The Canadian Financial System
Report for Congress
The Canadian Financial System
June 10, 2002
Barbara L. Miles
Prepared by The Lyndon B. Johnson School of Public Affairs
The University of Texas at Austin
Congressional Research Service ˜ The Library of Congress
The Canadian Financial System
In light of the major changes in financial regulation introduced by the Gramm-
Leach-Bliley Act of 1999 (GLBA, P.L. 106-102), the significant security and
operational concerns connected with the events of September 11, and the failure of
Enron Corp., the scope, structure, operations, and functions of the U.S. financial
system are receiving a heightened level of attention. However, the United States is
not unique in facing fundamental questions about markets and regulation. A number
of other nations have instituted basic changes and overhauls in their financial
systems. This report provides a descriptive overview of the Canadian financial
system. While the Canadian and American systems are generally similar in structure
and function, there are significant differences in market and regulatory practices, and
comparison may yield useful insights for oversight of the U.S. financial system.
The Bank of Canada, like the U.S. Federal Reserve, plays a pivotal role in
maintaining the macroeconomic stability of the Canadian economy. The Canadian
central bank implements monetary policy primarily through regulation of the interest
rate on overnight loans between banks. Unlike the Federal Reserve, the Bank of
Canada has few regulatory powers and does not provide check clearing services.
Regulation of commercial banking is in most respects similar to the U.S. model.
The industry, perhaps because of the smaller market, is dominated by six large banks,
which account for 92% of total industry assets. Canadian banking is a world leader
in the provision of electronic services to both retail and institutional customers.
Canada’s securities industry, although it is regulated at the provincial rather than
the national level, displays a striking degree of harmonization among regulators and
markets. Half a dozen provincial exchanges have been transformed into one market
for blue-chip stocks, one for stock derivatives, and one for start-up companies and
penny stocks. A notable difference from U.S. market structure is that six of the seven
largest securities firms are owned by banks. (The seventh is Merrill Lynch Canada.)
Other financial intermediaries – insurers, trust and loan companies, and mutual
funds – function much as their U.S. counterparts do, although the regulatory roles of
federal and provincial governments do not always correspond to U.S. practice.
Canada has confronted the same mismatches between marketplace
developments in financial services and traditional industry and regulatory boundaries
that made enactment of GLBA so difficult in the United States. Recent legislation
has imposed similar regulatory and governance requirements on financial institutions
in different industries, based (for example) on their size, rather than on the particular
products and services they sell. The regulatory jurisdictions of federal, provincial,
and self-regulatory organizations have been modified to protect consumers while
allowing innovation in services and technology to continue.
This report describes Canada’s financial system; comparisons to U.S. and other
systems are for the most part left to the reader. It will not be updated.
The Bank of Canada................................................1
Bank of Canada - Monetary Policy................................2
Policy variable category.....................................4
Implementation of Monetary Policy...........................6
Commercial Banking System.........................................9
Predominance of Six Large Banks............................10
Geographic Distribution of Banks............................11
Trends in Direct Lending Income and Direct Fee Income..........12
Automated Clearing Settlement System.......................13
Large Value Transfer System................................13
Canadian Deposit Insurance Corporation (CDIC)................15
Ownership Rules for Banks.................................17
Foreign Bank Branches and Activities.............................18
Canadian Banks’ Foreign Operations.........................18
American and Other Foreign Banks’ Operations in Canada........18
Foreign Banks’ Activities in Canada..........................19
Legislation Affecting Foreign Banks’ Operation in Canada........19
Requirements for Foreign Banks to Establish Full-service or
Securities Dealers and Markets......................................21
History of the Canadian Securities Industry........................21
Structure of the Canadian Securities Industry.......................22
Profitability and Capital....................................22
Canadian Capital Markets......................................22
Toronto Stock Exchange...................................23
Canadian Venture Exchange................................25
Foreign Securities Activities....................................27
Securities Regulatory Authorities............................28
Canadian Securities Administrators...........................29
The Canadian Investor Protection Fund........................32
Other Financial Intermediaries.......................................32
Life Insurance Companies......................................32
Trust and Loan Companies.....................................35
Mortgage Loan Companies.................................36
Mutual Fund Companies.......................................38
Summary of Canadian Financial Regulation............................39
The Modern History of the Canadian Regulatory System..............39
Appendix A: Guide to Intervention for Federal Financial Institutions:
Appendix B. Acronyms............................................55
List of Tables
Table 1: Key Monetary Policy Variables................................4
Table 2: Distribution of Assets, Deposits and Branches in the Canadian
Table 3: Market Shares of the Six Largest Domestically Chartered Banks,
as of Oct. 31, 2001............................................11
Table 4: Geographic Distribution of Bank Branches: 2000 ...............11
Table 5: Largest Foreign Bank Subsidiaries, by Assets...................18
Table 6: Bank Ownership of Full-service Securities Firms.................21
Table 7: Market Share of Canadian Corporate Financing..................22
Table 8: Ten Largest Stock Exchanges by Market Capitalization of
Domestic Companies: 2000.....................................24
Table 9: Top Five Life Insurance Firms by Assets: 2000..................34
Table 10: Regulatory Reforms for Trust and Loan Companies Under the
Financial Consumer Agency of Canada Act........................37
For questions or further information, please contact Barbara L. Miles, Congressional
Research Service, 7-7804.
The Canadian Financial System
In light of the major changes in financial regulation introduced by the Gramm-
Leach-Bliley Act of 1999 (P.L. 106-102), the significant security and operational
concerns connected with the events of September 11, and the failure of Enron Corp.,
the scope, structure, operations, and functions of the U.S. financial system are
receiving a heightened level of attention. A large number of financial issues ranging
from reform of deposit insurance to the possibility of federal chartering and
regulation of insurance companies are all currently on the legislative agenda of
Congress. However, the United States is not unique in facing fundamental questions
about financial markets and regulation. A number of other nations have instituted
basic changes and overhauls in their financial systems. This report provides a
descriptive overview of the Canadian financial system. While the Canadian and
American systems are generally similar in structure and function, there are significant
differences in market and regulatory practices, and comparison may yield useful
insights for oversight of the U.S. financial system.
The following report provides a description of the scope, operations, functions
and regulatory framework of the Canadian financial system. The first section focuses
on the Bank of Canada and its role and functions including monetary policy
operations. The second section focuses on the private banking system, the third on
securities dealers and stock exchanges, and the fourth on other financial
intermediaries. The final section provides a historical and institutional overview of
financial regulation in Canada, including a summary of recent legislation.
Unless otherwise noted, all money amounts in this report are given in Canadian
The Bank of Canada
The Bank of Canada is the country’s central bank. The Bank of Canada Act of
1934 defines the role of the bank: “to promote economic and financial well-being of
Canada.”1 Founded in 1934 as a private corporation, it became a Crown Corporation2
in 1938, belonging to the federal government. The Bank has considerable autonomy
to carry out its responsibilities: monetary policy, central banking services, issuing
bank notes, and administering public debt. The management structure of the Bank
of Canada is as follows:
1 Bank of Canada Act. [http://laws.justice.gc.ca/B-2/3990.html]
2 A Crown Corporation is a public enterprise that functions much like a private corporation.
It is wholly owned by the government and is accountable to Parliament through a minister.
In general, a Crown Corporation is created through a special act of Parliament that sets out
in broad terms the mandate, powers and objectives of the corporation.
!The Board of Directors is responsible for managing the Bank and
includes the Governor, the Senior Deputy Governor, 12 outside
directors and the Deputy Minister of Finance.
!The Governor of the Bank of Canada is the Bank’s chief executive
officer and has full authority over the Bank’s businesses. The
Governor and the Senior Deputy Governor are appointed by the
outside directors with the approval of the Governor in Council
(Federal Cabinet) for a term of seven years. Since the Bank of
Canada was founded there have been seven Governors. The current
one, David A. Dodge, was appointed Governor in February 2001.3
!Subject to the approval of the Governor in Council, Directors are
appointed by the Minister of Finance to fill vacant seats on the
Board for three-year terms. Directors are mainly responsible for
three aspects in the Bank:
i.) keeping the Bank informed about relevant economic
conditions in their respective regions;
ii.) ensuring the Bank is managed competently according to the
general policies and corporate objectives; and
iii.) appointing the Governor and Senior Deputy Governor.
Bank of Canada - Monetary Policy
While the enabling legislation of the Bank of Canada gave it jurisdiction over
national monetary policy, it was unclear before 1967 whose policy would prevail
should there ever be a major disagreement between the Minister of Finance and the
Governor of the Bank. In 1967, an amendment to the Bank of Canada Act specified
the means through which the Government would have the right to override the
Bank’s monetary policy decisions. To do so, the Minister of Finance would have to
publish the reasons for his dissatisfaction, indicating both the new measures that the
Bank should undertake as well as the period during which the actions should be
applied. The intent of the amendment has been understood to be applicable only
when there is a fundamental disagreement between the Minister of Finance and the
Governor, and that should it ever be used, the Governor would resign. Additionally,
the amendment was intended to balance the rights of the democratically elected
government to determine policy while maintaining the operational independence
required by the Bank. To date, this action has never been taken by the Minister of
Fi nance. 4
In practice, monetary policy at the Bank is developed by the Bank’s Governing
Council (consisting of the Governor, the Senior Deputy Governor, and the four
3 Bank of Canada. “Management Structure.” [http://www.bankofcanada.ca/en/manage.htm]
4 Thiessen, Gordon, “Can a bank change? The evolution of monetary policy at the Bank of
Canada (1935-2000), lecture Oct. 17, 2000, p. 7.
Deputy Governors appointed by the Bank’s Board of Directors). The Council’s
monetary policy is developed by consensus, and it uses a calendar of eight
predetermined dates on which it announces any new monetary policy actions,
followed by the publication of its formal monetary policy report to the government.
There are no recorded votes, and no transcripts or minutes are taken of any monetary
policy meetings. Assisting the Governing Council is the Monetary Policy Review
Committee which consists of the Governing Council, the Bank’s General Counsel,
the Special Adviser to the Governor, other Advisers to the Governor, the chiefs of the
four economic departments, the Financial Markets Department Directors in Toronto
and Montreal, and two senior Communications Department officers.5
Like all central banks, monetary policy at the Bank of Canada has gone through
several evolutions. Since February 1991 the focus of Canadian monetary policy has
been primarily on inflation-reduction targets.6 The policy was introduced through a
joint statement with the Minister of Finance, making Canada only the second country
in the post-World War II period (New Zealand was first) to introduce inflation
targets.7 Although the Bank had been considering becoming more explicit about its
inflation objective, the timing of the policy change was in part influenced by the
introduction of a new federal goods and services tax (GST). The use of inflation
targets was seen as a way to mitigate the effect on inflation expectations that would
follow as a result of the one-time jump in prices generated by the GST. In addition,
the government had also expressed an interest in having an inflation targeting
agreem ent . 8
In May 2001, the government of Canada and the Bank of Canada agreed to
continue for another five-year period the inflation-control target policy: “The best
contribution monetary policy can make…is to preserve confidence in the value of
money by providing individuals and businesses with the certainty of a stable, low-
inflation environment for their economic decisions.”9
Under the inflation-control target system, the government and the Bank jointly
announce a target range for inflation. Since December 1995, this has been 1 to 3%.
The Bank aims to hit the 2% target midpoint over an 18-24 month horizon.10 The key
monetary policy variables monitored by the Bank fall into three general categories:
monetary conditions, monetary aggregates, and inflation indicators. Table 1 below
summarizes these key variables.
5 From interview with officials of the Bank of Canada, Nov. 7, 2001.
6 Thiessen, Gordon, “Can a bank change? The evolution of monetary policy at the Bank of
Canada 1935-2000,” lecture Oct. 17, 2000, p. 11.
7 Ibid, p. 12.
8 Information provided by the Bank of Canada via e-mail correspondence dated March 19,
9 Bank of Canada News Release, “Joint Statement of the Government of Canada and the
Bank of Canada on the Renewal of the Inflation-Control Target”, Ottawa, May 17, 2001.
10 Information provided by the Bank of Canada via e-mail correspondence dated March 19,
Table 1: Key Monetary Policy Variables11
Policy variablePolicy variableDescription
MonetaryMonetaryA weighted sum of the changes in the
conditionsconditions indexshort-term interest rate (the 90-day
commercial paper rate) and the exchange
rate (as measured by the C-6 Index) from
a given base period.
Note: The C-6 Index is an index of the
trade-weighted exchange value of the
Canadian dollar against the U.S. dollar,
the euro, the yen, the U.K. pound, the
Swedish krona, and the Swiss franc. The
weights are calculated using the trade
flows between Canada and the countries
in the index.
90-day commercialThe rate the Bank of Canada estimates
paper ratefor the operative market trading levels of
C-6 trade-weightedThe C-6 exchange rate is an index of the
exchange rateweighted- average foreign exchange
value of the Canadian dollar against
major foreign currencies. Weights for
each country are derived from Canadian
merchandise trade flows with other
countries over the three years from 1994
through 1996. The C-6 index broadens
the coverage of the old G-10 index to
include all the countries in the EMU.
MonetaryGross M1Currency outside banks plus personal
aggregateschequing accounts plus current accounts
plus certain adjustments.
M1++M1+ plus non-chequable notice deposits
held at chartered banks, trust and
mortgage loan companies, and credit
unions and caisses populaires less
interbank non- chequable notice deposits
plus continuity adjustments.
11 Bank of Canada Summary of Key Monetary Policy Variables, available online:
[http://www.bankofcanada.ca/en/graphs/a1-table.htm], last accessed: March 6, 2002.
Policy variablePolicy variableDescription
M2++M2+ plus Canada Savings Bonds plus
cumulative net contributions to mutual
funds other than Canadian dollar money
market mutual funds (which are already
included in M2+).
