FINA Committee Meeting

STANDING COMMITTEE ON FINANCE

COMITÉ PERMANENT DES FINANCES

EVIDENCE

[Recorded by Electronic Apparatus]

Wednesday, May 13, 1998

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[English]

The Chairman (Mr. Maurizio Bevilacqua (Vaughan—King—Aurora, Lib.)): I call this meeting to order. I'd like to take this opportunity to welcome officials from the Department of Finance: Douglas R. Wyatt, counsel, general legal services; Mr. John Grace, economist, finance sector division; Mr. Frank Swedlove, director, financial sector division, financial sector policy branch. We also have with us Mr. Robert Turnbull, senior legal counsel with the Bank of Canada.

Mr. Swedlove, I guess you have some introductory remarks, and then we will proceed to the question-and-answer session. Welcome.

Mr. Frank Swedlove (Director, Financial Sector Division, Financial Sector Policy Branch, Department of Finance): Thank you, Mr. Chairman.

We have provided to the clerk a copy of the short statement I'm going to make in both English and French.

The proposed Depository Bills and Notes Act updates federal legislation so that efficient market practices can be expanded to include a wider range of financial instruments. Specifically, the proposed legislation will make certain new types of financial instruments eligible to be held in a securities depository. It will also mean that when these instruments are traded in the market, the transfer of their ownership will be recorded by means of an accounting entry on the books of the depository rather than having the traded securities physically transferred between parties. The adoption of these practices will contribute to the safety and efficiency of the market for these instruments.

The use of central depositories and book-entry transfer is well established in Canada, with many types of financial instruments already eligible. However, certain types of instruments, namely those governed by the Bills of Exchange Act, are currently excluded because the Bills of Exchange Act has not been updated to accommodate their use. For example, the Bills of Exchange Act still refers to being in physical possession of a financial instrument when describing the rights of parties involved in a transaction. The limitations of the Bills of Exchange Act have prevented the movement of bankers' acceptances and commercial paper into depositories.

Rather than amending the Bills of Exchange Act, the proposed legislation creates a new act. It also establishes two new types of financial instruments to be known as depository bills and depository notes and provides a set of rules supporting their acceptance into a depository. The proposed act requires that these instruments state clearly on their face that they are either a depository bill or a depository note. The existing provisions of the Bills of Exchange Act will remain in force and apply to ordinary bills and notes that are not held in a depository.

The creation of this new legislation is supported by the financial community. An immediate benefit will be to provide the statutory basis for moving bankers' acceptances and commercial paper into the Canadian Depository for Securities, or CDS. With trading activity in these instruments second only to federal bonds and treasury bills, this move will make an important contribution to the efficiency of the Canadian securities market.

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Finally, Mr. Chairman, I would note that a related technical amendment to the Financial Administration Act has been included in this legislation. The FAA permits negotiable instruments such as Treasury Bills and government bonds to be traded in the market. However, there's a legal issue as to whether the definition of negotiable instrument includes government debt that is held in a depository and subject to book-entry transfer. The proposed amendment deals with this question of legal interpretation by replacing the term “negotiable instrument” with more general language.

This concludes my opening remarks, Mr. Chairman. We would be pleased to respond to any questions you may have.

The Chairman: Thank you very much, Mr. Swedlove.

We will now move to the question-and-answer session.

Mr. Szabo.

Mr. Paul Szabo (Mississauga South, Lib.): Thank you.

I have looked at the materials related to Bill S-9, and although I do understand that this is going to conform basically with legislation Ontario has enacted but does not apply to these because they're subject to the Bills of Exchange Act, there was a point in here that had to do with the rationale as to why we simply didn't amend the existing acts. It would seem to me it's always the first choice and the best choice not to have more bills governing a pool of legislative activity. I'm really curious as to how onerous it would have been simply to amend the existing legislation to incorporate two new instruments.

Mr. Frank Swedlove: You're right, Mr. Szabo. Certainly the first thing we looked at was amending the Bills of Exchange Act, but the decision was taken, in consultation with legal counsel, to proceed in this fashion. Maybe I'll ask Mr. Wyatt to respond to some of the difficulties associated with amending the Bills of Exchange Act.

Mr. Douglas Wyatt (General Counsel, General Legal Services Division, Department of Finance): We could have done it that way, and in fact it started off as a new part to the Bills of Exchange Act, but we found that there would have been so many clauses that said section X of the Bills of Exchange Act doesn't apply— There would have been a long list of sections that don't apply, and then there probably would have been an equal number of sections that do apply. We found that the overall effect was more confusing than having a new statute.

