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CDIC Publishes New Eligible Financial Contracts By-law

The Canada Deposit Insurance Corporation (“CDIC”) has introduced a new by-law that seeks to ensure that the existing limitations on stay provisions for “eligible financial contracts” (“EFCs”) apply to EFCs governed by foreign law or in respect of an EFC with a foreign counterparty.

CDIC is a Crown corporation that is designated as the resolution authority for CDIC federal member institutions (“FIs”), including various banks, trust companies, loan companies and federal credit unions.  When an FI has ceased or is about to cease to be viable, the Canada Deposit Insurance Corporation Act (“CDIC Act”) provides various “resolution orders” that may be made, including an order to: (i) vest the shares and subordinated debt of the FI in CDIC, (ii) appoint CDIC as receiver in respect of the FI, (iii) have the FIs deposit liabilities assumed by a bridge institution; and (iv) direct CDIC to carry out a conversion of certain of the FIs shares and liabilities into common shares of the FI or its affiliates (a “bail-in”). See our previous articles here and here describing the bank resolution regime in Canada in further detail. 

Where a “resolution order” is made, the CDIC Act imposes a stay of proceedings that, among other things, prevents counterparties from terminating agreements with the FI by reason of the FIs insolvency or deteriorated financial condition.  However, with respect to EFCs (such as derivatives, repo transactions and securities lending transactions), the stay of termination rights is only temporary, lasting two business days after a resolution order is made. The stay provisions relating to EFCs are set out in the CDIC Act in sections 39.15 (7.1)-(7.104) and (7.11) (the “EFC Stay Provisions”).

The EFC Stay Provisions play an important role in addressing large-scale termination of an FIs EFCs and reflect a balancing of interests.  In particular, the temporary two-day stay provides CDIC a short period of time to assess how it will resolve the FIs viability issues, while still providing certainty to EFC counterparties that termination rights are not stayed for an indeterminate period.

In the Canada Deposit Insurance Corporation Eligible Financial Contracts By-Law[1] (the “EFC By-Law”), CDIC seeks to ensure that the EFC Stay Provisions apply to prescribed EFCs to which an FI is a party where the EFC is governed by foreign law or the counterparty to an EFC is not Canadian.  In such circumstances, if the laws of the foreign jurisdiction are different, there may be uncertainty as to whether the EFC Stay Provisions or the laws of the foreign jurisdiction would apply to the EFCs of the FI.

The EFC By-law creates greater certainty that the EFC Stay Provisions will apply by requiring that every FI must ensure that all EFCs of a prescribed class include provisions (the “EFC Acknowledgement Provisions”) indicating the parties’ agreement to the application of the EFC Stay Provisions:

4 Every federal member institution must ensure that all eligible financial contracts that are part of the class prescribed in respect of it by section 3 contain provisions indicating the parties’ agreement to the application of subsections 39.15(7.1) to (7.104) and (7.11) of the Act in relation to the actions that the parties, other than any referred to in subparagraphs 3(a)(i) to (v), may take.

Not all EFCs fall within the scope of the EFC by-law.  The “prescribed class” of EFCs to which the EFC By-law applies must meet the conditions set out in the EFC By-law including that:

  1. the EFC is one that permits the counterparty to take certain steps such as terminating or amending the EFC, unless the counterparty is of a prescribed group, including the federal government, the government of a foreign country or a central bank; and
  2. the EFC is not one that is governed by Canadian law or the EFC has at least one party that is not Canadian (or a Canadian entity).

While parties may decide to bilaterally amend existing EFC master agreements to include the EFC Acknowledgement Provisions, the International Swaps and Derivatives Association Inc. will likely facilitate this process by including a “Canadian” module to the “ISDA Resolution Stay Jurisdictional Modular Protocol.”[2]  Adhering to the protocol will automatically amend covered agreements entered into between two adhering parties by adding the required provisions to those covered agreements.

FIs must comply with the new EFC By-law for all EFCs of the prescribed class if:

1. the EFC is entered into, amended or renewed on or after:

a. October 1, 2023 if the EFC is with a counterparty that is another CDIC member institution, or an affiliate, or a global systemically important bank (GSIB) identified by the Financial Stability Board, or an affiliate; or

b. October 1, 2024 for all other EFCs of the prescribed class; or

2. at least one other party to the EFC and the FI are together parties to another contract that is part of the prescribed class.


[2] ISDA protocol