InflationCPIA measure of price movements, produced
indicatorsby Statistics Canada and obtained by
comparing the retail prices of a
representative “shopping basket” of
goods and services at two different points
Core CPIA variant of the CPI that excludes the
eight components with the most volatile
prices—which account for 16 per cent of
the CPI basket—(fruit, vegetables,
gasoline, fuel oil, natural gas, mortgage
interest, intercity transportation, and
tobacco products) as well as the effect of
changes in indirect taxes on the
Yield spreadAre based on actual mid-market closing
betweenyields of the selected long-term bond
conventional andissue. At times, some of the change in the
Real Return Bondsyield that occurs over a reporting period
may reflect switching to a more current
issue. Yields for Real Return Bonds are
mid-market closing yields for the last
Wednesday of the month
CPIXExcludes the eight most volatile
components from the CPI as well as the
effect of indirect taxes on the remaining
CPIWAdjusts each of the CPI basket weights
by a factor that is inversely proportional
to the component’s variability.
Unit Labor CostsAre defined as aggregate labour income
per unit of output (real GDP at factor
IPPI (finishedIndustrial Product Price Index for
products)finished products comprises the prices of
finished goods that are most commonly
used for immediate consumption or for
Average hourlyData for average hourly earnings of
earnings ofpermanent workers are from Statistics
permanent workersCanada’s Labour Force Information
Implementation of Monetary Policy.
Monetary policy implementation in Canada is distinctly different from the
current practice used by the U.S. Federal Reserve. The Canadian banking system
operates without reserve requirements. As a result, the Bank of Canada focuses on
tools that allow it to influence the market for the use of bank surplus transaction
balances. The Bank of Canada exercises a more direct influence on interest rates, in
comparison to the U.S. Federal Reserve’s system of manipulating the size of the
General Framework of Monetary Policy Implementation.
The overnight interest rate serves as the mechanism whereby the Bank’s
monetary policy actions are transmitted through the economy, ultimately affecting
total spending and inflation. The overnight interest rate is defined as “the rate at
which major participants in the money market borrow and lend one-day funds to each12
other.” In practice, financial institutions are engaged on a daily basis in the clearing
and settlement of payments. At the end of the day some institutions will have surplus
settlements balances while others will have deficit balances. The overnight interest
rate is the rate that is paid on the surplus balances lent to the institutions that need
funds to cover their deficit balances.
The Bank has created a framework designed around this daily system of
payment clearing and settling which allows it to influence the overnight interest rate.
In initiating a monetary policy action, the Bank first announces a target for the
overnight rate after which the Bank creates an operating band. This sets an upper
limit interest rate above the target rate and a lower limit below the target rate. At the
end of the payment settlement day, institutions with deficit balances are allowed to
borrow from the Bank at the upper limit of the operating band (defined as the Bank
Rate). Institutions with surplus balances are eligible to receive interest from the
Bank at a rate equal to the lower limit of the operating band.
Since institutions with surplus balances know they can receive an interest rate
equal to the lower limit of the operating band, they have no incentive to lend their
balances at a rate below the operating band. Conversely, since institutions with
deficit balances know they can borrow at a rate equal to the Bank Rate (the upper
limit of the operating band), they have no incentive to pay at a rate above the
operating band. As a consequence, the Bank’s framework encourages all market
participants to clear the overnight money market at an interest rate that is within the
Bank’s operating band without direct market participation by the Bank.
The Mechanics of Monetary Policy Implementation.
The two primary systems through which payments are cleared and settled in
Canada are the Large Value Transfer System (LVTS), introduced in February 1999,
12 Bank of Canada Online Glossary, available online:
[http://www.bankofcanada.ca/en/glossary/glossovernight.htm], last accessed: March 6,
and the Automated Clearing Settlement System (ACSS). The LVTS handles large-
value electronic payments while the ACSS handles paper-based payment items such
as checks. While the target rate for both markets is the same, the Bank utilizes
different operating bands for the two systems, the range for the LVTS being narrower
than the ACSS. Given the dollar volume difference in the two systems, $26.0
trillion13 LVTS and $5.3 trillion ACSS in calendar year 2000,14 the LVTS is where
the Bank focuses its primary attention when conducting monetary policy operations.15
In describing the mechanics of monetary policy implementation the remainder of the
report will focus primarily on the LVTS, with noticeable ACSS differences
highlighted when applicable.
The primary action components for the implementation of the Banks’ monetary
!announcements of the target rate;
!open market transactions taken to maintain the target rate;
!neutralization of government and Bank of Canada flows;
!pre-settlement trading by market participants.
Target Rate Announcements.
The implementation process begins with the announcement by the Bank of a
change in the operating band. The decision to change or not change the target rate is
made by the Governing Council. The announcements are made at 9:00 a.m. (Eastern
Time) on the effective date of the change. In December 2000, the Bank of Canada
switched to a system of eight pre-specified dates for announcing any changes to the16
operating band and thus the bank rate
Open Market Transactions.
For both the LVTS and the ACSS, the Policy Target Rate for overnight funds
is defined as the midpoint of the operating band. The operating band for the LVTS
is 50 basis points (0.50%). Thus, if the upper limit of the LVTS was 3.50%, the lower
limit would be 3.00% and the Policy Target Rate would be 3.25%. The operating
band for the ACSS is 150 basis points (1.50%). In order to maintain the overnight
rate near the specified Policy Target Rate, the Bank is prepared to enter into open
market operations. These open market operations involve either the purchase of
Special Purchase and Resale Agreements (SPRAs) or the sale of Sale and Repurchase
13 All dollar amounts are Canadian unless otherwise noted.
14 Canadian Payments Association Statistics, available online:
[http://www.cdnpay.ca/eng/pub/pub-e.htm#Statistics], last accessed: March 6, 2002.
15 Bank of Canada, “The Framework for the Implementation of Monetary Policy in the
Large Value Transfer System Environment” (Jan. 1999). p. 13.
16 Bank of Canada Information/Consultation Paper, available online:
[http://www.bankofcanada.ca/fixed-dates/], last accessed: March 6, 2002.
“At 11:45, if overnight funds are generally trading above the indicated target
level, the Bank will enter into SPRA transactions. That is, the Bank will offer to
transact SPRAs in amounts up to individual predetermined limits. Conversely, if
overnight funds are generally trading below the indicated target level, the Bank will
enter into SRA transactions in amounts up to predetermined limits. If the overnight
rate is trading around the target level, the Bank will not intervene.”17 In practice, the
Bank’s open market transactions are minimal.
Neutralizing Government and Bank of Canada Flows.
The Bank’s operating band framework provides strong cost incentives for
market participants to adjust their settlement positions in the market, rather than rely18
on the Bank’s facilities. Thus, if the Bank’s facilities are not used, the market
participants should be holding roughly zero balances at the end of the settlement day.
In order to allow the market participants to achieve close to zero settlement balances,
the Bank must take actions to neutralize the impact of public sector monetary flows.
Since the Bank acts as the government’s banker, any net disbursement or receipt
by the government on a given day will result in an increase or decrease in the
settlement balances of the market participants.19 To offset the net public sector flow,
the Bank engages in transactions that adjust the amount of government deposits held
by market participants.
Deposits of government funds are maintained among market participants in the
form of financial instruments called Receiver General Deposits. Receiver General
Deposits mature and are auctioned on a daily basis by the Bank of Canada. In
practice, the Bank knows by 3:00 p.m. (Eastern Time) what the net flow of public
sector funds will be on a given day. As a result, the net flow is offset through the
difference between the total amount of Receiver General Deposits maturing and the
amount that is auctioned off back into the market. That is, if there is a net increase
in settlement balances as a result of a net disbursement by the government, the
amount of Receiver General Deposits auctioned by the Bank will be less than the
amount of Receiver General Deposits maturing. The difference will be equal to the
net disbursement. The reverse will occur in the case of a net receipt of funds by the20
Pre-Settlement Trading Period.
In order to assist market participants in achieving roughly zero settlement
balances, the Bank has established a half hour Pre-Settlement Trading Period that
begins after the close of client transactions conducted through the LVTS. The
purpose of the Pre-Settlement Trading Period is to allow market participants with
17 Bank of Canada, “The framework for the implementation of monetary policy in the Large
Value Transfer System environment” (Jan. 1999). p. 8.
18 Ibid, p. 8.
19 Ibid, p. 9.
20 Ibid, p. 9.
deficit balances to cover their deficits with loans from participants with surplus
balances, thus achieving close to zero settlement balances. On normal days, the
market clears any large surplus and deficit balances without calling upon the Bank’s
overnight facilities in any significant fashion. In practice, the Bank supplies a small
positive amount of settlement balances as banks do not find it cost effective to trade
small amounts of overnight cash late in the trading day.21
Commercial Banking System
The private banking system that developed in Canada is quite different from that
in the United States. A different philosophy in the U.S. encouraged the development
of independent local banks, while in Canada a system with a preference for limited
numbers of banks with multiple branches prevailed.
Canadian banking institutions play a pivotal role in the delivery of financial
services and act as the driving force behind Canada’s financial system. While
relatively few banks operate in Canada, the existing institutions offer a wide array of
services and provide customers with access through both traditional and
technological means. An examination of banking institutions, services provided,
geographic distribution of banking resources and the integration of technology in the
banking industry reveals a thriving and independent banking industry in Canada.
As of May 2000, there were 49 banks operating in Canada, 11 of which were
domestically chartered, while the remaining 38 were foreign bank subsidiaries.22
These 49 banks serve an estimated 20 million retail customers nationwide through
an extensive network of over 8,300 bank branches.23 Domestically, these banks
employ roughly 236,000 people,24 or about 1.5% of the Canadian workforce.25
Despite a relatively small market, Canadian banks manage well over $1.5 trillion in
assets and currently hold over $1 trillion in deposits.26
Like banks worldwide, Canadian banks provide personal and commercial
banking, wealth management, and corporate and investment banking services.
21 Information provided by the Bank of Canada via e-mail correspondence dated March 19,
22 Canadian Bankers Association, Canadian Bank Facts: The Annual Guide to Canada’s
Banking Industry, May 2000, p. 3.
23 Ibid., p. 6.
24 Canadian Bankers Association, “Employment Figures by Province as of July 31, 2000,”
25 Ibid., p. 4.
26 Busseri, Heather, Media Relations Officer, Canadian Bankers Association.
Personal and commercial banking services include checking and savings accounts,
loans, mortgages, letters of credit, insurance, cash management and a full line of
services to small and medium sized businesses. Wealth management includes
individual estate planning, mutual funds, trust services, managed asset programs,
financial planning and a full line of discount brokerage services. Finally, corporate
and investment banking services encompass corporate finance, derivatives, global
trading, mergers and acquisition services, merchant banking and asset
Predominance of Six Large Banks.
While there are 49 banks operating in Canada, six large Canadian banks hold
the vast majority of the nation’s assets and deposits. These banks are the Royal Bank
of Canada, Canadian Imperial Bank of Commerce (CIBC), Toronto Dominion Bank
(TD), Bank of Nova Scotia, Bank of Montreal, and National Bank of Canada. Table
2 outlines the relative size of each bank in terms of its assets, deposits and number
of bank branches.
Table 2: Distribution of Assets, Deposits and Branches
in the Canadian Banking Industry
Bank nameAssets ($CDN billions)Deposits($CDN billions)Number ofbranches
Royal Bank of Canada$360$2331,800
CIBC $287 $194 1,274
Bank of Nova Scotia$284$1861,380
Bank of Montreal$239$1541,144
National Bank of$76$51824
Six Bank Totals:$1,534$1,0127,659
Note: Dollar figures as of 10/31/01; number of branches as of 12/31/00.
Source: Canadian Bankers Association.
In relation to the overall size of the Canadian banking industry, it is obvious that
the six large banks dominate the industry. As of October 31, 2001 all Canadian
banks managed roughly $1.7 trillion in assets, 92% of which is managed by the top
six. Their dominance is further highlighted when examining their market share of
deposits, loans and assets in relation to other domestically chartered banks, as shown
in Table 3.
27 Canadian Bankers Association, Canadian Bank Facts: The Annual Guide to Canada’s
Banking Industry, May 2000, p. 6.
Table 3: Market Shares of the Six Largest Domestically
Chartered Banks, as of Oct. 31, 2001
Royal Bank of Canada23.1%23.5%22.6%
CIBC 15.4% 15.7% 15.0%
Bank of Nova Scotia18.3%20.0%18.1%
Bank of Montreal18.5%16.0%18.8%
National Bank of Canada4.9%5.1%5.0%
Total: 98.7% 98.1% 98.3%
Source: Canadian Bankers Association.
Geographic Distribution of Banks.
Representative of its population, Canadian banking resources are scattered
throughout the country with concentrations in Ontario, Quebec, and British
Columbia. Accordingly, these areas have a substantially larger numbers of both bank
branches and employees. Table 4 presents data on the distribution of both bank
branches and employees by region.
Table 4: Geographic Distribution of Bank Branches: 2000
ProvinceBank branches# of Employees
Newfoundland 148 1,920
Prince Edward Island34560
Quebec 1,777 39,690
Ontario 3,599 126,510
Manitoba 315 6,395
Saskatchewan 296 4,975
Alberta 715 18,475
Yukon/N.W . T./ 38 365
Source: Canadian Bankers Association.
Canadian banks pride themselves on the integration of technology into the
banking industry. Over 57% of all payment transactions and 85% of all banking
transactions are completed electronically.28 Moreover, Canadians lead the world in
automatic banking machine (ABM) usage, with an average of 53 ABM transactions
per person annually, followed by the United States and Sweden.29 Canadians are
also number one in debit card purchases, just ahead of the Netherlands and France,
with an average of 45 debit transactions per person annually.30 Finally, Canada leads
the world with debit card terminals as well. There are nearly 13,000 terminals per
one million people. A distant second is the United Kingdom with roughly 10,000
terminals per one million people.31
Trends in Direct Lending Income and Direct Fee Income.
Direct fee income has become an increasingly larger share of Canadian banks’
overall revenues. Over the last five years, direct fee income has increased over 80%,
while direct lending income has remained virtually stagnant, increasing only 7%. In
fact, from 1996 to 1999, direct lending income experienced no growth. Clearly,
providing services has become an important part of an investment banks’ operations.
Direct service income accounted for 21% of banking revenue in 2000, up from14%
The Canadian Payments Association was created by an act of Parliament in
1980, and was charged with setting up a national payments system. Its membership
is composed of all the deposit taking institutions in Canada, of which 40% are banks.
