Part I – Canadian Securities Regulators Propose New ‘Commercial Paper’ Exemption

Koscak_CommercialPaper_3By: Brian Koscak, Alison Manzer, Jonathan Fleisher and Michael Brown

 The Canadian Securities Administrators (the CSA) have published for comment proposed amendments (the 2014 Proposals) to National Instrument 45-106 Prospectus and Registration Exemptions . The 2014 Proposals seek to

  • amend the existing prospectus exemption for short-term debt securities by imposing different credit rating requirements and restricting its use to non-securitized products (the Proposed Short-Term Debt Exemption) and
  • create a new prospectus exemption for the sale of short-term securitized products backed by traditional or conventional assets (the Proposed Short-Term Securitized Product Exemption).

Part I of this series discusses the Proposed Short Term Debt Exemption while Part II discusses the Proposed Short-Term Securitized Product Exemption set out in the 2014 Proposals.


The 2014 Proposals are the product of a lengthy regulatory review process regarding the sale of asset-backed commercial paper (ABCP) in Canada that started in 2007 when Canada experienced market turmoil in the ABCP market. The immediate response to fears of an impending collapse of the Canadian ABCP market was the “Montreal Proposal” of August 2007, which resulted in the freezing of approximately $32 billion in non-bank or third-party sponsored ABCP, followed by a restructuring of outstanding ABCP. This restructuring enabled some to recover a portion of their investments, and financial settlements subsequently extracted by the regulators were recently (2013) approved for distribution to investors (other than in Québec).

In October 2008, the CSA released a consultation paper that explored proposals to regulate the distribution of ABCP. This consultation paper was followed in 2011 by an extensive set of proposed rules and amendments, designed to create a new framework for the regulation of securitized products (a broader group of securities that includes ABCP) in Canada (the 2011 Proposals). The 2011 Proposals suggested the narrowing of existing prospectus exemptions relating to the sale of securitized products, as well as increased disclosure requirements for the sale of such securities, both under a prospectus and on an exempt basis.

Although some expressed support for the 2011 Proposals, the majority of commentators did not, in part, because the 2011 Proposals were viewed to be a regulatory “overreaction” to the financial crisis. The 2014 Proposals reflect the CSA’s acknowledgement of such concerns, noting “with the exception of non-bank ABCP (that is no longer being issued), securitization activity in Canada currently does not raise systemic risk or investor protection concerns that warrant the type of comprehensive regulatory intervention contemplated by the 2011 Proposals.

Accordingly, while the 2014 Proposals share certain features with the 2011 Proposals, they are significantly narrower in scope. The 2014 Proposals will not be moving forward with various proposals relating to securitized products distributed and traded in the public markets and instead focus on the two targeted exemptions – the Proposed Short-Term Debt Exemption and the Proposed Short-Term Securitized Product Exemption. We note that the CSA does not intend to change existing regulation involving the sale of any medium and long term securitized products which was contemplated in the 2011 Proposals.

Current Short-Term Debt Exemption

The current Short-Term Debt Exemption permits the distribution of commercial paper (CP) without a prospectus. CP is a form of short-term debt issued as notes that is generally issued in Canada to provide capital for short-term financing needs of a company or “bridge financing” for a new capital investment or corporate take-over until longer-term securities are issued. CP is issued in the “exempt market” with no resale restrictions under applicable securities law.

The current Short-Term Debt Exemption provides that the prospectus requirement does not apply to a distribution of CP maturing not more than one year from the date of issue, if the CP distributed:

  • is not convertible or exchangeable into, or accompanied by a right to purchase another security other than CP; and
  • has a designated rating from a designated rating organization (a DRO) or its DRO affiliate.

The designated rating provision requires CP to have at least one credit rating that meets or exceeds a specified minimum rating (referred to below as the “credit rating threshold condition”). Although it does not require more than one credit rating, if an issuer obtains another credit rating, each credit rating must be at or above the specified minimum. This additional rating requirement has been termed the “split rating condition”.

Problems with the Current Short-Term Debt Exemption

The split rating condition may cause difficulty for issuers with multiple credit ratings if not all of its ratings meet the split rating condition. Such issuers are currently forced to seek exemptive relief from CSA members on a case-by-case basis. As a result, the CSA has determined that the current Short-Term Debt Exemption may act as a regulatory disincentive for issuers to obtain additional credit ratings. In addition, the CSA has also noted that the Short-Term Debt Exemption can be unfair, as it can result in differential treatment for certain issuers with similar credit risk. For example, while Issuer A (with a single designated rating that meets the rating threshold) could utilize the exemption, Issuer B (which may have an identical credit risk and designated rating), would be prohibited if it had obtained an additional rating that did not meet the minimum rating threshold.

Proposed New Short -Term Debt Exemption

The Proposal seeks to maintain the existing credit rating threshold condition in the current Short-Term Debt Exemption but modify the split rating condition.

