October 17, 2008 at 7:21 PM EDT
Canadian brokerage firms did little to review asset-backed commercial
paper products before selling them to retail investors, according
report by Canada's brokerage industry regulator.
The Investment Industry Regulatory Organization of Canada (IIROC)
reported yesterday on a year-long compliance sweep of firms involved in
selling non-bank ABCP to Canadian investors, laying out new guidelines
to change the way investment firms review products before selling them
"There was very little understanding, generally speaking, of what this
product really was all about," IIROC chief executive officer Susan
Wolburgh Jenah said yesterday. She said brokerage firms reported they
saw non-bank ABCP as little different from traditional commercial paper,
even though IIROC concluded there were major risk differences.
The review concluded 76 per cent of the assets underlying non-bank ABCP
were complex financial derivatives like synthetic collateralized debt
obligations, whereas bank-sponsored ABCP had only three per cent of
those types of derivatives and had 97 per cent traditional commercial
paper assets like credit-card receivables. "The name asset-backed
commercial paper was a misnomer. They were liability-backed," Ms.
Wolburgh Jenah said.
||The non-bank ABCP market collapsed in August, 2007, leaving investors
holding about $35-billion of frozen notes, including 2,542 individuals
with investments totalling $317-million. Many individuals were seniors
or other risk-averse investors who reported they were assured ABCP was
as safe as a bank GIC or other guaranteed product.
||The report said none of the 21 Canadian brokerage firms that sold
third-party ABCP to clients had reviewed the product through their
internal due diligence process. Under such a process, committees assess
whether new products are suitable for a firm to sell to corporate or
IIROC said most firms reported they did not do due diligence reviews
because they relied on the high credit rating the ABCP notes received
from DBRS. Industry participants also reported they felt ABCP was a
typical money market instrument that did not require risk assessment.
Bank-owned brokerage firms relied on reviews by their parent banks, the
report added, but most of the reviews were done to establish credit and
trading limits as part of financial risk control. Only one unidentified
bank reviewed the product from a client suitability perspective and
decided not to sell it. Toronto-Dominion Bank has previously disclosed
it did not sell ABCP to clients.
IIROC said member firms that did not sell ABCP to clients reported they
did not believe their clients would understand the product, or that
there were simpler alternative products, or that there was little profit
on the transactions. Indeed, the report said all dealer members who sold
ABCP to retail investors reported the product was viewed as a
"loss-leader" service to clients and not a profitable product.
No firms or brokers have been sanctioned by IIROC for selling ABCP to
clients for whom it was not a suitable investment under the industry's
know-your-client rules. Ms. Wolburgh Jenah said IIROC has not completed
its reviews of complaints from clients.