Bucking the Trend

PF, PQR. UCITS V.  N-MFP.  AIFMD.  MMIF.  N-PORT. In the wake of the financial crisis, there has been a long list of new rules and requirements for investment companies to deal with, most of which are designed to accommodate systemic risk in one way or the other. 

For some it is via enhanced data reporting like PF, others through restrictions on remuneration like UCITS V, or even through a combination of both, like AIFMD. Securities and capital markets in general have also felt this shift, with lots of regulations around high frequency trading, capital adequacy, and derivatives markets.

And then there is Canada. For those unfamiliar with the Canadian securities and capital markets’ regulatory environment, some background might be in order. Canada does not have a centralized securities markets regulator. Each province or territory has its own securities regulator and its own rules, though all but Ontario have joined together in an umbrella regulatory body called the Canadian Securities Administrators (CSA). This voluntary group harmonizes its rules and creates a passport so that registering in one province means you can sell a fund in every province.

The Ontario Securities Commission (OSC) is technically outside of the CSA, but they harmonize their rules with the CSA, so that a single set of National Instruments (NI) defines the rules–NI 81 for investment funds.  The unique part about Canada is that it is all voluntary, and as such, there is less of a centralized regulatory authority than even the European Union.

The decentralized Canadian regulations have not been completely absent of systemic risk rule making. Canada has had its share of high frequency trading and derivatives related rule changes. But data collection for use in systemic risk analysis, which has played such a major role for US and European investment companies and created major headaches for them (probably more in the US than Europe, but Annex IV for UCITS funds can’t be too far in the distant future), is missing.  There is no Canadian equivalent of PF or AIFMD today and there are no plans for one in the future. The acronyms that are of the greatest concern on the streets of Toronto are IFRS and CRM2, some good old fashioned investor disclosure rules.

Why is this the case? Why aren’t the various Canadian securities regulators pressing for data collection as their US and European counterparts have done? One reason might be Canada’s decentralized regulatory environment, which is not well positioned for processing systemic risk data.

Another explanation might be that during the Great Recession, Canadian banks did not fail and the Canadian government did not need to provide support to keep them from failing. Certainly things looked grim in Canada, as they did everywhere. But relatively speaking, they fared much better than their European and US counterparts. And since the government did not have to bail anyone out, there might be less of an outcry for the government to do something differently to prevent bail outs in the future, and less political capital available for new rule making.

Investment companies in Canada have the good fortune of exemplary behavior in the banking sector and a favorable, decentralized regulatory environment, which has allowed them to steer clear of the systemic risk reporting and its correlated data management that is transforming the US and European back office.