting in a significant amount of time, energy and money on compliancy issues,” he says. “Most Canadian participants trade either with a US product, or with US counterparties or with subsidies of US counterparties, so they have to worry about it.”
Introduced at the same time as Dodd-Frank, FATCA has created responsibilities that custodians cannot take on themselves. Almeida explains that in the past, custodians could make certain US tax filings on behalf of clients, but now “FATCA requires specific internal client information that we cannot access, as well as certifications that we cannot give on behalf of clients”.
However, there are some regulations that could work to Canada’s advantage. According to Desgagné, Europe’s move into TARGET2-Securities (T2S) could make the clearing industry far easier. “Historically we used to have to forge links between central securities depositaries (CSDs in Canada and CSDs in Europe, but in the future with T2S, getting access to one player in that space will give you access to the market.”
“One of the things that would make sense for any clearing firm in the world would be how you would use T2S to cement to links between Europe and your home market. That is something we are thinking about.”
Canada is one of the nation’s whose soverign debt is triple-A rated, and with its approach to staying aligned with global regulations, the nation will remain a favourite among investors.
With such a strong bond with the US trading markets, there has been some discussion of moving to T+1 settlement. Currently, the US is in the process of debating the move and the current regulatory requirement for Canada is to have “90 percent of trades matched on T+1 by noon”. Almeida explains: “We often look to align closely with the US market to support cross-border activity and cross-listed shares.”
The CDS has a strong relationship with the US Depository Trust Company and, as Desgangé says: “Like everyone we are having to build more strength around the edges to comply with new rules.” Moving into T+1 with the US would make trade matching an easier feat.
Though Canada shares $1.4 trillion in annual bilateral trade with the US, eyes are looking further out across the horizon and to the east. “We are seeing increased bilateral investment with China and South Korea,” says Almeida. “But there is a long way to go before these activities approach the volume of trade we maintain with the US.”
While there have been pressures that have arisen from regulatory rules and changes, Canada has taken them in its stride. “I do not expect that will change,” says Desgagné, “I think the regulators are going to continue the pressure. We are okay with that and we will keep reacting to that.”
He adds: “For us, the reputation that Canada has is well earned and hard earned and we do not want to squander that.”