In fact, this is probably the first of a number of statutes that will come before Parliament and the provincial legislatures dealing with a legislative basis for book-entry systems, because even now the Uniform Law Conference of Canada is working on a more general federal-provincial statute dealing with book-entry transfer of shares, bonds for all different corporations, and stuff like that. It may very well be subsumed into that further legislation, but initially we found it was much cleaner to do it this way.

These instruments are quite different from what the Bills of Exchange Act applies to, such as your promissory note or mine. These are basically wholesale, commercial instruments. There is only one clearing house now in Canada that will be holding these. It was very limited application and there wouldn't be much confusion if we had a separate statute.

Mr. Paul Szabo: Are you of the opinion that over the longer term the changes you're making now would suffice and that we're not going to be into the same kind of thing again should other more creative instruments start to appear on the marketplace?

Mr. Douglas Wyatt: The new statue would probably be generic in applying to a type of instrument, so new instruments would probably fall under it. The financial markets are very creative, and it's very hard to say that we can enact something now that will be covered in 10 years' time, because they've shown a lot of ability to change very quickly. We're aware of that, but sometimes you just can't come up with the right words to encompass everything they can think of.

Mr. Paul Szabo: A subject matter that has been raised with regard to legislation generally is that it becomes a little more difficult for those who are not in full-time review of legislation or working with legislation to simply follow. I'm hoping we're always cognizant of ways to make our legislation and bills workable as well as understandable. I'll accept that this is the best option in this regard.

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The last question I have, Mr. Chairman, has to do with a statement that creating these bills and notes for book-entry purposes would improve the efficiency of the marketplace. Can you comment on how that efficiency is achieved or the rationale for saying it's going to be a more efficient marketplace?

Mr. Frank Swedlove: Simply the fact that now that one will be able to use a depository and allow book-entry transfer of commercial paper and bankers' acceptances it will increase the efficiency of that activity. In the absence of that, there has to be a physical movement of these documents from the purchaser to the seller.

Mr. Paul Szabo: So this is not a matter of creating a greater appetite for these kinds of instruments but rather simply the elimination of the administrative work.

Mr. Frank Swedlove: I would think that anytime administratively it's easier to trade these instruments, it will increase the attractiveness of it. I think they're related.

Mr. Paul Szabo: Fair enough. Thank you.

The Chairman: Thank you, Mr. Szabo.

Mr. Finlay, go ahead.

Mr. John Finlay (Oxford, Lib.): Thank you, Mr. Chairman. Not being a regular member of this committee, I have to ask a more simple question so that I understand what you're dealing with here.

In the third paragraph you say:

The use of central depositories and book-entry transfer is well established in Canada, with many types of financial instruments already eligible.

I wonder if you'd tell me what some of those are. Does that include treasury bills, my stocks, my bonds, etc.?

Mr. Frank Swedlove: Yes, it does include all of those.

Mr. John Finlay: When you say in the last paragraph:

—with trading activity in these instruments second only to federal bonds and treasury-bills—

—we are not starting something new. We're simply applying another method of safe keeping, transferring, and trading these things, which I used to carry around from the bank to businesses on my messenger route 30 or 40 years ago, into something that can be done by computer.

Mr. Frank Swedlove: That's right, Mr. Finlay.

Mr. John Finlay: So we've cut a few jobs in the meantime.

An hon. member: You have a new one now.

Mr. John Finlay: I liked the other one, actually.

Thank you, Mr. Chairman.

The Chairman: Ms. Redman.

Mrs. Karen Redman (Kitchener Centre, Lib.): Thank you, Mr. Chairman. I have a couple of I think fairly simple questions.

What are the major Canadian depositories?

Mr. Frank Swedlove: I'll ask the Bank of Canada to respond.

Mr. Robert G. Turnbull (Senior Counsel, Bank of Canada): Perhaps I can address that. The answer is quite simple. At this point there's only one depository service corporation in Canada that is handling debt and the settlement of debt and security instruments, and that's the Canadian Depository for Securities, based in Toronto.

There was a western-Canadian-based company up until I believe last year or a year and a half to two years ago called West Canada Clearing Corporation, which handled transactions that settled in the western part of Canada. Within the last year or so, CDS—the Canadian Depository for Securities—has taken over the operations of that other entity, so they are now the only securities depository and clearing house in Canada.

Mrs. Karen Redman: Do Canadians make use of foreign depositories?

