Friday, October 17, 2008
TORONTO -- There was so much confusion among Canadian investment dealers
about the true nature of asset backed commercial paper that many
couldn't say how much of the product they held when the market froze up
last year, according to the industry's self-regulatory body.
In a report released on Friday, the Investment Industry Regulatory
Organization of Canada said one of the "greatest challenges" it faced
when it launched a fact-finding initiative into the market failure was
figuring out who was exposed, because some dealers did not distinguish
the third-party ABCP that seized up from conventional debt instruments
such as plain vanilla commercial paper. In fact, the stalled ABCP was
backed by risky credit derivatives, some linked to subprime mortgages.
Further, IIROC said it found "inadequacies" in the dealers' due
diligence of the product category.
The report, issued more than a year after the $35-billion market for
third-party ABCP fell apart, makes a number of recommendations, mostly
focusing on the need for dealers to understand investment products
before they sell them.
"Dealer members must have a product due diligence process that takes
into account the nature of the product and the target investors," the
Brokers should also ensure that they understand the needs of their
clients and that the products they introduce them to are suitable.
Another recommendation is that dealers should ensure greater
transparency in products they are involved in.
The lion's share of the frozen ABCP was sold to institutions, however
about $372-million ended up in the hands of retail investors, most of
who relied on their brokers for advice about the product.
Many firms that sold the notes relied on ratings issued by DBRS, the
only rating agency willing to offer an opinion on third party ABCP.
IIROC recommends that brokers should conduct their own assessments of
the products they sell.
According to the report, 26 IIROC member firms were involved in the
third-party ABCP market, including 13 that sold it to retail clients.
Most of them bought the paper back from individuals shortly after the
freeze-up in August 2007, but a handful -- including Canaccord Capital
Corp. and Credential Securities -- did not. Both have agreed to
repurchase the notes they sold following a proposed restructuring of the
"What we have tried to do [with this report] is not point fingers or
blame people," said IIROC chief executive Susan Wolburgh Jennah, "What's
we've tried to do is take a look at a very difficult situation and
understand what lessons can be learned... We tried to do what I consider
to be the right thing here, which is to look at the issues, to
understand what happened and to make constructive recommendations" so
this doesn't happen again.
Backers of a proposed restructuring have said they expect the process to
be complete by the end of this month.