ARCHIVED — Vol. 146, No. 18 — August 29, 2012

Registration

SOR/2012-161 August 17, 2012

CANADIAN PAYMENTS ACT

By-law Amending Certain By-laws Made Under the Canadian Payments Act

The Minister of Finance, pursuant to subsection 18(2) (see footnote a) of the Canadian Payments Act (see footnote b), approves the annexed By-law Amending Certain By-laws Made Under the Canadian Payments Act, made by the Board of Directors of the Canadian Payments Association.

Ottawa, July 25, 2012

JAMES MICHAEL FLAHERTY
Minister of Finance

The Board of Directors of the Canadian Payments Association, pursuant to the definition “payment item” (see footnote c) in subsection 2(1) and to subsection 18(1) (see footnote d) of the Canadian Payments Act (see footnote e), makes the annexed By-law Amending Certain By-laws Made Under the Canadian Payments Act.

Ottawa, June 29, 2012

JANET COSIER
Chairperson of the Board of Directors,
Canadian Payments Association

BY-LAW AMENDING CERTAIN BY-LAWS MADE
UNDER THE CANADIAN PAYMENTS ACT

BY-LAW NO. 7 RESPECTING THE LARGE VALUE TRANSFER SYSTEM

1. The French version of By-law No. 7 Respecting the Large Value Transfer System (see footnote 1) is amended by replacing “dès que cela est en pratique possible” with “aussitôt qu’il peut raisonnablement le faire” in the following provisions:

  • (a) subsection 14(3);

  • (b) subsection 15(2); and

  • (c) paragraph 44(1)(a).

CANADIAN PAYMENTS ASSOCIATION BY-LAW NO. 1 — GENERAL

2. Subsection 93(1) of the French version of the Canadian Payments Association By-law No. 1 — General (see footnote 2) is replaced by the following:

Vote

93. (1) Sous réserve du paragraphe 9(4) de la Loi, toute question mise aux voix à une assemblée des membres est tranchée à la majorité des voix.

CANADIAN PAYMENTS ASSOCIATION BY-LAW NO. 3 — PAYMENT ITEMS AND AUTOMATED CLEARING SETTLEMENT SYSTEM

3. The definition “clearing agent” in section 1 of the Canadian Payments Association By-law No. 3 — Payment Items and Automated Clearing Settlement System (see footnote 3) is replaced by the following:

“clearing agent”
« agent de compensation »

“clearing agent” means the direct clearer or group clearer appointed under subsection 33(1) that, on behalf of an indirect clearer, exchanges payment items and either effects clearing and settlement or makes entries into the ACSS.

4. Subparagraph 6(1)(b)(ii) of the By-law is replaced by the following:

  • (ii) are identified in accordance with the rules, and

5. The heading before section 10 and sections 10 to 13 of the By-law are repealed.

6. Section 16 of the By-law is amended by adding the following after subsection (2):

Settlement account and loan facility

(3) An indirect clearer may maintain a settlement account and establish a loan facility with a central that has been designated in accordance with subsection 33(2).

7. Subsection 30(1) of the By-law is replaced by the following:

Revocation of status

30. (1) The Board may revoke the group clearer status of a member if that member no longer complies with the requirements set out in paragraph 26(a), (b) or (d) or 29(2)(b) or, in the case of a group referred to in paragraph 28(1)(b), the contractual commitments referred to in paragraph 29(2)(c) no longer ensure the ability of the member to satisfy its liability as group clearer.

8. Section 31 of the By-law is repealed.

9. Section 33 of the By-law is replaced by the following:

Clearing agents appointment

33. (1) The Board may, on completion by a direct clearer or group clearer of the application procedures set out in the rules, appoint it to act as a clearing agent if the direct clearer or group clearer meets the technical, financial and other requirements set out in the rules.

Designation of a central

(2) A group clearer that has been appointed to act as a clearing agent for an indirect clearer may, in accordance with the rules, designate a central that belongs to the group where the settlement account of that indirect clearer is maintained and the loan facility of that indirect clearer is established.

Effect of designation

(3) The designation of a central in accordance with subsection (2) by the group clearer appointed to act as a clearing agent does not preclude the group clearer from remaining subject to all obligations applicable to clearing agents set out in this By-law and in the applicable rules.

10. The By-law is amended by adding the following after section 43:

Exception — immediately ceasing to act

43.1 (1) Despite section 43, a group clearer may immediately cease to act for an entity belonging to the group if

  • (a) the group clearer reasonably believes that the entity poses a legal, financial or operational risk to the group clearer; or

  • (b) the entity has breached a substantial term of an agreement entered into with the group clearer for the purposes of clearing and settlement.