The remaining 60% consists mainly of trust companies and credit unions. These
members all belong to statutory deposit insurance plans, which insure each account
for up to $60,000. The exceptions to this rule are credit unions, which have their
own special regulations.33
In 1996, Canada decided to set up a Payments System Advisory Committee to
review the payments system and the CPA Act of 1980. In particular, the committee
wanted to review the Large Value Transfer System (LVTS) that was set to come on
line in 1999 to handle large value electronic transfers. The committee produced a
series of reports that described the status of the payment system and made
recommendations for the future. The committee reports were positive overall, seeing
the Canadian payment system as one of the finest in the world. As a main
28 Canadian Bankers Association, Canadian Bank Facts: The Annual Guide to Canada’s
Banking Industry, May 2000, p. 12.
32 Canadian Statistics. [www.statcan.ca].
33 Canadian Payments Association. [www.cdnpay.ca].
recommendation, the committee wanted to continue encouraging more payments to
take place electronically.34
Automated Clearing Settlement System.
The payment system consists of two parts, the Automated Clearing Settlement
System (ACSS) and the Large Value Transfer System (LVTS). The ACSS settles
paper check and automated banking machine transactions, and was the only system
in place until 1999. Checks are processed electronically at regional centers, and
private companies are in charge of transporting the checks. It takes no more than two
days for a check to clear anywhere in Canada. In fact, the payment system is so
efficient that banks credit accounts at the time of deposit. Canadians have the option
of paying bills and procuring other services, such as buying groceries, electronically.
Employers can also pay their employees electronically. The ACSS accounts for
almost 90% of the volume of electronic payments.35
Large Value Transfer System.
The LVTS deals with inter-bank transfers and transfers between banks and other
financial institutions. To be part of the LVTS a bank has to meet the technical
requirements of the system and keep a reserve amount with the Bank of Canada.
Currently, 14 banks are set up on the LVTS infrastructure. Other banks can offer
LVTS services if they have an agreement with one of the 14 banks to process their
transactions.36 The LVTS offers transactions that are in real time and runs credit
checks on institutions making transfers. Once a transaction has been made, it cannot
be reversed. Having irreversible transactions that take place in real time is essential
to the smooth operation of the system. The built-in credit reviews help to ensure that
the institutions involved in the LTVS are sound. Accounts are settled at the end of
the day, which saves the Bank of Canada administrative costs since it does not have
to settle balances after each transaction.37 As noted above, the Bank of Canada also
uses the LVTS in the conduct of monetary policy.
Unlike other central banks, the Bank of Canada does not play a direct role in the
regulation of the national financial system except with respect to the payments
system. Bank regulation is a responsibility of the Office of the Superintendent of
Financial Institutions (OSFI) and of the Canadian Department of Finance. The
Department of Finance is directly responsible for the process of policy formulation:
preparation and evaluation of the legislation. OSFI also plays a role in the
34 “Payment System Review Discussion Paper,” July 31, 1998. [www.fin.gc.ca].
35 “An Overview of the Types of Payments Flowing Through the Automated Clearing
Settlement System,” Nov. 1998. [www.cdnpay.ca].
36 “LVTS Overview,” April, 2000. [www.cdnpay.ca].
37 “LVTS: Real-Time Irrevocable Payments via Canada’s Wire Transfer System” April
development of regulations and legislation, but the Department of Finance is
ultimately responsible for the implementation.
The Office of the Superintendent of Financial Institutions (OSFI) is a
government agency, established in July 1987 by an act of Parliament that merged the
Department of Insurance and the Office of the Inspector General of Banks. It
regulates and supervises all federally chartered, licensed, or registered banks;
insurance, trust, loans, and investment companies; cooperative credit associations;
fraternal benefit societies; and pension plans.38
The Superintendent is appointed by the Governor in Council per section 5(1) of
the OSFI Act. The appointment is not subject to parliamentary approval.39 The
Superintendent is accountable to the Minister of Finance and has a seven-year term.
He or she works closely with the Advisory Board of OSFI, which makes
recommendations on the agency’s responsibilities and internal operations. The board
may have between five and seven members. All serve for a period of three years, with
the possibility of a second term. In the beginning of the mandate, the superintendent
becomes the chairman of the board, but over time one of the other members takes
OSFI is responsible for administering five important acts: Trust and Loan
Companies Act, Insurance Companies Act, Bank Act, Cooperative Credit
Associations Act and Pension Benefits Standards Act.41 The agency has several
major responsibilities, the most important of which are:
!to strengthen public confidence in the system by evaluating the
financial risks taken by institutions, and
!to supervise the institutions’ activity in order to avoid stakeholders’
(depositors, members of pension plans, and insurance policyholders)
To achieve these goals, OSFI has the right to inspect the solvency and liquidity
of financial institutions. It also oversees compliance with laws and regulations. The
cost of supervision is assessed to the financial institutions being supervised.43
38 Binhammer, H; Sephton, P. “Money, Banking and the Canadian Financial System,”
Thompson Learning, 2001.
39 Interview with Tony Maxwell, Director of Foreign Relations, OSFI, Nov. 16, 2001.
40 Office of the Superintendent of the Financial Institutions. “About OSFI.” Online.
Available: [http://www.osfi-bsif.gc.ca/eng/about/advbrd.asp]. Accessed: Oct. 4, 2001.
41 OSFI. Annual Report 2000-2001, p. 9. Online. Available: [http://www.osfi-
bsif.gc.ca/eng/publications/osfireports/pdf/osfi01eng.pdf]. Accessed: Oct. 4, 2001.
42 Office of the Superintendent of Financial Institutions. “How We Regulate.” Online.
Available: [http://www.osfi-bsif.gc.ca/eng/how/index.asp]. Accessed: Oct. 4, 2001.
43 Binhammer, H; Sephton, P. “Money, Banking and the Canadian Financial System.”
Thompson Learning, 2001.
OSFI recognizes that the senior management of a particular institution is
responsible for avoiding financial failure of the company. OSFI’s main goal is, by
early intervention, to avoid failures and to minimize losses to depositors and
policyholders. The three most common reaction strategies include: change of
management; selling the entity or parts of it to a third party liquidator; or shutting the
organization down while there is still some positive net worth.44 However, in case of
shutdown, the Minister of Finance has the authority to override a decision made by
OSFI on grounds of “public good.” If the Minister believes that the closure will have
a negative impact on the public, he can “assume responsibility” for the organization
and keep it open.45 The Minister of Finance has authority to create a new financial
institution, and may issue a letter of patent approving the creation. From there, OSFI
establishes the operating procedures and the corporation is then responsible to
OS FI. 46
In 1999 OSFI developed a framework to evaluate the material risks of a
particular institution and assess its management’s risk control practices. The
framework rests on several rules targeting well-recognized risks and areas of
concern, and it is carried out by OSFI supervisors. Intervention is proportionate to
the risk profile of the institution, and all important management functions (e.g.
internal audits) are subject to supervision.47
In March 2001, OSFI supervised approximately 500 financial institutions and
1200 pension plans. Forty were under direct supervision.48 In 1995 OSFI, in
cooperation with the Canada Deposit Insurance Corporation (CDIC), introduced a
Guide to Intervention for Federal Financial Institutions, which sets guidelines for
efficient and timely response to signs of potential financial failure in supervised
institutions. The guide describes the actions that should be taken according to the
seriousness of the situation.49 The guide recognizes five different stages of financial
stability, and defines the corresponding actions of OSFI and CDIC.
Canadian Deposit Insurance Corporation (CDIC).
In an attempt to further stabilize the Canadian financial system, Parliament
established the Canadian Deposit Insurance Corporation (CDIC) under the Financial
Administration Act of 1967. Accountable to Parliament through the Minister of
Finance, the CDIC is charged with insuring deposits in banks, trust companies, and
loan companies against loss.50 Independent from governmental subsidies, the CDIC
45 Interview with Tony Maxwell, Director of Foreign Relations, OSFI, Nov. 16, 2001
47 Office of the Superintendent of Financial Institutions. “How we Regulate.” Online.
Available: [http://www.osfi-bsif.gc.ca/eng/how/index.asp]. Accessed: Oct. 4, 2001.
49 Ibid. (See Appendix A on p. 43).
50 Canadian Deposit Insurance Corporation, “About Us” accessed at:
draws its operating budget from insurance premiums and funds collected from failed
institutions. However, it is important to note that citizens are ultimately liable when
a member institution fails. The CDIC operates under the Canadian Deposit
Insurance Corporation Act, which delineates its responsibilities and powers.51
A nine member Board of Directors composed of the Chairman, the Governor
of the Bank of Canada, the Deputy Minister of Finance, the Superintendent and
Deputy Superintendent of Financial Institutions, and four private sector
representatives governs the CDIC.52 The Canadian Deposit Insurance Corporation
Act requires the Board of Directors “to administer the affairs of the Corporation in
all things.” The Chairman of the Board is an appointed position with a five-year term.
Ex-officio members, those representing other governmental agencies, change only
with personnel changes in the respective agencies. Private sector directorships are
rotational in nature, but with no specified term limit.53
Only eligible institutions and accounts are covered by deposit insurance.
Preliminary eligibility requirements include: (1) the monies must be held in Canadian
currency and payable in Canada; (2) repayable no later than five years from the date
of deposit; and (3) monies must be held at a CDIC member institution.54 Moreover,
the CDIC only insures specific types of accounts. Insurance eligible accounts
include: savings and checking accounts; term deposits and debentures issues by loan
companies; and money orders, drafts, and certified checks.55 All eligible accounts
at one member institution are covered for a maximum of $60,000. Joint accounts,
deposits held in trust, and retirement accounts each qualify for an additional $60,000
in deposit insurance.56
The CDIC serves as a regulatory body for deposit taking institutions and defers
to the Office of the Superintendent of Financial Institutions for bank examining
purposes. The CDIC’s five primary responsibilities are57 to establish conditions and
standards governing the terms on which insurance is provided, decide and control
entry as to which applicants obtain insurance, actively monitor and assess the
ongoing performance of insured institutions and their risk to the insurance fund
(including the ability to undertake annual and special examinations and to access all
[http://www.cdic.ca/?id=4]. Last accessed on 4/21/02.
52 Canadian Deposit Insurance Corporation, “Organization and Structure” accessed at:
[http://www.cdic.ca/?id=57]. Last accessed on 4/21/02.
54 Canadian Deposit Insurance Corporation, “How Deposit Insurance Works” accessed at:
[http://www.cdic.ca/?id=1]. Last accessed on 4/21/02.
57 Canadian Deposit Insurance Corporation, “General Responsibilities of a Deposit Insurer”
accessed at: [http://www.cdic.ca/?id=96]. Last accessed on 4/21/02.
the information it needs about member institutions), set insurance premiums, and
take appropriate action and impose penalties, where necessary, against institutions
that are operating outside the established risk and business conduct parameters
(including the cancellation of insurance).
Ownership Rules for Banks.
Different ownership restrictions apply to three classes of banks and their bank
holding companies (BHCs), based on their equity: large banks and BHCs with equity
of $5 billion or more, mid-sized banks and BHCs with equity of $1 billion to $5
billion, and small banks and BHCs with equity of less than $1 billion.
Large banks continue to be widely held, but the meaning of “widely held” has
changed. A widely held institution should not have a major shareholder holding
more than 20% of any class of the institution’s voting shares or more than 30% of
any class of its non-voting shares. A major shareholder is subject to a fit and proper
test and the approval of the Minister of Finance. A large bank, therefore, must have
at least five unrelated shareholders. This more flexible approach is designed to
encourage strategic alliances and joint ventures with these large entities.
The National Bank of Canada, the Laurentian Bank of Canada, and the Canadian
Western Bank, all banks with equity of less than $5 billion, are deemed to be large
banks and, therefore, cannot be acquired. The Minister, however, has the power to
re-categorize these banks as mid-sized. As discussed below, if re-categorized, these
banks may be acquired. Under Bill C-8, the government can review merger
proposals for large banks. The government plans to implement a public merger
Mid-sized and Small Banks.
A major shareholder, including domestic or foreign financial institutions and
commercial enterprises, is allowed to hold up to 65% of the voting shares of a mid-
sized bank. The remaining 35% must be publicly traded on a Canadian stock
exchange and may not be owned by a major shareholder. This is a significant change
from the previous rules, permitting commercial enterprises to establish a significant
presence in the Canadian banking sector.
There are few ownership restrictions on shareholders of small banks.
Commercial enterprises, other than ones that engage in automobile leasing activities,
are permitted to wholly own a small bank. Commercial owners of mid-sized and
small banks are subject to a pre-approval review of their financial resources, business
experience, reputation and the transparency of their corporate structures, among other
Bank Holding Companies.
For the first time, banks may be held by regulated, widely held, non-operating
BHCs incorporated under the Bank Act. Holding company structures permit banks
the choice of moving activities that they currently conduct either in-house or in a
subsidiary to an affiliate of the bank. Depending on the activity, an affiliate of the
bank owned by a BHC may be subject to lighter regulation. The holding company
option permits banks greater structural flexibility to compete with regulated and
specialized firms, and to enter into strategic alliances. Generally, the ownership
restrictions applicable to BHCs are very similar to those for banks, based on their
Foreign Bank Branches and Activities
Canadian Banks’ Foreign Operations.
Canadian banks have a long history of involvement in international finance. On
average, foreign business accounts for about 40% of their earnings and in some cases
it is considerably higher. The majority of this business is with the United States.
However, for more than a century, Canadian banks have also had an important
presence in the Caribbean. Today, they are among the most important financial
institutions in some Caribbean commonwealth countries. Recently, Canadian banks
have also expanded their activities in Latin America and Asia.
According to the Canadian Bankers Association, 49% of the earnings of the six
largest banks are now made outside Canada, 23% of the taxes paid by the industry
are coming from foreign countries, and 10% of bank employees are located outside58
American and Other Foreign Banks’ Operations in Canada.
There are now 42 foreign bank subsidiaries and six foreign bank branches in
Canada. The six authorized foreign bank branches are: The Chase Manhattan,
MBNA Canada, National City, Mellon Bank (N.A. Canada Branch), Morgan
Guarantee Trust Company of New York, and U.S. Bank National Association. The
largest foreign bank subsidiaries operating in Canada are shown in Table 5 below.
Table 5: Largest Foreign Bank Subsidiaries, by Assets
(In Millions of Dollars)
HSBC Bank of Canada$24,721.7
CITIBANK of Canada$10,456.9
Bank of America – Canada$8,990.7
Deutsche Bank of Canada$8,821.8
Societe Generale of Canada$5,271.1
Source: Canadian Bankers Association.
