The Office of the Superintendent of Financial Institutions has issued guidance on the use of innovative instruments in Tier 1 capital calculations.

OSFI says the guidance concerns banks, federally regulated trust and loan companies and federally regulated life insurance companies, and is effective immediately. OSFI says it will continue to review the principles in light of any issues arising from their application to specific transactions.

Firms seeking to include an innovative instrument in Tier 1 capital should obtain OSFI’s prior approval. To gain approval, they must demonstrate clearly how the proposal conforms to each of the requirements. Submissions should include independent unqualified opinions on the tax treatment and legal viability of the structures.

Once the initial review is completed, OSFI will require detailed documentation supporting the transaction, including a preliminary prospectus, if any is to be issued.

Additional information may be required, depending on the complexity of the transaction and the supervisory concerns it raises; this requirement will be determined on a case-by-case basis.