Notice

(2) The group clearer shall, immediately on ceasing to act,

  • (a) give written notice to the entity of its decision to immediately cease to act for that entity;

  • (b) give notice of its decision to the President;

  • (c) give notice of its decision to the other entities belonging to the group for which it is a group clearer or to every indirect clearer for which it acts as clearing agent, as the case may be; and

  • (d) attempt to give notice of its decision to the direct clearers and other group clearers.

Notice by the President

(3) The President shall give notice to the direct clearers and other group clearers of the group clearer’s decision to immediately cease to act for the entity.

Notice by direct clearers and group clearers

(4) The direct clearers and other group clearers shall immediately notify every indirect clearer for which they act as a clearing agent or every entity belonging to the group for which they act as a group clearer of that decision.

11. Sections 54 to 56 of the By-law are repealed.

12. Subsection 57(1) of the By-law is replaced by the following:

Allocation of shortfall

57. (1) Upon receiving notice from the Bank of Canada that a direct clearer or group clearer is in default, the direct clearers and group clearers that are not in default and the Bank of Canada shall each deposit into the defaulting direct clearer’s or group clearer’s settlement account the amount determined by the formula

A × B⁄C

where, for a given direct clearer or group clearer that is not in default or the Bank of Canada,

  • A is the amount of the shortfall;
  • B is the value of the payment items that the given direct clearer or group clearer or the Bank of Canada entered into the ACSS during the ACSS cycle prior to the default and that are drawn on or payable by the direct clearer or group clearer that is in default; and
  • C is the total value of payment items that were entered into the ACSS during that cycle by all direct clearers and group clearers that are not in default and by the Bank of Canada and that are drawn on or payable by the direct clearer or group clearer that is in default.

13. Sections 59 to 62 of the By-law are replaced by the following:

Prohibition

59. A direct clearer or group clearer that is in default shall not make entries into the ACSS unless under the control of a regulator.

COMING INTO FORCE

14. This By-law comes into force on the day on which it is registered.

REGULATORY IMPACT ANALYSIS STATEMENT

(This statement is not part of the By-law.)

Issue and objectives

The Canadian Payments Association (CPA) is a not-for-profit organization that is responsible for establishing and operating national clearing and settlement payment systems and to facilitate the interaction of its payment systems with other systems involved in the exchange, settlement and clearing of payments. The CPA is also responsible for developing rules that apply to its member institutions which ensure the safety, soundness and efficiency of the payment systems.

The CPA by-laws are made by the CPA Board of Directors and set out rules relating to the requirements for membership of the CPA; the payment of fees and dues of members; the payment of penalties related to the failure to comply with the by-laws, rules and orders of the CPA; the exchange, clearing and settlement of payment items; the authenticity and integrity of payment items and messages; and limiting the liability of the CPA and its members for any loss or damage suffered by a member. The CPA by-laws require the approval of the Minister of Finance and must be published in the Canada Gazette before they are considered in effect.

The four sets of amendments to CPA By-law No. 3 — Payment Items and Automated Clearing Settlement System (By-law No. 3) serve to ensure the continued efficiency, safety and soundness of the payment systems for which the CPA is responsible, by increasing transparency; reducing legal risk; eliminating provisions that are not feasible; promoting equity between direct and group clearers; and completing technical amendments which provide clarity for member institutions.

Description and rationale

Removal of the unwinding provisions

These amendments relate to how certain payment items would be treated upon the default of a CPA member financial institution. In 2009, the CPA undertook a review of its default framework and concluded that CPA members were not in a position to carry out the unwinding provisions of the current default framework, which were viewed as difficult, if not impossible, to implement. These amendments will better align with CPA member systems by decreasing operational uncertainty in a default situation. There is also legal uncertainty in the case of insolvency as to whether a receiver would be required to abide by the CPA’s unwinding provisions. These amendments will help to mitigate legal uncertainty by simplifying the liability regime for surviving CPA members. In addition, unwinding was no longer viewed as an effective risk-management tool, as it had an uncertain financial impact on surviving CPA members, as the defaulting institution would have the ability to unwind items in an indiscriminate way, thereby creating a question as to whether unwinding would be implemented in an equal fashion as against all other surviving members. As a result, the unwinding provisions are being removed from the CPA by-laws.