58 The Canadian Bankers Association’s Response to Bill-C-8, p. 4
[http://www.cba.ca/eng/cba_on_the_issues/reports/billc8.cfm] , last visit 12/21/01.
Foreign Banks’ Activities in Canada.
The major activities of foreign banks in Canada are: retail banking, small-
business lending, investment banking, discount brokerage and branch banking.
Traditionally, foreign banks have entered Canada for corporate lending to the
subsidiaries of their multinational clients. In recent years, however, several foreign
banks have established, or expanded, a presence in markets such as credit cards,
investment banking, and discount brokerage. In the era of globalization, they are
competing with Canadian banks on their home turf.
HSBC is a wholly owned subsidiary of London-based HSBC Holdings PLC.
It is, by far, Canada’s largest foreign bank subsidiary, and has approximately 140
offices and branches throughout Canada. Its total assets are about $25 billion.59
BCI, a member of the Intesa Group with headquarters in Milan, has established
13 branches, which ranks second by number of branches. ING Direct relies entirely
on electronic banking and ABMs, and is based in Amsterdam. It now has over
300,000 Canadian customers and $3.2 billion in assets. Amex Bank of Canada is
a major foreign issuer of credit cards in Canada.
Legislation Affecting Foreign Banks’ Operation in Canada.
Since reaching a peak of 59 in 1987, the number of foreign bank subsidiaries in
Canada declined to 45 in 1998. Their share of total banking sector assets, which
stood at about 12% in 1990, fell to less than 10% by the end of 1998. Foreign banks
have indicated that existing regulatory requirements make it difficult for them to
compete. In order to help sustain a viable foreign bank presence in Canada, the60
options available to foreign banks may need to be broadened.
During the past two decades, Canada has encouraged the liberalization of the
regulatory framework governing international financial institutions, including the
right to establish new entrants. Consistent with this, Canadian regulatory barriers to
entry by foreign financial institutions have been largely eliminated. Foreign banks
have been permitted to establish subsidiaries in Canada since 1980, and they are now
eligible to open branches. In addition, other important restrictions on financial
services were eliminated under the Canada-U.S. Free Trade Agreement, the North
American Free Trade Agreement, and the World Trade Organization Agreement.
Consistent with the freedom being offered to domestic financial institutions
through allowing financial holding companies, changes to foreign bank entry rules
provide foreign banks with greater choice. Foreign entities are allowed to hold more
than one banking entity in Canada (e.g., a lending branch, a full service branch, and
bank subsidiaries may be held concurrently). Bill C-8 also provides foreign banks
59 The Canadian Financial System – Canada’s Chartered Banks
[http://www.fin.gc.ca/toce/1995/fctshtsum95-e.html], last visit 02/03/02.
60 Background on Foreign Bank Entry Bill [http://www.fin.gc.ca/news99/data/99-
that have no deposit taking entities in Canada with virtually unrestricted investment
powers. As such, the foreign bank entry provisions have the potential for increasing
In addition to the existing option of establishing a foreign bank subsidiary in
Canada, Bill C-8 offers foreign banks the option of establishing either a full-service
branch or a lending branch. Both types of branches have essentially the same
business powers as foreign bank subsidiaries and domestic banks, except with respect
to deposit taking. A full-service branch is not permitted to take retail deposits, but
can take deposits above $150,000. A lending branch, on the other hand, is not
permitted to take deposits, large or small, or borrow from the Canadian public.
Lending branches are primarily in the business of making loans in Canada.
The main advantage of including two types of branches in the foreign bank entry
regime is that regulatory requirements can be tailored more closely to the activities
of a foreign bank’s operations in Canada. For example, in light of the nature of their
liabilities in Canada, lending branches are required to deposit only $100,000 in
approved assets with an unaffiliated Canadian financial institution. Lending branches
are also subject to less frequent examination by Office of the Superintendent of
Financial Institutions (OSFI) than full-service branches.
The ability to reduce Canadian regulatory requirements for foreign bank
branches relative to subsidiaries stems from the fact that no Canadian retail
depositors’ funds are at risk. In addition, satisfactory regulation by the home country
regulator is one of the conditions for allowing individual foreign banks to set up
branches in Canada. While foreign bank branches are exempted from many
regulations, it should be emphasized that they are regulated financial institutions in
Canada. They are, for example, subject to federal regulations respecting such things
as the cost of borrowing and the disclosure of interest and other charges. In addition,
certain guidelines issued by OSFI apply to foreign bank branches, covering such
things as accounting practices and deterring and detecting money laundering. Federal
regulation and oversight of foreign bank branches are essential to safeguarding the
interests of consumers and enhancing the stability of the Canadian financial sector.
The branching regime is designed to give foreign banks the same opportunities
to compete in the Canadian financial services market as Canadian financial
institutions. Canadian banks are subject to full regulation and are not permitted to
establish lightly-regulated financial institutions to serve particular market niches.
Similarly, foreign banks that choose to operate a lightly regulated lending branch are
not permitted to also operate a fully regulated bank subsidiary or full-service branch.
Foreign banks are permitted to operate both a bank subsidiary and a full-service
Requirements for Foreign Banks to Establish Full-service or
A foreign bank must obtain approvals from the Minister of Finance and the
Superintendent of Financial Institutions in order to establish a branch in Canada.
Provisions in the Bank Act provide guidance with respect to these approvals by
setting out certain minimum requirements, as well as factors to be considered.
Among other things, a foreign bank is required to show that:
!it is capable of making a contribution to the Canadian financial
!it is a bank in its home country and is regulated in a manner
acceptable to the Superintendent; and
!its principal activity is the provision of services that would be
permitted by the Bank Act if they were provided by a Canadian bank.
Securities Dealers and Markets
History of the Canadian Securities Industry
Canada’s securities industry dates back to 1832, when the shares of Canada’s
first railroad were traded in a Montréal coffee house. Canada’s first stock exchange,
the Montreal Stock Exchange, was incorporated in 1874. The first Canadian
securities underwriters were the chartered banks, but by the turn of the century the
industry was dominated by independent securities firms, such as Wood Gundy and
Company, and Dominion Securities.
Until the late 1980s, most Canadian securities firms were owned by their senior
partners. Increasing demands on capital, an environment of intensified global
competition, increasing market volatility, and cyclical earnings performance made
this partnership structure difficult to maintain. A major ownership realignment of the
securities industry took place after the removal of provincial foreign ownership
restrictions and the elimination of federal restrictions on the ability of federal
financial institutions to own securities dealers in 1987. The purchase of securities
firms was particularly attractive to Canada’s banks, which wanted to offer customers
a one-stop financial services provider. Currently, all but one of Canada’s large, full-
service securities firms (Merrill Lynch Canada) are bank-owned (see Table 6).
Table 6: Bank Ownership of Full-service Securities Firms
BMO Nesbitt BurnsBank of Montreal
CIBC World MarketsCanadian Imperial Bank of Commerce
National Bank FinancialNational Bank of Canada
RBC Dominion SecuritiesRoyal Bank of Canada
Scotia CapitalThe Bank of Nova Scotia
TD SecuritiesThe Toronto-Dominion Bank
Structure of the Canadian Securities Industry
At the end of 1999, there were 188 securities firms operating in Canada. Of
these, seven can be considered large integrated full-service firms, offering a wide
range of services. Of the remainder, 53 firms primarily service the institutional
market, and 128 are concentrated in retail brokerage. The total number of firms
increased by 26% between 1993 and 1997 and has remained fairly constant since.
In 1999, securities firms assisted corporations in raising $39 billion in debt and
$21 billion in equity. Table 7 gives an indication of the major participants in the
corporate underwriting market. Securities firms also assisted provincial governments
in raising $25 billion in debt, and participated in the syndication and auction of $50
billion in Government of Canada marketable bonds.
Table 7: Market Share of Canadian Corporate Financing
Securities firmMarket share
RBC Dominion Securities15.5 %
BMO Nesbitt Burns13.8 %
CIBC World Markets12.7 %
Scotia Capital10.2 %
TD Securities9.7 %
Merrill Lynch6.8 %
In 1999, gross revenues of the industry were about $8.8 billion. Of this amount,
$6.2 billion (70%) was accounted for by the large full-service firms, $1.1 billion
(13%) went to firms geared to the institutional market, while $1.5 billion (17%) was
earned by retail brokerage firms. The retail brokerage group has exhibited the
greatest revenue growth in percentage terms since 1993. Employment in the
securities industry increased steadily for most of the 1990s.
Profitability and Capital.
Net income for the industry increased 47% to $582 million in 1999, from $395
million in 1998. However, this result is still well below the record net income of
$850 million set in 1996. The return on equity (ROE) of the securities industry as a
whole has been superior to that of deposit-taking institutions and insurers. Within
the industry, there has been a considerable gap between the performance of bank-
owned and independent securities dealers. In 1998, bank-owned dealers achieved an
ROE of 17.7% compared to an ROE of 10.6% for the independent dealers. At the
end of 1999, the regulatory capital of the securities industry in Canada totaled $8.7
billion. Close to 70% of this was accounted for by the large, full-service firms.
Canadian Capital Markets
In recent years, the established Canadian stock exchanges underwent a major
realignment in order to allow them to better compete with exchanges abroad and the
new electronic entrants to the Canadian market. The Toronto Stock Exchange (TSE)
is now the sole senior equity market in Canada. The Montreal Exchange (ME) has
assumed responsibility for all derivatives trading.61 The Canadian Venture Exchange
(CDNX), created through a merger of the Alberta Stock Exchange and the Vancouver
Stock Exchange, is now Canada’s major junior equity market Securities exchanges
in Canada, such as the TSE, are self regulating organizations (SROs). The principal
function of a stock exchange is to bring together buyers and sellers. Traditionally,
trading on most of the major exchanges has been by auction through open outcry,
whereby traders confront each other directly to bargain over price. Recently, the
traditional open-outcry floor-trading system of the exchange has been supplemented,
and in many cases replaced, by a computer system, the electronic order books.
Notably, there is no longer a trading floor at TSE. Stock trading is also conducted by
brokerage firms and investment dealers over-the-counter (OTC). 62 Many of these
stocks traded in OTC markets are stocks of companies that because of their small size
do not qualify for listing on the exchanges. Some companies prefer to have their
stocks traded in OTC markets to avoid the exchanges’ listing fees. The Canadian
Dealing Network, formerly the Canadian Over-the-Counter Trading System, was
formed in 1986 as an electronic quotation- and trade-reporting system for OTC
stocks. In late 1999, it joined the Canadian Venture Exchange (CDNX) along with
the Winnipeg Stock Exchange.
A circuit-breaker policy was implemented in Canada on January 2, 2002.
Adopted by all Canadian and American exchanges, this measure allows an exchange
to temporarily suspend trading should the Dow Jones index drop more than 10% in
a single day.
Toronto Stock Exchange.
TSE is the premier stock exchange in Canada, capturing 98% of trading on
Canadian exchanges. In 2000, it had a market capitalization of $1.4 trillion, with
1,421 listed companies from all sectors of the Canadian economy. All transactions
utilize electronic trading technology. The TSE, with a domestic market capitalization
of US $789 billion, was the world’s seventh largest stock exchange in 1999 and had
total trading of just over US $332 billion. In 2000, more than 40 billion shares
traded, worth more than Canadian $944 billion, which is an 86% increase over 1999,
about Canadian $3.8 billion a day in share transactions. The TSE 300 Composite
Index performed among best in the world with an annual compound return of 7.41%.
In 2000, it facilitated 58 initial public offerings (IPOs), a 65% increase over 1999.
61 A small number of Quebec-based junior equities remain listed on the ME.
62 OTC is a market where trades are mainly conducted over the phone.
Table 8: Ten Largest Stock Exchanges by Market Capitalization
of Domestic Companies: 2000
( $US billions)
New York Stock Exchange$11,432
NASDAQ Stock Market$5,205
Tokyo Stock Exchange$4,455
London Stock Exchange$2,855
Toronto Stock Exchange$789
Italian Stock Exchange$728
SWX Swiss Exchange$693
Source: International Federation of Stock Exchanges
The most commonly-used Canadian stock indexes are based on stocks listed on
the TSE. A new index, S&P/TSE 60TM, was launched on December 31, 1998. This
index is comprised of 60 blue-chip companies in leading industries from the TSE 300
Composite IndexR. The new index will eventually replace the Toronto 35, TSE 100
and TSE 200 indices. Because a number of equity products (e.g., options, futures,
participation units) and other index-linked financial products (e.g., index-linked
guaranteed investment certificates) currently trade off the Toronto 35 and TSE 100,
the phase-out period for these indices has not yet been set and is expected to be
On April 3, 2000, the TSE became the first stock exchange in North America
to demutualize, or to convert its business structure from a membership association
to a stock corporation. It became a for-profit company known as the Toronto Stock
Exchange Inc. In conjunction with the change, the market regulation function was
separated from the for-profit business operations. A new independent division, TSE
Regulation Services, was created to avoid conflict of interest. Regulation Services
operates on a cost-recovery basis. In 2000, the overall revenue of TSE was $235.5
million, which was up 47% over 1999. Operating expenses – $107.4 million – were
below 1999 levels, resulting in net income of $80.5 million. On August 1, 2001, he
Toronto Stock Exchange completed its acquisition of the Canadian Venture
Exchange Inc. (CDNX). The two markets now operate as one corporate entity,
containing separate junior and senior exchanges. These markets will continue to
work on a complementary and co-ordinated basis. According to a study in 2000 by
the Conference Board of Canada on the costs of going public in Canada and in the
United States, it costs less to complete an IPO on the TSE than it does on any other
major North American exchange.
The Investigations and Enforcement Division of TSE has many duties, including
investigating manipulative and insider trading. In addition, they enforce rules that
apply to brokers, for example, brokers must ensure that the best possible market price
is obtained for clients, and brokers may not trade ahead of client orders in an attempt
to take advantage of non-public information concerning imminent trades. Lastly,
they monitor pre-marketing activities by securities issuers and their representatives
Canadian Venture Exchange.
