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OSFI on ABCP Hook?

Juliius Melnitzer

Tuesday, April 08, 2008

Whatever shape the final ABCP deal takes, one thing looks clear: Canada's financial regulator, OSFI, and the government aren't going to get releases which makes sense, because they aren't going to contribute anything.

But that raises the prospect of OSFI as a potential defendant in lawsuits that could blow up in the face of all the players who think they are getting full releases in any "final" ABCP settlement.

Here's how it plays out: OSFI made what amounts to a cozy club deal with Canadian banks when it allowed the banks to use a variation of the market disruption clause that is recognized internationally, in their ABCP structures. The fine legal question is whether that amounted to regulatory negligence. And if it does, did OSFI's duty extend only to the regulated institutions or the wider market?

Now you can bet that if OSFI gets sued, it will seek indemnity from the banks, who may in turn seek indemnity from the dealers, and so on. If the scenario crystallizes, everyone who thought they were off the hook may find themselves right back on it.

As it turns out, OSFI chief Julie Dickson may have been trying to discourage potential plaintiffs when she told an insurance industry gathering some time ago that the ABCP crisis was a market failure, not a regulatory failure. In this context, and as a previous blog pointed out, it's also of some interest that OSFI's recently-released priorities report promises stepped-up surveillance of financial markets, the creation of an internal committee to help identify emerging financial risk, and a 10% increase in financial institution monitors.

Still, there may be a bright light at the end of the tunnel: because the scenario was a club deal in its inception, it can probably be settled as a club deal.

Julius Melnitzer

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