Removal of the group clearer guarantee

These amendments relate to the removal of the group clearer guarantee. Currently, a group clearer is required to guarantee the payment of items drawn on the entities belonging to its group and must give at least 30 days’ notice to the CPA before ceasing to act for entities belonging to its group. In addition, the effect of the group clearer guarantee results in inequity between group clearers and direct clearers. Direct clearers can immediately cease to act as a clearing agent for an indirect clearer if they believe that it poses a legal, financial or operational risk to the direct clearer, or if the indirect clearer has breached a substantial term of agreement, regarding clearing and settlement, with the clearing agent. Removing the group clearer guarantee will reduce a group clearer’s exposure to credit, liquidity and operational risk and promote equity between group clearers and direct clearers. The CPA has proposed the removal of the group clearer guarantee based on findings that it is an ineffective risk reduction tool for group clearers.

Technical amendments

These amendments relate to the removal of outdated or duplicative provisions, specifically, the removal of the “identification and guarantee” provisions. Following consultation with CPA members, the CPA determined that, based on the distinctions in its by-law making and rule making authorities, it would be appropriate that the identification and guarantee provisions be removed from By-law No. 3 (since they do not relate to the relationships among the CPA, its directors and its members) and retained within the Automated Clearing Settlement System Rules (which relate to procedures for the exchange, clearing and settlement of payment items). Further, the sections that the CPA is seeking to remove from By-law No. 3 are already effectively duplicated within the CPA Rules.

Also included are technical amendments put forward by the Standing Joint Committee for the Scrutiny of Regulations on CPA By-law No. 1 — General and CPA By-law No. 7 — Respecting the Large Value Transfer System for harmonization between the English and French versions.

CPA credit union framework

These amendments are aimed at providing additional flexibility for indirect clearers. Currently, each CPA indirect clearer must maintain a settlement account and establish a loan facility with their clearing agent, either a direct clearer or a group clearer. These amendments expand the framework to permit provincial centrals to hold settlement accounts and loan facilities for indirect clearers who wish to clear and settle using a group clearer. This amendment is necessary to enable indirect clearers to clear through a group clearer as it is the provincial centrals that have historically held settlement accounts and loan facilities for local credit unions; further, the group clearer does not have the operational capacity to hold settlement accounts or loan facilities.

This amendment will also help promote competition between direct clearers and group clearers, which will further benefit the credit union movement in Canada. As well, this amendment will address an inconsistency in the current framework, which allows group clearers to act as the clearing agent for indirect clearers, but is silent as to whether provincial centrals may hold the necessary settlement accounts and loans facilities.

Alternatives

The unwinding provisions require removal to mitigate various risks as assessed above. The group clearer guarantee requires removal to reduce the risk to group clearers and to remove inequity that currently exists between clearing agents and group clearers. Technical amendments are required to clarify outdated and duplicated provisions. The credit union framework requires amendment to create greater competition for clearing services and more choice for indirect clearers.

Benefits and costs

These amendments will benefit CPA member institutions in a number of ways. They will provide increased transparency, reduce operational and legal risk, create increased competition among direct clearers and group clearers and provide additional flexibility for credit unions.

No costs should be attributed directly to these changes. The removal of the unwinding provisions will have the effect of saving CPA members costs as a result of not having to maintain systems for the event that they may fail. Further, the removal of the group clearer guarantee reduces financial risk to group clearers as they will no longer be required to guarantee payment items of a defaulted institution for 30 days.

Consultation

The first two sets of amendments to By-law No. 3 were subject to public consultations. Respondents included CPA member institutions, stakeholder representatives, Government entities and industry associations. All respondents were supportive of the proposed amendments.

The third and fourth set of amendments to By-law No. 3 are technical in nature. The CPA has consulted with member institutions, as well as both the By-law No. 3 Committee and the Payments Risk Working Group, which include a wide range of stakeholders.

Implementation and enforcement

To come into force, the changes would require the approval of the Minister of Finance. Following ministerial approval, the by-law must be sent to all CPA member institutions by the president of the CPA.

The amendments do not require any new mechanisms to ensure compliance and enforcement. The CPA is currently responsible for ensuring that its member institutions comply with the by-laws.

Contact

Tracy Molino
Legal Counsel
Canadian Payments Association
180 Elgin Street, 12th Floor
Ottawa, Ontario
K2P 2K3

Footnote a
S.C. 2007, c. 6, s. 429(3)

Footnote b
R.S., c. C-21; S.C. 2001, c. 9, s. 218

Footnote c
S.C. 2001, c. 9, s. 219(3)

Footnote d
S.C. 2007, c. 6, ss. 429(1) and (2)

Footnote e
R.S., c. C-21; S.C. 2001, c. 9, s. 218

Footnote 1
SOR/2001-281

Footnote 2
SOR/2003-174

Footnote 3
SOR/2003-346