The CDNX, which is the national junior equity market and successor to the
former Vancouver, Alberta, and Winnipeg Stock Exchanges and the Canadian
Dealing Network, began trading on November 29, 1999. With offices in Toronto,
Calgary, Vancouver, Winnipeg and Montreal, CDNX offers services across the
country. Trading is conducted through its TradeCDNXTM system. As of December
Starting in November 1999 with an index set at 2000, the CDNX index broke 4,000
in early 2000, reaching a peak of 4471.84 in March. Relative to 1999, its revenues
and expenses (excluding merger and restructuring costs) for the year 2000 increased
by 33% to $46.0 million and by 17% to $ 38.9 million, respectively, for an increase
of $7 million in operating earnings.
CDNX is Canada’s public venture capital marketplace, providing emerging
companies with access to capital while offering investors a regulated market in which
to make venture investments. CDNX-listed companies are active in the mining, oil
and gas, manufacturing, technology, financial services and other sectors. CDNX
takes a special interest in the technology and industrial sectors. As a niche market for
early-stage companies, it seeks to provide a middle step between start-up status and
listing on senior markets such as the TSE, NASDAQ and AMEX. In the year 2000,
45 companies “graduated” from CDNX to the TSE, representing 38% of the TSE’s
new listings. Total market capital at graduation was $8.37 billion and the market
capital growth for the year prior to graduation was 302%. Graduating firms included
eSoft, Genetronics, Forbes Medi-Tech, Burntsand and Cell-Loc.
There are three ways to list companies on CDNX: initial public offering (IPO),
reverse takeover (RTO) and, for proven entrepreneurs with a public market track
record, a capital pool company (CPC). Companies listed on CDNX are classified in
three tiers. Tiers 1 and 2 each have initial listing requirements based on a company’s
financial performance, stage of development, and financial resources at the time of
listing. Tier 1 is CDNX senior tier and Tier 2 represents innovative, early stage
companies. Most CDNX listed companies trade on Tier 2. Each tier has its own
minimum listing requirements for net tangible assets, property or reserves; prior
expenditure; recommended work program; working capital and financial resources;
earnings or revenues; distribution; market capitalization and float; reports
requirements; and other criteria. Tier 3 is reserved for those companies that were
previously quoted on the Canadian Dealing Network. Industry segments within each
tier also have specific minimum listing requirements.
Companies are classified into five segments: mining; oil and gas; technology or
industrial; research and development; real estate or investment. Companies must also
have directors, officers, and a corporate governance structure in compliance with
Exchange requirements; be sponsored by a CDNX member firm; and submit all
necessary agreements and documentation. In addition to the listing requirements,
CDNX has also requirements and rules for tier maintenance and inter-tier movement,
trading halts, suspensions and delisting. Penny shares (shares traded for under one
dollar) are primarily traded on CDNX and the OTC market.
The Market Surveillance Department of CDNX performs post-trade monitoring
on market activities, and assumes the responsibility of monitoring and reviewing
listed company activities, and detects breaches of listing policies or the listing
agreement. The Market Regulation Department conducts investigations into alleged
violations of securities trading. The CDNX Conduct Review Committee determines
whether a cause for discipline exists.
Now known as the Canadian Derivatives Exchange, the Montreal Exchange
(ME) was established in 1874, as Canada’s first stock exchange. In 1975, it was the
first Canadian exchange to list options and, soon after, to establish a major futures
market. As the result of the market realignment, the ME ceased trading junior listing
equity securities on October 1, 2001 and became the market for financial derivatives
trading in Canada. The ME offers a wide range of derivative products on stocks,
stock indexes, bonds, banker’s acceptances, and other financial assets. Its main
derivative products include: single stock futures (FNT, which were introduced in
January 2000), S&P Canada 60 Index futures (SXF), three-month Canadian banker’s
acceptance futures (BAX), five-year Government of Canada bond futures (CGF), 10-
year Government of Canada bonds futures (CGB), options on the ten-year
Government of Canada bonds futures (OGB), and options on three-month Canadian
bankers’ acceptance futures (OBX). In 2000, options on iUnits S&P/TSE 60 Index
Participation Fund (XIU) and S&P Canada 60 Index Options and Long Term Option
(SXO) were launched. It also offers clearing services through its corporation, the
Canadian Derivatives Clearing Corporation. (CDCC).
4,861,030 contracts of equity options with a value of $2.56 billion were traded
in 2000, which was an increase of 227% over the previous year. However, the ME
had revenues of only $31.7 million in 2000, a decrease of 14% from 1999. This is
due mainly to the revenue loss resulting from the restructuring of the Canadian
exchanges in 1999, especially the transfer of the large capitalization market to the
TSE. Equity options trading continued to set new records in 2001 with a total annual
volume of 5,203,143. Long-term equity options traded increased by 7% from the
previous year. Daily and monthly volume records were also set in 2001. The equity
products based on the S&P/TSE 60 Index showed a 10% decrease in volume of
trading, whereas the CGB achieved an impressive 22% volume increase over the
previous year. The interest rate contracts had a mixed year, as the BAX experienced
a 15% decline.
Following the demutualization of the TSE, the ME was demutualized on
September 25, 2000. The ME completed its transition to a fully electronic trading
platform, the SAM (Montreal Automated System) in December 2001. This makes
ME the first traditional derivatives exchange in North America to become fully
As in other countries, technological change has spurred the emergence of new
players in Canada’s securities exchange environment. Firms such as Instant and
VERSUS Technologies Inc., which operate in the U.S. as alternative trading systems
(ATS), have entered Canada. Canadian securities regulators are presently re-
examining ATS regulation as part of a larger review of equity market regulation.
NASDAQ is another new player entering the Canadian market. On November 12,
2000, NASDAQ Canada commenced operations, with 10 securities dealers initially
participating in the trading of all NASDAQ-listed securities directly from Montreal.
Foreign Securities Activities
Canadian corporate and government issuers have been tapping foreign capital
markets since the late 1800s. This is one factor which has led Canadian securities
firms to establish offices in the United States, Europe and, to a more limited extent,
Asia. In 1999, net new bond financing abroad by Canadian corporate issuers totaled
$8 billion, compared to $12 billion within Canada. Government issuers, which in the
past have made extensive use of foreign debt markets, reduced their foreign exposure
in 1999. That year, net new government bond financing in Canada totaled $9 billion,
compared to net redemptions of $9 billion abroad. Thus, net new bond financing for
public and private issuers combined totaled $21 billion in Canada, as opposed to net
redemptions of about $1 billion outside Canada.
Canadian equity issuers rely on foreign markets much less than Canadian debt
issuers. Between 1993 and 1999, more than 95% of Canadian equity issues took
place in domestic markets. Several Canadian securities firms, particularly those
owned by banks, have been exploring niche opportunities, such as discount brokerage
and wealth management, in the U.S. and other select markets. As Canadian banks
continue to expand overseas, their securities arms will be integral in supporting
banking operations and exploiting new business opportunities.
A number of foreign-owned securities firms, particularly U.S. based firms, have
a long history of operating in Canada. Although several foreign firms have pursued
an increased share of the retail brokerage business, only Merrill Lynch has been
successful in obtaining a substantial market share. Foreign firms are increasingly
active in arranging issues for corporate clients, trading in fixed-income securities, and
advising on mergers and acquisitions.
The Canadian securities industry, like many of its counterparts in other
countries, has been faced with the challenges of globalization, rapid technological
change, and consolidation. Proximity to the U.S., the relatively low barriers to entry
for foreign securities firms, free movement of capital, and an increasingly North
American focus for many large Canadian corporations have made the Canadian
securities business more competitive. As a response, larger Canadian securities firms
have been improving their ability to service clients on a North American basis.
Canadian exchanges have also been faced with an increasingly competitive
environment. Issuers of capital are increasingly able to access global markets,
bypassing local markets and intermediaries. A growing number of Canadian firms are
choosing to list their stock on U.S. exchanges.
Instead of a national agency like the Securities and Exchange Commission
(SEC) in the United States, Canada’s provincial and territorial securities regulators
are responsible for the regulation of the industry. All Canadian securities dealers are
registered by the provincial and territorial securities regulators.63 At the national
level, the Canadian Securities Administrators serve as the forum where provincial
securities regulators meet quarterly to further the goals of regulatory harmonization
and mutual recognition of standards.
In Canada, each of the 10 provinces and three territories has its own Securities
Commission or similar regulatory authority. The provincial securities regulators
delegate some authority to the self-regulatory organizations (SRO) which have a long
history of regulating and supervising market intermediation in Canada. The well-
recognized SROs are the TSE, ME, CDNX, and the Investment Dealers Association
of Canada. IDA membership includes the majority of firms actively engaged in
securities trading in Canada. Another association, the Mutual Fund Dealers
Association of Canada, has recently been recognized as an SRO. When it is fully
operational, it will be responsible for regulating all sales of mutual funds in Canada,
except in Quebec. It will not, however, assume responsibility for regulating the funds
themselves. Firms that do not belong to an SRO are regulated directly by their
respective provincial securities regulators.
Securities Regulatory Authorities.
In some jurisdictions, Securities Regulatory Authorities (SRA) are self-funding
agencies or crown corporations. In others, they operate as agencies of the provincial
government under statute. Individual SRAs do some or all of the following:
formulate policy; make rules; sit as an administrative tribunal in hearings on
securities-related matters; and hear appeals from decisions made by the Executive
Director and staff. The mandate of the SRAs is to ensure well-regulated markets
which protect investors from unfair, improper or fraudulent practices, while fostering
fair, efficient capital markets within each of their jurisdictions. Enforcement of
provincial securities laws and day-to-day regulation of the securities industry within
a particular province is delegated by law to SRAs. Specifically, all the SRAs:
!register directly, or indirectly through self regulatory organizations,
individuals and companies who give advice about or trade in
securities or exchange contracts;
!monitor continuous disclosure documents;
!conduct compliance reviews of registrants;
63 Certain security activities may be carried on by a bank in-house (not through a securities
subsidiary). These activities are supervised by the Office of the Superintendent of Financial
Institutions, the federal regulator.
64 A document which must be delivered to recipients of offers to sell securities and to
purchasers of securities in a public offering and which contains a detailed description of the
issuer’s business. It is included as part of the registration statement filed with the SRAs.
!grant discretionary exemptions from registration and prospectus
!investigate possible violations of provincial securities laws; and
!commence proceedings before the Commission or applicable
Provincial Courts of Justice.
Among the SRAs, the Ontario Securities Commission regulates the largest
capital market and stock exchange in Canada, the Toronto Stock Exchange.
Canadian Securities Administrators.
The SRAs combine to form the Canadian Securities Administrators (CSA). It
is primarily responsible for developing a harmonized approach to securities
regulation across the country. Along with quarterly meetings of Commission Chairs,
there are ad hoc interactions between Executive Directors. CSA Working
Committees are established by the Chairs and report to them on issues of shared
concern, matters of import, or other initiatives that the Chairs have decided to pursue
jointly. Funding and support resources are drawn from within a Commission’s
operating budget on a voluntary basis.
Over the last several years, CSA has established, and continues to develop and
administer, the Canadian Securities Regulatory System (CSRS). By collaborating on
rules, regulations, and other programs, the CSA helps avoid duplication of work and
streamlines the regulatory process for companies seeking to raise investment capital
and others working in the investment industry. In recent years, the CSA has
developed a system of mutual reliance that designates one securities regulator as the
lead agency when it comes to reviewing applications or disclosure documents from
companies that report to more than one jurisdiction. The purpose of this system is to
increase market efficiency by streamlining the process and reducing the number of
regulatory agencies a given company must deal with. The strategic goals of CSA are
!protect investors from fraudulent, abusive, and unfair practices in
Canada’s securities markets;
! foster the development of fair, efficient, dynamic and competitive
securities markets that will provide investment opportunities and
access to capital for the benefit of Canadians in all regions and
!maintain an efficient, effective, responsive and enforceable
regulatory framework that serves and protects market participants in
all jurisdictions of Canada and balances national harmonization with
regional flexibility; and
!ensure that Canada participates actively and effectively in
international regulatory arrangements and organizations.
CSA has adopted a National Policy Statement system to harmonize securities
law regulation across the country on a continuing basis. National Policy Statements
deal with procedures for filing and clearing prospectuses, mutual funds, timely
disclosure of material information, shareholder communications, and the System for
Electronic Document Analysis and Retrieval (SEDAR).65 SEDAR, which is the
Canadian counterpart of the U.S. EDGAR (Electronic Data Gathering, Analysis, and
Retrieval System), requires most reporting issuers to file documents electronically.
British Columbia, Alberta, and Ontario are currently replacing National Policy
Statements with binding National Instruments. This is part of a comprehensive
reformulation process to change their non-binding National and Local Policy
Statements and other instruments to binding rules. This is being done in consultation
with the securities regulators in the other provinces.
While the SRAs have, to a considerable extent, standardized their codes and
procedures, there can be important distinctions. The position of the CSA is that a
trade or distribution can occur in more than one jurisdiction and that one must
comply with the laws of each jurisdiction in which the trade or distribution occurs.
As self-regulatory organizations (SROs), Canadian stock exchanges participate in the
regulation of equity finances and are principal regulators of private placements66 of
securities pursuant to authority delegated to them by the CSA. Finally, securities law
requirements (for instance, those relating to take-over bids and solicitation of
proxies) may be supplemented by the applicable federal or provincial corporate
statutes under which an issuer is organized.
A self-regulatory organization is an organization that has been given the
authority and the responsibility to regulate its members. In Canada, regulation of the
securities industry is carried out by provincial securities commissions and self-
regulatory organizations. These include the Investment Dealers Association of
Canada (IDA), the Canadian stock exchanges, such as TSE, ME, CDNX, and other
agencies. The Canadian SROs have been delegated responsibility by provincial
governments to ensure that SRO members meet agreed-upon standards that are
written into the provincial laws governing securities. The SROs regulate markets and
trading as well as member firms, their employees, and their business practices by (1)
setting standards that participants must meet prior to employment; (2) creating rules
governing how markets must operate; (3) monitoring and examining investment
dealers on a regular basis; (4) setting capital requirements to ensure firms are solvent
and following all the rules; (5) extensively investigating suspected infractions; and
(6) employing investigators and compliance officers to ensure that dealers are
meeting these standards.
