The Investment Industry Regulatory Organization of Canada (IIROC) that would make it easier for dealers to raise capital from one another.
IIROC is proposing amendments to its rules that impose “cross-guarantee” requirements on firms that are at least 20% commonly owned. The current rules require firms with 20% common ownership to guarantee each other’s obligations to clients. IIROC is proposing to raise that threshold to 50%.
According to a notice setting out the proposed rule change, raising the threshold from 20% to 50% would “reduce the constraint that exists within the current rules” relating to [dealers] raising capital from one another. It says that the prospect of having to enter into a cross-guarantee agreement “currently acts as a strong current disincentive” to firms investing in other firms above the 19.9% level.
The notice says this change would also limit the requirement to enter into a cross-guarantee agreement to “situations where it is clear that the same shareholder controls the decision making at both [dealers].”
The “cross-guarantee” requirement is designed to ensure that dealers that belong to the Canadian Investor Protection Fund (CIPF), “do not structure their operations and their legal relationships with each other in a way that compromises investor protection and/or shifts business risk from commonly-owned [dealers] to CIPF,” it notes.
“The current rule requirement warrants revision to ensure that the rule focuses on those situations where the ‘fairness’ of who pays for the insolvency of a commonly-owned [dealer] is a concern — specifically, to focus on those situations where two or more [dealers], directly or indirectly, have the same controlling shareholder,” it notes.
The notice also indicates that the reduction in the number of cross-guarantee agreements required under the revised rules is not expected to significantly affect the default risk faced by CIPF, or the investment dealer community.
The proposals are out for comment until Feb. 4, 2015.