Canadian Parliament Building at Dusk

This article appears in the June 2021 issue of Investment Executive. Subscribe to the print edition, read the digital edition or read the articles online.

The decision in March to shut down the Capital Markets Authority Implementation Organization was seen as the death knell for a national securities regulator, but the federal government still is interested in building a stronger bulwark against systemic risk.

In addition to creating a more cohesive framework for securities markets oversight, the planned Capital Markets Regulatory Authority (CMRA) would have taken on the responsibility of collecting data at the national level to help guard against systemic risk — a concern that has lingered unaddressed since the global financial crisis of 2008-09.

Now, that plan is in limbo.

“It is disappointing that after more than 12 years since the great financial crisis of 2008, Canada still does not have a coherent legislative scheme for monitoring and managing systemic risks to our financial system,” said Jean-Paul Bureaud, executive director of the Canadian Foundation for Advancement of Investor Rights (a.k.a. FAIR Canada) in Toronto.

Yet, while the effort to create the CMRA has been halted, it seems the federal government hasn’t given up on addressing systemic risk at the national level.

The 2021 federal budget included a pledge of $12 million to sustain another little-known federal agency — the Canadian Securities Transition Office (CSTO), which has been working on the co-operative regulator project since mid-2009 — for another two years. That funding is intended to keep the CSTO running until June 2023, bringing the total cost of its work since 2009 to $119.5 million.

Over the next two years, the CSTO will be focused primarily on developing the capacity to monitor systemic risk at the national level under proposed federal legislation known as the Capital Markets Stability Act (CMSA), said Doug Hyndman, the agency’s chair and CEO, at a May 26 meeting of the Standing Senate Committee on Banking, Trade and Commerce.

“If the co-operative system were to go ahead, [monitoring for systemic risk] would be the federal component of the co-operative system, but it’s something we’re working on as an independent priority at the federal level,” Hyndman said.

While provincial securities regulators already monitor for systemic risk, collecting data at the national level is seen as essential, given that systemic risks typically don’t respect national, let alone provincial, boundaries.

The Supreme Court of Canada, in a 2018 decision that acknowledged a role for the federal government in securities regulation, said the job of regulating systemic risk is a federal responsibility: “Put simply, the management of systemic risk across Canadian capital markets must be regulated federally, if at all.”

For now, the CSTO will continue to work at collecting the data it needs to monitor the sort of systemwide risks that were exposed 12 years ago during the global financial crisis — and, more recently, during the market turmoil brought on by the Covid-19 pandemic.

“I would like to see us move forward and fill those [data] gaps and continue to develop methodologies for identifying risks, for assessing how much of a threat they present to the Canadian capital markets and the economy, and devising consultative and co-ordinated responses by all manner of regulators to address those risks before they blow up in our faces,” Hyndman told the Senate banking committee.

While the additional funding promised in the budget will enable the CSTO to continue that work, who will actually carry out the task of collecting and analyzing vast quantities of market data to identify emerging risks is not clear. The original plan was for the CMRA to have that responsibility.

“The right thing to do — assuming the CMRA is indeed off the table — would be for the feds to move forward on their own” and create a new agency for the task, Bureaud said — and the sooner, the better.

“Given their clear constitutional authority [surrounding] systemic risk and the current economic situation — low interest rates, the chase for yield, high household debt levels, et cetera — the longer [the feds] wait to implement a CMSA, the more they squander our ability to monitor and manage growing risks within the financial system,” Bureaud said.

Hyndman told the Senate committee the federal government will determine how and when the CMSA will be implemented. (As of IE’s press time, Finance Canada hadn’t responded to a request asking when the CMSA would be in force.)