65 Available at [www.sedar.com], SEDAR is a central database containing public records
of all companies publicly traded on the Canadian markets. Anyone with an Internet
connection can go to SEDAR and view a company’s recent news releases or financial
66 The offer and sale of securities not involving a ‘public offering.’ The definition of ‘public
offering’ varies from country to country. A private placement typically implies that the
stock will be placed only with a limited number of private institutional investors and that
restrictions will be placed on the resale of the shares issued. In the United States, private
placements are exempt from the registration and prospectus delivery requirements of the
Securities Act of 1933.
SROs occupy a unique position because they have been delegated responsibility
by provincial governments to set standards and to police their members to ensure
compliance with those standards. By-laws and rules created by the SROs (as well as
complaints lodged with SROs) are carefully reviewed by the securities
Investment Dealers’ Association.
The Investment Dealers’ Association is an SRO that also functions as a trade
association for investment dealers across the country. The IDA is the only national
SRO; it monitors members in terms of both their capital adequacy and how they
conduct their business. If a member does not meet the minimum capital requirements
established by the IDA, for example, the IDA has the power to require the member
to take corrective action or it may suspend the member’s trading privileges. The IDA
also investigates complaints received against members, and has the authority to
prosecute individuals suspected of wrongdoing and to levy fines. The IDA’s
regulatory actions are reviewed by provincial securities commissions. Members of
the IDA must also register with the applicable provincial authority in order to sell
securities in a particular province.
In addition to its policing function, the IDA is active in raising policy issues
with provincial governments and the CSA on matters impacting the investing public
and relating to the efficiency of the markets. The IDA also pursues harmonization of
securities regulation internationally. As the industry’s national trade association, the
IDA represents a critically important Canadian industry. The member firms,
employing more than 39,000 people in all provinces and abroad, play a key role in
the national and provincial economies and account for over 97% of the industry’s
revenue and capital.
While the principal function of a stock exchange is to bring together buyers and
sellers (creating a market), the exchanges play a significant role in investor
protection. Exchanges have rules governing the behavior and conduct of exchange
members in many areas, including trading activities. Exchanges have specific listing
and reporting requirements for companies wishing to have their securities traded on
them. One important way an exchange protects the general public is by ensuring that
material information about companies traded on the exchange gets widely
disseminated so that all investors are trading on a level playing field. Furthermore,
the Canadian Investor Protection Fund protects investors from the loss resulted from
a member firm’s insolvency.
As SROs, exchanges may interrupt the trading of a listed company’s securities
or delist the securities if the exchange feels it is appropriate. There are a number of
reasons trading in a security may be halted by an exchange, for example, to allow
significant news to be widely disseminated to the public. A security may be delisted
if the company’s financial condition no longer meets the exchange’s requirements for
continued trading. With respect to regulation of members, exchanges have stringent
requirements on their trading activities. Furthermore, all employees of members of
a stock exchange who deal with the investing public must register with the stock
exchange or the IDA, in addition to the applicable provincial administrator.
The Canadian Investor Protection Fund.
The CIPF is a fund established in 1969 to protect customers in the event of the
insolvency of any member of an SRO that contributes to the Fund. Sponsoring SROs
(the Canadian exchanges and the IDA) contribute assets to the fund through regular
annual and periodic special assessments. As soon as an investor becomes a customer
of a member of any of the sponsoring SROs, the customer’s accounts are covered by
the fund. In the event that a member firm of a sponsoring SRO becomes insolvent,
customers’ losses of securities and cash balances are covered up to certain limits. The
CIPF covers separate customer accounts, within certain guidelines, up to $1 million.
If a member of an SRO becomes insolvent, customers of that firm should act within
180 days of the insolvency to file a claim. The fund has rarely been called on to settle
claims. The CIPF does not cover customers’ losses resulting from changes in market
values, only losses due to insolvency of a member of a sponsoring SRO.
Other Financial Intermediaries
Other financial intermediaries that play a vital role in the Canadian financial
system include insurance, mutual funds, and trust and loan companies. While the
financial function these companies serve has become more integrated, each sector is
regulated according to its primary financial instrument. The oversight legislation
governing these other financial intermediaries was amended by the Financial
Consumer Agency Act of 2001 to address the needs of the modern Canadian
economy. The financial safety net for consumers of these services is provided
through self-funded and self-regulated associations.
Life Insurance Companies
Life insurance companies constitute the third largest segment of Canada’s
financial services sector, with 117 firms and $258 billion in assets. The five largest
companies control 54% of the market, and Canadian owned companies account for
72% of the market. In four of the last five years, the return on equity in this sector
has exceeded 10%.67 There are two types of life insurance companies, mutual and
stock. Both provide protection from the financial hardships of death or considerable
old age and offer methods for wealth management. Mutual insurance companies are
owned by policyholders, who are represented by the board of directors. Stock
insurance companies are owned by stockholders, and the board of directors represents
both stock and policy holders. In 1999, the Insurance Companies Act was amended
to allow insurance companies to demutualize. Demutualized companies were
required to undergo a two-year transition period that ended on December 31, 2001,
during which time mergers and acquisitions were prohibited.
67 Department of Finance. Canada’s Life and Health Insurers.
Insurance companies offer term and whole life policies, and have recently
explored other types of policies that revise premiums, or vary the amount or timing
of benefits. Traditionally, they also sell deferred and immediate payment annuities.
More recently, retirement fund management has become a lucrative service for
insurance companies. Firms sell individual variable insurance contracts (IVICs) to
customers and pool the contracts into a segregated fund. Segregated funds were first
offered in 1961, and are used mostly for pension investments. These funds are
invested in securities normally prohibited for insurance portfolios, and operate like
mutual funds. Segregated funds are considered to be less risky than mutual funds
since 75% of the investment is guaranteed by the Canadian Life and Health Insurance
Compensation Corporation (CompCorp). Through their efforts to match the
maturities of their assets and liabilities, Canadian insurance companies have been
able to respond to the growing demands of the baby boomer generation.
Life insurance companies may be federally or provincially regulated. Federally
they are governed by the Canadian and British Insurance Companies Act, or the
Foreign Insurance Companies Act. Canadian regulations require a firm to have at
least seven directors, and a minimum of one-third of those cannot be affiliated with
the company. The directors must meet four times a year. The Chief Agent and
Actuary must both be Canadian residents. The Superintendent of Financial
Institutions is responsible for the supervision of this sector, and can force an unsound
company to cease operations. The Superintendent has the authority to take over a
company that refuses to introduce remedial actions. All insurance companies are
required to maintain adequate capital reserves, and foreign companies must maintain
the reserve in Canada. Institutions are allowed to invest up to 70% of assets in real
property or equities. A company with more than $25 million in assets has no limit
on portfolio investments in commercial and personal loans. 1992 legislation allows
banks to purchase life insurance firms, but restricts them from selling insurance
through their branches. Large banks and large demutualized insurers are restricted
from merging with or acquiring each other. Provincial regulations concern license
requirements and the marketing of products, set education standards for insurance
agents, and provide for consumer protection. In a June 2000 report by the
International Monetary Fund, Canada is noted for its application of “prudent person”
rules and the insurance sector’s overall stability.68
The Financial Consumer Agency of Canada Act amended several provisions of
the Insurance Companies Acts. It lowers the minimum capital requirement for
incorporation to $5 million. The Canadian residency requirement for the board of
directors has been changed to two-thirds, and at least one non-affiliated board
member must attend each meeting. The Finance Minister’s role in the oversight of
mergers is defined, as is the Minister’s authority to enforce sanctions for
noncompliance. The widely held requirement for companies with assets over $5
68 International Monetary Fund. Report on the Observance of Standards and Codes: III.
Insurance Supervision. [http://www.imf.org/external/np/rosc/can/insurance/htm], p. 2-3.
billion limits individual or entity ownership to 20% of voting shares, and 30% of
other shares. After the transition period, companies with less than $5 billion in
equities may become closely held, provided they maintain a 35% public float for
voting shares. Firms with assets under $1 billion may be wholly owned by an
individual. For companies that have always been organized as stock companies, the
35% public float requirement applies when assets exceed $1 billion. A closely held
stock company may grow beyond $5 billion in assets if the public float is maintained.
Insurance holding companies are subject to the same regulations as insurance
firms. Consumer protection measures included in the new legislation require firms
to issue public accountability statements and participate in dispute resolution through
an independent organization or the Canadian Financial Services Ombudsman.
Insurance companies are also required to maintain control of financial institution
subsidiaries involved in risky activities. Other amendments cover the role of the
Minister of Finance in a firm’s Internet operations and portfolio investments; expand
the power of the Superintendent to intervene in failing companies and force
compliance through management reorganization; and mandate a yearly compliance
review by the Financial Consumer Agency of Canada (FCAC). Bill C-8 also expands
the payments system to include insurance companies. These reforms were enacted
to address the changing role of insurance companies in the Canadian financial
The insurance industry safety net is provided through the Canadian Life and
Health Insurance Compensation Corporation (CompCorp). CompCorp was organized
in 1989, and federal and provincial governments require insurers to join the
corporation and pay assessments. CompCorp protects consumers from a firm’s
insolvency. Insurance policies are covered to $200,000; cash withdrawal guarantees
and segregated funds are covered to $60,000; and disability and regular annuities are
protected at $2,000 a month. In the event of an insurance company failure,
CompCorp regulations provide for another firm to take over policies up to the stated
limits, and for the original terms of the policy to be honored. The Canadian Council
of Insurance Regulators is responsible for the oversight of segregated funds. The
insurance industry also operates the Consumer Assistance Centre to provide
customers with information and policy search assistance, and to manage complaints.
Table 9: Top Five Life Insurance Firms by Assets: 2000
CompanyAssets in $ billion
Sun Life Financial Services of Canada Inc.$33.773
Clarica Life Insurance Company$26.677
Canada Life Financial Corporation$23.095
Source: Canada Online. Canadian Insurance Industry Facts.
Trust and Loan Companies
Trust and loan companies serve two roles in the Canadian financial system.
Both of these types of companies offer services similar to banks and credit unions:
they accept deposits, offer checking accounts, and make mortgage loans. Through
their wealth management services, trust and loan companies provide Canadian
consumers with financial instruments and services that are not available from other
institutions. Recently, trust and mortgage loan company regulations have been
updated to improve this sector’s functionality in the overall financial system.
Trust companies act as trust executors, investment managers, and agents in
stock and bond issues. They specialize in estate planning, establishing trusts, and
managing funds for charities and pensions. Trust companies were organized to fulfill
a need for financial trustees independent of the corporate structure. While banks are
still restricted from offering trust services at their branches, many trust firms are now
owned by banks, insurance or holding companies. Currently, there are 25 non-bank
trust companies doing business in Canada.
Regulation of trust companies depends on whether a firm is incorporated
federally or provincially. Federally incorporated firms are regulated by the Trust
Companies Act and licensed in each province. Financial oversight is provided
through the Office of the Superintendent for Financial Institutions (OSFI), and the
Financial Consumer Agency of Canada (FCAC) oversees consumer protection
measures. Trust companies do not own the trusts they manage, and must hold trust
funds separate from other funds. Federally incorporated companies with assets
under $25 million cannot participate in commercial loans, and firms with more than
$25 million in capital require approval from OSFI to put more than 5% of their assets
into commercial loans. Limits on the investment portfolio of trust companies allow
a maximum of 70% of capital to be placed in real property or common shares.
Under Bill C-8, which went into effect October 24, 2001, several important
reform measures are directed at trust companies. The minimum capital requirement
for firms seeking incorporation is halved to $5 million. The board of directors’
Canadian residency requirement is lowered from three-fourths to two-thirds. One
director who is otherwise unaffiliated with the company is required to be present at
all board meetings. The Minister of Finance is given an expanded role in reviewing
merger proposals, approving the expansion of internet based services, improving the
flexibility of investment strategies, and may sanction companies that do not comply
with his directives. The bill also revises ownership regulations, consumer provisions,
and regulatory oversight. Ownership regulations for trust companies are based on a
firm’s equity. If a firm has less than $1 billion in equity, ownership is unrestricted.
If a firm has more than $1 billion in equity, 35% of voting shares must be widely held
and available to the public through Canadian stock exchanges. Consumer protection
measures require companies to provide written information concerning financial
products, notify customers of pending branch closures, and issue public
accountability statements highlighting contributions to the economy and society.
Institutions must join an independent dispute resolution program, and may choose the
Canadian Financial Ombudsman.
The Financial Consumer Agency of Canada Act also focuses on regulatory
oversight reforms. The agency was established to monitor a company’s complaint
resolution procedures and its compliance with consumer protection regulations. The
Superintendent of Financial Institutions is directed to intervene quickly when it
suspects that a firm will have difficulty meeting its obligations. The Superintendent
may seek court orders for compliance, and can remove directors or senior officers
who have contributed to the company’s mismanagement. The reforms passed with
The Financial Consumer Agency of Canada Act are the culmination of Canada’s last
legislative review of the financial services sector.
A financial safety net for trust companies is provided by the Canadian Deposit
Insurance Corporation (CDIC). Deposits up to $60,000 are insured by the CDIC.
Firms participating in the insurance program (or “fund”) must meet a capital69
adequacy requirement that 5% of total assets be held in equity capital. Member
institutions fund the CDIC through annual insurance premiums. In 1993, the CDIC
worked in coordination with OSFI to develop Standards of Sound Business and
Financial Practices. Standards were set for liquidity, interest, credit risk, investment
portfolio and capital management, and internal controls. The CDIC has the authority
to cancel the insurance of any member that fails to follow these standards.
Mortgage Loan Companies.
Residential mortgage loans are the primary financial instrument offered by loan
companies. Mortgage loan companies can be deposit accepting or co-operative.
Deposit accepting mortgage firms take demand and term deposits, and restrict
investment of funds to mortgaged real estate. Customers of co-operative mortgage
companies raise funds for member mortgage loans and real estate investments. In
1973, the Loan Companies Act was amended by the Residential Mortgage Financing
Act to include mortgage investment companies, and real estate investment trusts.
Mortgage investment companies issue shares and debentures, and borrow funds.
They are not depository, and cannot manage or develop real estate. They are required
to maintain a percentage of their investments in residential mortgages, but are
allowed to invest in other forms of real estate and equity instruments. Through a
Declaration of Trust, real estate investment trusts may be federally or provincially
regulated. These trusts are unincorporated, and cannot develop real estate. Members
69 Binhammer and Sephton. “Money, Banking and the Canadian Financial System”
Thompson Learning, 2001.
hold transferable, equal shares, which are invested in mortgages and real estate
Regulation and Consumer Protection.
