Canada Gazette, Part I, Volume 146, Number 12: By-law Amending Certain By-laws Made Under the Canadian Payments Act
March 24, 2012
Canadian Payments Act
Department of Finance
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 systems for the clearing and settlement of payments; facilitating the interaction of its payments systems with other systems involved in the exchange, clearing or settlement of payments; and facilitating the development of new payment methods and technologies. In pursuing these objectives, the CPA also promotes the efficiency, safety and soundness of its payments systems.
The CPA is also responsible for developing by-laws and rules that apply to its member institutions. The CPA Board of Directors makes by-laws respecting, among other things, CPA membership requirements; payment of fees and dues of members; payment of penalties for failing 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. CPA by-laws require the approval of the Minister of Finance and must be published in the Canada Gazette before they are considered to be in effect.
The four proposed sets of amendments to CPA By-law No. 3 — Payment Items and Automated Clearing Settlement System (By-law No. 3) would 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 cannot be complied with, promoting equity between direct and group clearers and providing clarity for member institutions by way of several technical amendments.
Description and rationale
Removal of the unwinding provisions
These amendments relate to the treatment of certain payment items 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, viewing them as difficult, if not impossible, to implement. These amendments would more appropriately reflect CPA member systems and decrease operational uncertainty in the event of a member default. 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 would help mitigate that legal uncertainty by simplifying the liability regime for surviving CPA members. In addition, the review revealed that unwinding was no longer considered an effective risk-management tool, as it would have an uncertain financial impact on surviving CPA members because the defaulting institution could unwind items indiscriminately, creating a question as to whether unwinding would be implemented in an equal fashion as against all other surviving members. Removing the unwinding provisions from By-law No. 3 would clearly address these issues.
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. The group clearer guarantee results in inequity between group clearers and direct clearers. In contrast to group clearers, direct clearers can immediately cease to act as a clearing agent for an indirect clearer if they believe it poses a legal, financial or operational risk to the direct clearer, or if the indirect clearer has breached a substantial term of the agreement (regarding clearing and settlement), with the direct clearer. Removing the group clearer guarantee would therefore reduce a group clearer’s exposure to credit, liquidity and operational risk and promote equity between group clearers and direct clearers. The CPA has also proposed the removal of the group clearer guarantee based on findings that it is an ineffective risk reduction tool for group clearers.
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 Association determined that, based on the distinctions in its by-law making and rule making authorities, it would be appropriate to remove the Identification and Guarantee provisions from By-law No. 3 since they do not relate directly to relationships among the CPA, its directors and its members. Retaining these provisions in the Automated Clearing Settlement System Rules, which relate to procedures for the exchange, clearing and settlement of payment items would be more appropriate. Further, the sections that the CPA is seeking to remove from By-law No. 3 are already effectively duplicated within the CPA Rules.
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 would 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 hold settlement accounts and loan facilities for local credit unions. Moreover, the group clearer does not have the operational capacity to hold settlement accounts or loan facilities.
This amendment would also help foster competition between direct clearers and group clearers, which would further benefit the credit union movement in Canada. As well, this amendment would address uncertainty in the current framework, which allows group clearers to act as a clearing agent for indirect clearers, but is silent as to whether provincial centrals may hold the necessary settlement accounts and loans facilities.
Benefits and costs
These amendments would benefit CPA member institutions in a number of ways. The amendments would increase transparency, reduce operational and legal risk, increase 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 would 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 would reduce financial risk to group clearers as they would no longer be required to guarantee the payment items of a defaulted institution for 30 days.
The first two sets of amendments 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 sets of amendments 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, enforcement and service standards
To come into force, the changes would require 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 proposed amendments do not require any new mechanisms to ensure compliance and enforcement. The CPA currently is responsible for ensuring that its member institutions comply with the By-laws.
Canadian Payments Association
180 Elgin Street, 12th Floor
PROPOSED REGULATORY TEXT
Notice is hereby given, pursuant to subsection 18(2) (see footnote a) of the Canadian Payments Act (see footnote b), that 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 that Act, proposes to make the annexed By-law Amending Certain By-laws Made Under the Canadian Payments Act.
Interested persons may make representations concerning the proposed By-law within 30 days after the date of publication of this notice. All such representations must cite the Canada Gazette, Part Ⅰ, and the date of publication of this notice, and be addressed to Tracy Molino, Legal Counsel, Canadian Payments Association, 1200-180 Elgin Street, Ottawa, Ontario K2P 2K3 (tel.: 613-238-4173 ext. 3241; fax: 613-233-3385; email: firstname.lastname@example.org).
Ottawa, March 2, 2012
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:
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:
« 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.
(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:
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.