As illustrated in the chart below, the 2014 Proposals would now require an issuer to have:

  • at least one credit rating that satisfies the credit rating threshold condition; and
  • no credit rating below the modified split rating condition.

The credit ratings related to the Proposed Short-Term Debt Exemption are set out in the chart below.

Type of Condition

Proposed Short-Term Debt ExemptionTerms

Credit Rating Threshold Condition The   CP has at least one rating at or above: DBRS – R-1(low); S&P – A1(low); Moody’s – P-1; or Fitch – F1.
Modified  Split Rating Condition The   CP has no rating below: DBRS – R-1(low)   (same as the rating threshold condition for DBRS); S&P – A-2;·         Moody’s – P-2; or Fitch – F2.

 The CSA believe this modified split rating condition more accurately reflects how short-term credit ratings correlate across DROs and

  • removes the regulatory disincentive for some issuers to obtain an additional credit rating;
  • provides consistent treatment of issuers with similar credit risk; and
  • maintains the current credit quality of CP distributed under the Proposed Short-Term Debt Exemption.


Although the “modified split rating condition” still  requires an issuer to satisfy a “credit rating threshold”, unlike the existing “rating threshold condition”, an issuer can also have a credit rating of A-2 by S&P , P-2 by Moody’s or F-2 by Fitch and still have acceptable credit ratings for purposes of the Proposed Short-Term Debt Exemption. This would not be permitted under the existing Short-Term Debt Exemption and is an important distinction to understand.

 The CSA states that the modified split rating condition  is intended to codify the existing exemptive relief orders that it has provided approximately 40 times since 2006.  The CSA believes that a majority of the issuers that have obtained exemptive relief orders would be able to rely on the Proposed Short-Term Debt Exemption.  For those who do not and any other CP issuer, the CSA states such issuers could apply for exemptive relief which it would consider on a case-by-case basis. There is no intention to grandfather exemptions and no guidance as to whether the standard for an exemption will become more difficult.  This change should, however, allow more issuers to acquire the second rating desired by many investors increasing access to liquidity.

Other Matters – Proposed Changes to Who Can Sell Short-Term Debt

On December 5, 2013, the CSA also published proposed amendments to National Instrument 31-103 Registration Requirements, Exemptions And Ongoing Registrant Obligations on December 5, 2013, which included a proposed section 8.22.1 short-term debt registration exemption (the Proposed 8.22.1 Exemption).

 Currently, all CSA members (except Ontario[1]) have in place orders that provide the dealer registration requirement does not apply to trades in short-term debt by specified financial institutions. The Proposed 8.22.1 Exemption contains the same conditions as these blanket orders, including that the short-term debt instruments have a designated rating.  However, the CSA have added a new condition limiting the use of the exemption to trades with permitted clients. Generally, “permitted clients” are wealthy individuals and entities, corporations, financial institutions and government entities, but does not include retail investors.

The CSA understands that current CP trading involves persons that meet the definition of a permitted client. The CSA also believes that permitted clients generally have sufficient investment knowledge or resources to obtain expert advice, and accordingly may not need or wish to have the same level of protection as other investors.  Although the Proposed 8.22.1 Exemption is only available when all of the conditions are satisfied, if the conditions cannot be satisfied, the trade can still be conducted through a registered dealer. Most financial institutions have affiliations or relationships with registered dealers.

Although the CSA proposes to retain the condition relating to the securities traded under the Proposed 8.22.1 Exemption having prescribed credit ratings, the CSA  may amend or remove this condition based on the outcome of work in this area by other CSA committees including the work being done in connection with the 2014 Proposals involving the Proposed Short-Term Debt Exemption. The CSA states that is plans to repeal the existing exemptive relief orders when the Proposed 8.22.1 exemption comes into force.  No guidance has been given as to the timing or any transaction provisions.

Comment period

The comment period for the 2014 Proposals ends on April 23, 2014.The comment period for the Proposed 8.22.1 Exemption and other amendments to NI 31-103 ends on March 5, 2014.

[1]           In Ontario, there are alternate exemptions from the dealer registration requirement that are available for trading in short-term debt instruments, such as the exemptions in section 35.1 of the Securities Act (Ontario) and section 4.1 of Ontario Securities Commission Rule 45-501 Ontario Prospectus and Registration Exemptions.

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This blog is not intended to create, and does not create an attorney-client relationship. You should not act or rely on information on this blog post without first seeking the advice of a lawyer.  This material is intended for general information purposes only and does not constitute legal advice.  For legal issues that arise, the reader should consult legal counsel.

Brian Koscak is a Partner at Cassels Brock & Blackwell LLP located in Toronto, Ontario and Chair of the Exempt Market Dealers Association of Canada. Brian is also a member of the Ontario Securities Commission’s Exempt Market Advisory Committee. Brian can be reached by phone at 416-860-2955, by e-mail at or on twitter @briankoscak. Brian also regularly writes about Canadian securities law matters on his personal blog at

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