The regulatory framework for mortgage loan companies mirrors the structure
for trust companies. Many of the regulatory reforms for trust companies contained
in the Financial Consumer Agency of Canada Act also apply to loan companies, as
shown in the table below. For loan companies, OSFI is responsible for financial
operations oversight, and the FCAC monitors consumer protections. Deposits are
insured through the CDIC. The Canada Mortgage and Housing Corporation
(CMHC), also known as Cannie Mae, provides residential mortgage loan insurance
and administers the Mortgage Insurance Fund. CMHC insurance does not cover
conventional mortgages, only those obtained under the National Housing Act. The
purpose of the CMHC is to protect consumers and monitor the safety of the industry.
Mortgage loan companies continue to play a vital role in the Canadian financial
Table 10: Regulatory Reforms for Trust and Loan Companies
Under the Financial Consumer Agency of Canada Act71
Minimum capital requirement for$ 5 million
Ownership - based on equity:a. unrestricted
a. less than $1 billionb. 35% voting shares must be widely
b. more than $1 billionheld
Proportion of Canadian residents on two-thirds (2/3)
Board of Directors
Consumer Protectionwritten information on financial
products, public accountability
statements, independent dispute
Merger Review Subject to review by the Minister of
Board MeetingsOne unaffiliated Board member must
be present at all meetings
70Statistics Canada. “1980 SIC-E Division K”.
[http://www.statcan.ca/english/Subjects/Standard/sic/k.htm], p. 6-7.
71 Department of Finance Canada. Bill Summary. Bill C-8.
Mutual Fund Companies
Mutual funds are the fastest growing sector of the financial services industry in
Canada. Mutual funds are pooled investments in a portfolio of securities, varying in
their diversity and level of risk. These open-ended investments are professionally
managed and allow investors to reduce their financial risks and improve their expected
returns. Mutual funds are classified according to their assets, and include money
market funds, fixed income funds, and equity funds. Money market funds are invested
in short term securities including federal and provincial treasury bills, banker’s
acceptances, commercial paper, and guaranteed investment certificates. The value of
money market funds is usually set at 10 dollars per unit. Fixed income funds include
bond and mortgage funds with long-term obligations and a variable value. Dividend
funds and growth funds are two types of equity mutuals. The Canadian mutual fund
industry has assets of $390 billion in 1,400 different funds. Fifty companies are
designated as retail mutual fund managers. Banks, trusts, insurance, and mutual fund
management companies all offer mutual funds.
The Canadian mutual fund regulatory system is unlike that found in many other
countries in that it primarily regulates the activities of the fund rather than the fund
manager. Mutual fund dealers are regulated by the Mutual Funds Dealers Association
(MFDA), a self-regulatory organization (SRO) founded in 1998. The MFDA protects
investors through compliance reviews, and requires a minimum fee of $3,000 per
dealer. While the MFDA regulates the sales of these funds, the actual fund is regulated
by the securities commissions. Mutual fund assets must be held by a qualified
custodian, and are subject to oversight by the Canadian Securities Administrators
(CSA). The CSA has established registration and prospectus requirements, and rules
governing fund operations and sales. Mutual fund managers are prohibited from
owning company stock. The major reform for this sector under Bill C-8 extends the
payments system to include money market funds. Canadian regulation of the mutual
fund industry is intended to provide the flexibility required for future growth.
In the event of a dealer’s insolvency, consumers of mutual funds are offered a
limited safety net through the Canadian Investor Protection Fund (CIPF). The CIPF
covers separate customer accounts to $1 million. Member firms finance the
organization through their sector’s SRO. The CIPF provides immediate coverage to
accounts, and sets a deadline of 180 days to file claims. CIPF does not cover losses
due to market downturns. Through the establishment of national standards, monitoring
of SRO reviews, and the inspection of member companies, the CIPF is able to quickly
identify potential problems.
Summary of Canadian Financial Regulation
The Canadian financial services sector is regulated to ensure the integrity, safety,
and soundness of the system. Canada depends on three types of regulation: corporate
governance, self-regulation, and direct government regulation. Corporate governance
involves the policies and practices of each firm. Since inadequate corporate
governance can lead to failure, legislation has been passed to improve internal auditing
and reporting standards. Enforcement of standards and rules by an industry or
association is referred to as self-regulation. A self-regulatory organization (SRO) is
“an organization that has been given the authority and the responsibility to regulate its
members. The Canadian SROs have been delegated responsibility by provincial
governments to ensure that SRO Members meet agreed-upon standards that are written72
into the provincial laws governing securities.” SROs provide for a competitive
marketplace and are flexible enough to meet the evolving needs of their industries.
SROs improve the coordination and consistency of provincial policies and standards.
Government regulation includes the laws and statutes governing the behavior of
institutions, and the government agencies charged with ensuring compliance.
The Modern History of the Canadian Regulatory System
For the period 1980 to 1984, 13 Canadian financial institutions declared
bankruptcy. In 1985 two banks shutdown (the first in 62 years), followed by several
other trust, mortgage and insurance companies.73 As a result, in 1992 the federal
Parliament passed a legislation that presented a new framework with important changes
in the system of financial regulation in Canada. Prior to 1992, Canada’s Bank Act had
traditionally “included a 10-year sunset clause to ensure regular review of the
legislation. At the time the 1992 legislation was implemented, it was decided that the
breadth and scope of the changes warranted an early review of their effectiveness.”74
A five-year sunset clause was enacted. The major issues that were approved include:75
!regulation remained different for each type of institution. As in the
past, institutions remained classifiable according to their main
!upon supervisory approval, the loan, trust and insurance companies
with capital of at least $25 million were able to make unlimited
72 Investment Dealers Association of Canada. The Canadian Regulatory Landscape.
[http://www.ida.ca/ Investors/RegLandscape_en.asp], p. 1.
73 Binhammer, H; Sephton, P. “Money, Banking and the Canadian Financial System”
Thompson Learning, 2001.
74 National Library of Canada Electronic Collection. “1997 Review of Financial Sector
Legislation: Proposals for Changes.” Online. Available: [http://www.collection.nlc-
bnc.ca/100/200/301/finance/other_pubs/html/rev97-ef/fs197/fs11e.html#key]. Accessed Jan.
75 The following list of bullets is a short summary of the actual legislation. A complete
overview can be found in Binhammer, H; Sephton, P. “Money, Banking and the Canadian
Financial System” Thompson Learning, 2001.
!companies with smaller capital were restricted to no more than 5% of
!federally incorporated institutions were not allowed to have control
over any car-leasing companies, nor to perform any car leasing
!investment rules for financial intermediaries have been revised and the
prudent portfolio approach was introduced. The Board of Directors of
every institution became responsible for setting the rules and
procedures for investing and lending. The rules assumed holding a
portfolio of assets that matched the liabilities of the entity and was
!apart from holding companies as their subsidiaries, financial
institutions were also allowed to control other entities that performed
certain types of activities. These activities were defined in the
legislation and included distribution of mutual funds, information
services, factoring and other businesses. Financial institutions were
allowed to own not more than 10% of the voting shares, or 25% of the
shareholders’ equity, of other companies;
!bank, loan, insurance and trust companies were forbidden to purchase
assets or services, lend to, or make investments in certain companies.
These included any company that was a major shareholder or
performed any means of control over the financial institution;
!change of ownership of more than 10% of shares, or any additional
increase in an already high interest in the shares, of an institution was
to be approved by the Minister of Finance;
!when the consolidated capital of a financial institution exceeded $750
million, the company was to have, within five years, at least 35% of
its voting shares traded by public investors on Canadian stock
!at least one-third of the members of the Board of Directors of any
financial institution had to be independent of the institution.
In 1997, the Task Force on the Future of the Canadian Financial Services Sector
made further recommendations to help the system adjust to technological change and
financial globalization. Following the 1997 review, Parliament once again mandated
a five-year expiration. The comprehensive reforms contained in 2001’s Financial
Consumer Agency of Canada Act are also subject to a five-year sunset clause. The
changes had four different directions: to stimulate efficiency and growth, to support
domestic competition, to assure consumer protection and improve the regulatory
The final stage of the modern reforms was set out by a report called Reforming
Canada’s Financial Services Sector: A Framework for the Future. It was based on the
recommendations by the Task Force on the Future of the Canadian Financial Services
Sector and the subsequent analysis done by two parliamentary committees: the
Standing Committee on Finance and the Standing Committee on Banking, Trade and
Commerce. The process ended with the passing of Bill C-8 in October 2001, which
outlined the fundamentals of the present regulatory system in Canada. The Bill
introduced changes to the financial services sector and the ownership structure of the
institutions (banks would be allowed to own other banks). It also established a new
size-based ownership regime and created the Financial Consumer Agency of Canada.77
Some of the newly introduced rules included:
!The new ownership regime for banks. Bank holding companies are
classified into three groups according to their equity: over $5 billion
(large), between $5 billion and $1 billion (medium) and below $1
billion (small). Large banks are widely held. No shareholder can
control more than 20% of voting shares, or more than 30% of non-
voting shares. A medium bank can be closely held. However, it must
have 35% of its voting shares publicly traded at a Canadian stock
exchange. There are no limitations for banks with less than $1 billion
in equity. Similar rules apply for insurance holding companies.78
!Shareholders’ influence. No shareholder is allowed to have major
influence in a large bank or a federal insurance company. To ensure
that, the bill introduced two rules: the “tainting rule” and the
“cumulative voting rule”. According to the tainting rule, no one is
permitted to be a major shareholder in any subsidiary of a large bank
(or demutualized company). The other rule states that a shareholder
can control no more than 10% of any class of shares in any group of
banks or federal insurance companies connected to a large bank.79
!Foreign offices. Foreign banks are permitted to open two different
subsidiaries in Canada: lending branches or full-service branches. A
full-service office is allowed to take deposits greater than $150,000.
Lending branches are not permitted to take deposits; they can only
borrow from other entities.80
!Bank mergers. A bank is permitted to merge with a trust and loan
company; non-regulated lending institutions, or an insurance
company. Mergers are also subject to the $5 billion rule, i.e. if the
newly formed merger has more than $5 billion in equity, it has to be
!Superintendent’s Role. The Superintendent is granted the right to
dismiss senior executives and high company officials in cases of
misbehavior, incompetence, poor business record, etc. He is also able
to impose fines for violations of the legislation. Moreover, the
77 Haggard, Laurin, Kieley, Smith, Wrobel. Bill C-8: An Act to Establish the Financial
Consumer Agency of Canadat and to amend certain acts in relation to Financial institutions.
Library of Parliament. Online. Available: [http://www.parl.gc.ca.common/bills_ls.asp].
Accessed: Nov. 26, 2001.
Superintendent is allowed to prosecute any director of an entity who
had authorized an improper transaction.82 The Superintendent has the
right to approve transactions and business activities of financial
entities without the authorization of the Minister of Finance.83
Appendix A: Guide to Intervention for Federal Financial Institutions: Deposit-
No problems/Normal activities— Routine supervisory and regulatory activities pursuant to mandates of OSFI and CDIC.
In addition, both agenciesconduct research and analyze industry-wide issues and trends, appropriate to their respective
OSFI activitiesStatutory and inter-agencyCDIC activities
Incorporation of new financial institutionsOSFI informs Minister of status ofProcess application for policy of deposit
and issuance of orders to carry on business:supervised institutions.insurance and obtain appropriate guarantees
review and assess all relevantOSFI reports to the CDIC on postand undertakings.
documents and informationexamination results for individual deposit-Ongoing risk assessment of selected
make recommendation to Minister.taking member institutions and confirmsindividual institutions via:
Review and assess wide range of applicationsmaterial compliance with standards of sound information available from OSFI,
and requests for regulatory consents requiredbusiness and financial practices.the Bank of Canada and, where
iki/CRS-RL31459by statutes includingMonthly OSFI-CDIC inter-agency meetingnecessary, individual financial
g/wcorporate reorganizationsheld to discuss corporate governance andinstitution reports
s.or changes in ownershipactivities of member institutions. contacts with regulators
leak acquisitions of other financial rating agency results
institutions review and analysis of results of
://wiki transfers of business.annual examinations of federal
httpOngoing monitoring of supervisedinstitutions via information obtained frommember institutions carried outby OSFI
statutory filings and financial reporting other sources.
requirements:Ensure compliance with CDIC Act and
consider compliance with statutorystandards of sound business and financial
and other regulatory requirementspractices by-laws, policy of deposit
assess financial situation andinsurance and CDIC by-laws.
Periodic on-site examinations of supervised
institutions as required by statutes:
inform management and board of
directors of findings
management requested to provide
copy of report to external auditors
require that concerns be addressed
monitor remedial measures if
Stage 1 — Early warning — Deficiency in policies or procedures or the existence of other practices, conditions and
circumstances that could lead to the development of problems described at Stage 2. Situation is such that it can be remedied
before it deteriorates into a Stage 2 problem.
OSFI activities/interventionStatutory and inter-agencyCDIC activities/intervention
Management and board of directors ofActivities below are in addition to thoseCDIC risk assessment and interventions
financial institution are formally notified ofpreviously mentioned.listed here are in addition to those mentioned
concerns and are requested to take measuresOSFI and CDIC coordinate on requestedpreviously.
to rectify situation.remedial measures to deal with concerns andDepending on CDIC’s assessment of
Monitoring of remedial actions may involveon establishment of time frame within whichsituation
requests for additional information and/orsituation should be remedied. CDIC may request additional
follow-up examinations.OSFI’s post-examination report to CDICinformation from OSFI if available,
OSFI may require that institution’s externalidentifies issues requiring remedial measures,or from the institution if necessary
auditor enlarge scope of examination ofincluding any material breaches of standards CDIC may communicate its
institution’s financial statements or thatof sound business and financial practices,concerns to institution and may
external auditor perform other procedures,regardless of whether such issues are treatedplace it on its preliminary
iki/CRS-RL31459and prepare a report thereon. OSFI mayassign cost of external auditor’s work toas formal qualifications to OSFI’s report.The status of such issues is reviewed at“watchlist” and inform institution ofthat fact
g/winstitution.monthly inter-agency meetings. If circumstances warrant CDIC may
s.orCDIC notifies OSFI of contemplatedconduct or commission a special
leakintervention measures, discusses results ofexamination to obtain more
special examinations with OSFI, andinformation on the member
://wikicoordinates communications with theinstitution and to be in a position to
httpinstitution about its status and placement onassess the extent of the institution’s
“watchlist”.problem and CDIC’s exposure
Institution may pay higher CDIC
premiums, related to increased risk.