Mr. Robert Turnbull: Yes, they do, for foreign securities denominated in foreign currencies. I think those most used are the depository and clearing houses in the U.S.—Depository Trust Corporation. There's also a branch or an agency of the Federal Reserve that clears and settles transactions in U.S. treasury bills.

You're quite right that there are similar organizations in all of the major industrialized countries.

Mrs. Karen Redman: Finally, who would be the regulatory authority over those depositories?

Mr. Robert Turnbull: The Bank of Canada, under the Payment Clearing and Settlement Act, which came into effect in 1996, is the federal regulatory oversight authority of payment clearing and settlement systems in Canada from the point of view of systemic risk.

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So the Bank of Canada is concerned about the risk posed to the financial system by clearing and settlement systems, including CDS. However, in the case of the Canadian Depository for Securities, CDS, because it settles transactions and securities, it also partly comes within the regulatory purview of the provincial securities commissions.

The securities commissions are more interested in the trades in the securities and how that interacts with the settlement of those trades. With the huge volume of financial transactions that are concentrated in an entity like CDS in some of its clearing services, the Bank of Canada, as federal regulator, is more concerned with the potential risks that could cause to the financial system if something went wrong.

Mrs. Karen Redman: Thank you.

The Chairman: Thank you.

Mr. Jackson.

Mr. Ovid L. Jackson (Bruce—Grey, Lib.): It would appear that people like Bill Gates are going to create some currencies, and I've heard it discussed that corporations might in turn end up with a currency different from the Canadian dollar. I don't know if it applies here. Are you guys doing any work in that direction, to try to control currencies that might occur like that?

Mr. Frank Swedlove: The issue of electronic money is a very interesting issue and one that has a number of interesting regulatory aspects to it. There has been work going on among the Ottawa agencies—the Department of Finance, the Bank of Canada, and the Office of the Superintendent of Financial Institutions—looking at what may be necessary to deal with issues related to electronic money. It doesn't directly relate to this legislation before us, but it is indeed a very important issue that the department and the other agencies are looking at very seriously.

The Chairman: Thank you, Mr. Jackson.

Mr. Martin.

Mr. Keith Martin: Merci, monsieur le président.

I'm not a finance individual, but perhaps you can educate me on a point. If these depository notes are the same thing as a promissory note— is there a difference between them? If there isn't a difference, why have them, in view of promissory notes or in addition to promissory notes?

Mr. Douglas Wyatt: Let me put it this way. They are like a promissory note, but what we're doing is trying to segregate the promissory note you might issue with one issued by General Motors, if I can put it that way, because while you may give a promissory note to your banker and he holds it, General Motors issues $500 million in promissory notes, called commercial paper, and it's basically a wholesale operation. So what we're creating here is a separate regime for General Motors's promissory notes, because General Motors will give what we call a global note to CDS, and then CDS will record on its books the interests of different participants as they buy it. It's the wholesale market as opposed to an individual or retail market in that sense. The structures are the same. Commercial paper now is a promissory note issued by a corporation.

Mr. Keith Martin: Thank you.

The Chairman: Further questions?

I'd like to thank Mr. Turnbull, Mr. Wyatt, Mr. Swedlove, and Mr. Grace for their presentation.

I'm going to ask the committee if we can now move to clause-by-clause consideration. I say this because on the agenda it was specified that clause-by-clause consideration be given at 4.30 p.m. We are a little bit ahead of schedule, but I would ask for unanimous consent to proceed, if that is possible. Is that okay?

Some hon. members: Agreed.

The Chairman: Pursuant to Standing Order 75(1), consideration of clause 1 is postponed.

(Clauses 2 to 21 inclusive agreed to)

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(Clause 1 agreed to)

The Chairman: Shall the title carry?

Some hon. members: Agreed.

The Chairman: Shall the bill carry?

Some hon. members: Agreed.

The Chairman: Shall I report the bill to the House?

Some hon. members: Agreed.

The Chairman: Thank you everybody. Mr. Finlay, Mr. Jackson, thank you very much for joining us today and helping us out with the study of this bill. I want to thank everyone on the panel for helping us out, and, Mr. Martin, thank you for joining us.

I just want to remind you that the next meeting of the finance committee, meeting number 87, will be held Tuesday, May 26, 1998, from 9 a.m. to 11 a.m., in room 362 East Block. At that point in time we will be studying a report of the technical committee on business taxation, better known perhaps as the Mintz report.

The meeting is adjourned.