Chapter 3: The Canadian Regulatory Environment Flashcards
what does the OSFI do
office of the superintendent of financial institutions
- Regulates and supervises banks, insurance, trust and loan companies, pension plans
- It does not supervise the Canadian securities industry – this is done provincially
what is the Canadian Deposit Insurance Corporation (CDIC)
- Federal Crown corporation
- Insures deposits up to $100k per depositor in each financial institution
- You personally can be insured for a total greater amount than $100k – the insurance is for each “account” – bank account; mortgage etc.
- However, this insurance is not for mutual funds, stocks, bonds
- applies for term deposits (ex. savings, chequing, GICs) if they mature < 5 years
- > 5 years, they are not insured
Why would the Canadian government wish to insure bank deposits but not stocks / shares in Canadian companies?
they want Canadians to have confidence in their banking systems -> canadians would deposit their money in banks
how is the canadian securities industry regulated
- The Canadian securities industry is regulated provincially
- Each province has its own securities commission – in Ontario it is the Ontario Securities Commission (OSC)
what is the canadian securities association (CSA)
- formed by all 13 securities commissions to provide a national umbrella group to co-ordinate provincial activities (but only co-ordinate)
- provide securities regulatory system that protects investors from unfair, improper, or fraudulent practices
- helps make it fair, efficient, & vibrant capital markets
why have efforts to set up a national securities commission been resisted by some provincial commissions
- currently the provincial commissions have a lot of power
- if they set up a national securities commission, those provincial commissions would have less power (they don’t want that)
what is an SRO
- self-regulatory organizations
- An organization owned by its members that regulate and police themselves
- deals with member regulation, listing requirements, & trading regulation
what are examples of SROs
- TSX
- Mutual Funds Dealers Associations (MFDA)
- Investment Industry Regulatory Organization of Canada (IIROC)
what does the Investment Industry Regulatory Organization of Canada (IIROC) do
- IIROC oversees all investment dealer and trading activity in the Canadian debt and equity markets
- Monitor member firms for capital adequacy and business conduct
what is the purpose of IIROC
- purpose is to set high quality regulatory & investment industry standards, protect investors, & strengthen market integrity while keeping efficient & competitive capital markets
- also a national SRO & therefore needs to ensure national policies & rules reflect the various perceptions of people in all parts of the country
what is capital adequacy
- It is the amount of money (capital) that firms must set aside when holding bank deposits / making loans / raising capital for corporations
- If firms require less capital – their returns on this capital will be greater
- However, the greater the risk to these firms and the overall financial system (that was the financial crisis)
what happened in the financial crisis
- companies in the US didn’t have much capital (they wanted less capital bc it meant more gain if value of assets don’t decrease)
- because having more capital = dilution of ownership for others
- when the financial crisis happened, the value of assets (mortgages) went down while the amount of liabilities stayed the same
- since A = L + E, companies had to remove equity to balance it back out
what happened in the financial crisis for Canada
- real estate didn’t go down as much as it did in the US
- but regulations in Canada has required companies to have more capital
- so the canadian market didn’t face too much of an affect
what is short selling
- selling for higher
- buying back later for less
how does IIROC serve as a securities industry regulator
- Formulates standards and policies for Canadian debt and equity markets
- Monitors sales and trading activities of member firms
- regulates the qualifying & registration process of member firms
- If you dare to commit illegal trading activity as an investor in Canada, you are likely to hear from IIROC
why is IIROC an extremely important part of a properly functioning Canadian capital environment
- because of how it reduced the affect of the great recession/financial crises
- The financial crises brought much criticism upon financial institutions and the organizations that regulate them, since they make companies have more capital
- but Canadian financial institutions were not nearly as affected as U.S. / European companies
- but the More stringent regulation was only partly a reason for this
- Going forward, there will be much greater scrutiny of financial institutions / regulators to ensure that a similar crisis is avoided