CDIC may levy a premium surcharge if the
institution does not remedy any of the
fo llo wing:
failure to follow CDIC’s standards
of sound business and financial
failure to comply with its governing
sta t ute
failure to fulfill the terms of an
undertaking provided to CDIC
failure to maintain records and
information pursuant to provisions
of the policies of deposit insurance.
CDIC may request an undertaking from
institution or from entity that controls the
institution to rectify areas of concern.
Stage 2 — Risk to financial viability or solvency — Situation or problems that, although not serious enough to
present an immediate threat to financial viability or solvency could deteriorate into serious problems if not addressed
promptly, as evidenced by:
!concerns over the institution’s ability to meet capital and surplus, or vesting requirements on an ongoing basis
!deterioration in the quality or value of assets, or the profitability of the business undertaken by the financial
!undue exposure to off-balance sheet risk
!poor earnings or operating losses or questionable accounting
!low level of accessible liquidity or poor liquidity management in context of the institution’s situation
!less than satisfactory management quality or deficiency in management procedures or controls (including
material breaches of standards of sound business and financial practices)
!other concerns arising from:
– a financially weak or troubled owner
– rapid growth
– non-compliance with regulatory requirements
iki/CRS-RL31459– credit rating downgrades
g/w– systemic issues
OSFI Activities/InterventionStatutory and Inter-AgencyCDIC Activities/Intervention
Senior OSFI officers meet with managementActivities below are in addition to thoseCDIC risk assessment and intervention listed
and board of directors of financial institutionpreviously mentioned.here is in addition to those previously
and with external auditor of institution toCDIC and OSFI coordinate communicationsmentioned.
outline concerns and discuss remedialwith the institution.CDIC informs management and board of
actions. Management and board of directorsOSFI immediately notifies CDIC of situationdirectors of member institution of situation
are formally notified of the fact thatwhen uncovered, with a formal report toand of the fact that institution is being placed
institution is being placed on the regulatory >follow. Institution is placed on “watchlist”.on CDIC’s “watchlist” leading to more
watchlist.OSFI sends a “watchlist” progress report atvigorous monitoring.
External auditor of institution may beleast monthly to CDIC and Minister; report isIf institution is in breach of CDIC’s
required to perform a particular examinationdiscussed in regular meeting with Minister.standards of sound business and financial
relating to the adequacy of the institution’sProgress on remedial measures discussed atpractices, policy of deposit insurance,
procedures for the safety of its depositors,monthly OSFI CDIC interagency meeting.bylaws, CDIC may send the CEO or the
other creditors or shareholders, or any otherInstitution may be discussed at FinancialChairman of the institution a formal report
examination that may be required in theInstitutions pursuant to Section 30 of the CDIC Act.
public interest, and report thereon to OSFI. Supervisory Committee.CDIC may advise institution that if CDIC is
OSFI may assign cost of external auditor’sContingency planning commences.not satisfied with progress made in rectifying
iki/CRS-RL31459work to institution.the situation referred to in the above
g/wScope of on-site examinations may bementioned formal report, CDIC may seek
s.orenlarged on increased.(federal institutions) Minister’s permission to
leakMonitoring of financial institution isterminate the institution’s policy or deposit
enhanced as to frequency of reportinginsurance.
://wikirequirements and/or level of detail of
Institution must produce a business pln
acceptable to both OSFI and CDIC that
reflects appropriate remedial measures that
will rectify problems within a specified time
Business restrictions appropriate to
circumstances may be imposed on
institution’s order to carry on business or via
director of compliance covering such matters
OSFI Activities/InterventionStatutory and Inter-AgencyCDIC Activities/Intervention
payments of dividends or
lending or investment powers
level of deposits and other
interest rates paid on deposits
other restrictions tailored to
Progress of remedial measures is monitored
via reporting requirements and/or follow-up
Stage 3 — Future financial viability in serious doubt — Situations or problems described at Stage 2 are at a level
where, in the absence of mitigating factors such as unfettered access to financial support from a financially strong financial
institution parent, unless effective corrective measures are applied promptly, they pose a material threat to future financial
viability or solvency.
OSFI activities/interventionStatutory and inter-agencyCDIC activities/intervention
Management, board of directors and externalActivities below are in addition to thoseCDIC risk assessment and interventions
auditor of institution are informed ofpreviously mentioned.listed here are in addition to those mentioned
problems.OSFI immediately notifies CDIC ofpreviously.
A special audit may be required from anany material new findings or developments,CDIC may seek Minister’s permission to
auditor other than the institution’s ownwith a formal report to follow.terminate the institution’s policy of deposit
external auditor if OSFI is of the opinion thatResults and data from enhancedinsurance.
it is required. OSFI may assign cost ofexaminations, expanded audits, etc. and fromIn order to minimize risk to deposit insurance
external auditor’s work to institution.enhanced monitoring are discussed withfund, CDIC may provide institution with
If financial institution is a deposit-takingCDIC.temporary financial assistance or provide
institution, examination and monitoringIf financial institution is a deposit-takingsupport for a restructuring transaction by
iki/CRS-RL31459responsibility is transferred to an internalspecial work-out group within OSFI.institution and it is deemed to be, or is aboutto become, non viable, OSFI sends a formalsuch measures as: acquiring assets from the institution
g/wEnhanced examinations may be carried outreport to CDIC to that effect. making or guaranteeing loans or
s.orfocusing on particular areas of concern suchadvances with or without security,
leakas asset or loan security valuations. Suchto the institution
examinations may involve any of the making or guaranteeing a deposit
://wikifollowing:with the institution.
httpFollowing receipt of formal OSFI report
to the effect that institution has ceased, or is
about to cease, to be viable, CDIC
may initiate a restructuring by asking the
Minister of Finance to recommend that the
Governor in Council issue a “FIRP” order,
under the financial institutions restructuring
provisions of the CDIC Act.
OSFI activities/interventionStatutory and inter-agencyCDIC activities/intervention
substantial increase in sampling of
more in-depth review of files
engagement of specialists or
professionals to assess certain areas
such as quality of loan security,
asset values, sufficiency of reserves,
Depending on situation, OSFI examination
staff may be posted at financial institution to
monitor situation on an ongoing basis.
Business plan must reflect appropriate
remedial measures that will rectify problems
within a set time frame so as to avoid
triggering impaired viability or impaired
iki/CRS-RL31459solvency procedures (See Stage 4).OSFI may order institution to increase
s.orMonitoring of institution may be further
leakenhanced as to frequency of reporting
requirements and/or the level of detail of
://wikiinformation submitted so as to monitor
httpprogress of remedial measures.
Follow-up examinations may be carried out
Depending on circumstances, business
restrictions may be enhanced or additional
ones imposed on institution.
Depending on circumstances, pressures may
be exerted on management and board of
directors to restructure institution or to seek
out an appropriate prospective purchaser.
OSFI develops contingency plan in order to
be able to take rapid control of the assets of
the financial institution if changes in
circumstances so warrant.
Stage 4 — Nonviability/ insolvency imminent — Severe financial difficulties resulting in failure or imminent failure
to meet regulatory capital and surplus requirements in conjunction with inability to rectify the situation within a short period
of time; OR
!statutory conditions for taking control being met; OR
!failure to develop and implement an acceptable business plan, thus making either of the two preceding
circumstances inevitable within a short period of time.
OSFI Activities/InterventionStatutory and Inter-AgencyCDIC Activities/Intervention
New business restrictions may be imposed onOther relevant regulatory agencies (provincial orIf CDIC is of the opinion that the
institution or existing restrictions may beforeign) are notified of proposed regulatoryinstitution is or is about to become
expanded.intervention measures to be applied toinsolvent, CDIC may seek Minister’s
Pressure to rectify situation is exerted oninstitution.approval to cancel the institution’s
management and board of directors ofIf the institution meets any of the conditions thatpolicy of deposit insurance.
financial institution through frequent meetingswould make it eligible to be wound up pursuant
with senior OSFI officers.to the Winding-up Act, the institution itself may
OSFI notifies management and boardvoluntarily seek a winding-up order.
of directors of institution of intendedAlternatively, either OSFI or CDIC, working in
iki/CRS-RL31459regulatory intervention measures that will becollaboration with the other agency, may seek a
g/wtaken unless situation is rectified imminently.winding-up order. Minister may overrule this
s.orIf statutory conditions for taking control ofdecision on grounds of public interest only.
leakassets exist and if circumstances are such thatAll intervention measures applied to deposit-
there is an immediate threat to the safety oftaking institutions at this stage, whether initiated
://wikidepositors and other creditors, OSFI may takeby OSFI or CDIC, are the subject of close
httpcontrol of the assets of the institution for acoordination between the two agencies.
If statutory conditions exist, such as failure to
comply with order to increase capital, and
subject to representation to the Superintendent,
OSFI may maintain control of assets or take
control of the institution.
Source: Office of the Superintendent of Financial Institutions. Available online:
[http://www.osfi-bsif.gc.ca/eng/publications/supervisoryguides/index.asp?id=1995]. Accessed: October 4th 2001.
Appendix B. Acronyms
ABMAutomated Banking Machine
ACSSAutomated Clearing Settlement System is an electronic system through
which small value paper-based and electronic payment items are
exchanged. It is run and maintained by the Canadian Payment
ASEAlberta Stock Exchange
ATSAlternative Trading System
Bank of Canada The Bank of Canada Act of 1934 is the original legislation that created
Actthe Bank of Canada.
Bank RateThe Bank Rate is the rate charged by the Bank on LVTS advances to
financial institutions. It is defined to be the upper bound of the Operating
BAXCanadian Banker’s Acceptance Futures
BHCBank Holding Company
CDCCCanadian Derivatives Clearing Corporation
CDICCanadian Deposit Insurance Corporation
CDNCanadian Dealing Network
CDNXCanadian Venture Exchange
CGB10-year Govt. of Canada Bonds
CGFGovt. of Canada Bond Futures
CIPFCanadian Investment Protection Fund
CMHCCanadian Mortgage and Housing Corporation
CPACanadian Payments Association
CPCCapital Pool Company
CPIConsumer Price Index
CSACanadian Securities Administrators
CSRSCanadian Securities Regulatory System
DemutualizationThe process of converting from a mutual company to a stock company.
A mutual company is owned by its voting policyholders while a stock
company is owned by its shareholders.
Edge ActLegislation that allows National Banks to perform foreign lending
through government chartered subsidiaries.
FCACFinancial Consumer Agency of Canada
FINTRACFinancial Transactions & Reports Analysis Center of Canada
FNTSingle Stock Futures
FOMCFederal Open Market Committee
FuturesContracts to buy or sell a specific amount of some product at a specific
price on a specific date in the future. The underlying asset might be a
financial instrument (financial future), a stock index (stock index future)
or an agricultural product such as wheat, soybeans, or pork bellies. If the
underlying asset is a stock index, settlement is made in cash due to the
difficulty in delivering a market basket of stocks.
GDPGross Domestic Product
GovernorThe Governor of the Bank of Canada is the Bank of Canada’s chief
executive officer and has full control and authority over the business of
IDAInvestment Dealers Association of Canada
IPOInitial Public Offering
IPPIIndustrial Product Price Index
IVICIndividual Variable Insurance Contracts
LVTSThe Large Value Transfer System is an electronic system for the transferof large-value or time-critical payments. It is run and maintained by the
Canadian Payment Association.
MFDAMutual Funds Dealers’ Association
Minister ofCanadian Federal Government Cabinet Level position. Primary
Financeresponsibility is over the Department of Finance.
MSEMontreal Stock Exchange
OBXOptions on three-month Canadian Bankers Acceptance Futures
OGBOptions on 10-year Govt. of Canada Bonds
Operating The Bank of Canada’s 50-basis-point range (i.e., ½ of one percentage
Bandpoint) set around the Bank’s desired Target Rate.
OptionA contract that gives the right to a holder to buy (call option) or sell (put
option) a fixed amount of a security at a specific price anytime before
the stated expiration date (for an American-style option). If the holder
does not exercise his option, the option expires and he forfeits the
amount he paid for the option (the premium).
OSFIOffice of the Superintendent of Financial Institutions
OTCOver-the-Counter is a market where trades are mainly conducted over
Private The offer and sale of securities not involving a ‘public offering’ . The
Placementdefinition of ‘public offering’ varies from country to country. A private
placement typically at least implies that the stock will be placed only
with a limited number of private investors. In the USA, a private
placement is one which is exempt from the registration and prospectus
delivery requirements of the US Securities Act of 1933.
ProspectuseA document which must be delivered to recipients of offers to sell
securities and to purchasers of securities in a public offering and which
contains a detailed description of the issuer’s business. It is included as
part of the registration statement filed with the SRAs. And with
documents required by stock markets, stock exchanges and national
ROEReturn on Equity
SECUnited States Securities and Exchange Commission
SEDARSystem for Electronic Document Analysis and Retrieval
SPRAA Special Purchase and Resale Agreement is a transaction in which the
Bank of Canada offers to purchase Government of Canada securities
from designated counter parties with an agreement to sell them back at
a predetermined price the next business day; used to reinforce the Target
SRAA Sale and Repurchase Agreement is a transaction in which the Bank of
Canada offers to sell Government of Canada securities to designated
counter parties with an agreement to buy them back at a predetermined
price the next business day; used to reinforce the Target Rate.
SROA self-regulatory organization is an organization that has been given the
authority and the responsibility to regulate its members.
SXFS&P Canada 60 Index Futures
SXOS&P Canada 60 Index Options and Long-Term Option
Target RateThe rate that the Bank of Canada wants to see in the market for
overnight money market financing.
TSEToronto Stock Exchange
VSEVancouver Stock Exchange
WSEWinnipeg Stock Exchange
XIUOptions on iUnites S&P/TSE 60 Index Participation Fund
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