Bank Recapitalization (Bail-in) Conversion Regulations

Bank Recapitalization (Bail-in) Conversion Regulations Her Excellency the Governor General in Council, on the recommendation of the Minister of Finance, pursuant to subsection 39.2(10)a of the Canada Deposit Insurance Corporation Actb, makes the annexed Bank Recapitalization (Bail-in) Conversion Regulations. S.C. 2016, c. 7, s. 139(4) R.S., c. C-3 Definitions The following definitions apply in these Regulations. Act means the Canada Deposit Insurance Corporation Act. (Loi) debt obligation has the same meaning as in section 2 of the Bank Act. (titre de créance) non-viability contingent capital means a share or liability of a federal member institution that, by operation of its terms, may be converted into common shares of the institution as a result of a public announcement related to the institution’s viability that is made by the Superintendent or Her Majesty in right of Canada or a province. (fonds propres d’urgence en cas de non-viabilité) subordinated indebtedness has the same meaning as in section 2 of the Bank Act. (titre secondaire) Prescribed shares and liabilities Subject to subsections (2) to (7), the following shares and liabilities are prescribed for the purposes of subsection 39.2(2.3) of the Act: any debt obligation, other than subordinated indebtedness, that is issued by a domestic systemically important bank and that is perpetual, has an original or amended term to maturity of more than 400 days, has one or more explicit or embedded options that, if exercised by or on behalf of the issuer, would result in a maturity date that is more than 400 days from the date of issuance of the debt obligation or has an explicit or embedded option that, if exercised by or on behalf of the holder, would by itself result in a maturity date that is more than 400 days from the maturity date that would apply if the option were not exercised, is unsecured or is only partially secured at the time of issuance, and has been assigned a Committee on Uniform Security Identification Procedures (CUSIP) number, International Securities Identification Number (ISIN) or other similar designation that identifies a specific security in order to facilitate its trading and settlement; and any share or subordinated indebtedness that is issued by a domestic systemically important bank and that is neither a common share nor non-viability contingent capital. For greater certainty For greater certainty, a reference to a debt obligation or to subordinated indebtedness in this section includes a reference to any debt obligation or subordinated indebtedness that is due but remains unpaid on the day on which the order under paragraph 39.13(1)(d) of the Act is made or becomes due after that day. Limitation A share or liability is prescribed only if the share or liability is issued on or after the day on which these Regulations come into force; or in the case of a liability issued before the day on which these Regulations come into force, the terms of the liability are, on or after that day, amended to increase its principal amount or to extend its term to maturity. Partially secured If a debt obligation, other than subordinated indebtedness, is only partially secured at the time of issuance, only the portion of the principal amount and accrued and unpaid interest of the debt obligation that exceeds the value of the collateral, determined at the time that the debt obligation is issued, is a prescribed liability. Exclusions The following, as well as any liabilities that arise from any of them, are not prescribed shares or liabilities: any covered bond, as defined in section 21.5 of the National Housing Act; any eligible financial contract, as defined in subsection 39.15(9) of the Act; any structured note; any conversion or exchange privilege that is convertible at any time into shares; any option or right to acquire shares or any privilege referred to in paragraph (d); and any share of a series that was created before January 1, 2013 and issued as a result of the exercise of a conversion privilege under the terms of another series of shares that was created before January 1, 2013. Structured note For the purposes of paragraph (5)(c), a structured note is a debt obligation that specifies that the obligation’s stated term to maturity, or a payment to be made by its issuer, is determined in whole or in part by reference to an index or reference point, including the performance or value of an entity or asset, the market price of a security, commodity, investment fund or financial instrument, an interest rate, and the exchange rate between two currencies; or contains any other type of embedded derivative or similar feature. Exceptions — structured note Despite subsection (6), the following debt obligations are not structured notes: a debt obligation in respect of which the stated term to maturity, or a payment to be made by its issuer, is determined in whole or principally by reference to the performance of a security of that issuer; and a debt obligation that specifies that the return on the debt obligation is determined by a fixed or floating interest rate or a fixed spread above or below a fixed or floating interest rate, regardless of whether the return is subject to a minimum interest rate or whether the interest rate changes between fixed and floating, has no other terms affecting the stated term to maturity or the return on the debt obligation, with the exception of the right of the issuer to redeem the debt obligation or the right of the holder or issuer to extend its term to maturity, and is payable in cash. Definition of conversion For the purposes of sections 4 and 5, conversion means with respect to non-viability contingent capital, conversion of the shares and liabilities in accordance with their terms; and with respect to other shares and liabilities, conversion under subsection 39.2(2.3) of the Act. Conversion amount In carrying out a conversion, the Corporation must take into consideration the requirement, under subsection 485(1) of the Bank Act, for banks to maintain adequate capital. Order of conversion The Corporation must use its best efforts to ensure that a prescribed share or liability is converted only if all subordinate prescribed shares and liabilities and any subordinate non-viability contingent capital have previously been converted or are converted at the same time. Same proportion — equal rank The Corporation must use its best efforts to ensure that the converted part of the liquidation entitlement of a prescribed share, or the converted part of the principal amount and accrued and unpaid interest of a prescribed liability, is converted on a pro rata basis for all prescribed shares or liabilities of equal rank that are converted during the same restructuring period. Priority of instruments In a conversion under subsection 39.2(2.3) of the Act, holders of prescribed shares or liabilities must receive a greater number of common shares per dollar of the converted part of the liquidation entitlement of their shares, or the converted part of the principal amount and accrued and unpaid interest of their liabilities, than holders of any subordinate prescribed shares or liabilities that are converted during the same restructuring period or of any subordinate non-viability contingent capital that is converted during the same restructuring period; holders of prescribed shares or liabilities of equal rank that are converted during the same restructuring period must receive the same number of common shares per dollar of the converted part of the liquidation entitlement of their shares or the converted part of the principal amount and accrued and unpaid interest of their liabilities; and holders of prescribed shares or liabilities must receive, if any non-viability contingent capital of equal rank to the shares or liabilities is converted during the same restructuring period, a number of common shares per dollar of the converted part of the liquidation entitlement of their shares, or the converted part of the principal amount and accrued and unpaid interest of their liabilities, that is equal to the largest number of common shares received by any holder of the non-viability contingent capital per dollar of that capital. Ranking In this section, a share or liability of the federal member institution is subordinate to another share or liability of the institution if, in the event that the institution is wound up, the share or liability would rank subordinate in right of payment to that other share or liability; and equal in rank to another share or liability of the institution if, in the event that the institution is wound up, the share or liability would rank equally in right of payment to that other share or liability. Definition of liquidation entitlement In this section, liquidation entitlement means the amount to which the holder of a share of a federal member institution is entitled to be paid, in the event that the institution is wound up, in priority to any amount to be paid to a holder of a subordinate share. 180th day after registration These Regulations come into force on the 180th day after the day on which they are registered. [Note: Regulations in force September 23, 2018.]