Proceedings of the Standing Senate Committee on
Banking, Trade and Commerce
Issue 26 - Evidence - November 6, 2012
OTTAWA, Tuesday, November 6, 2012
The Standing Senate Committee on Banking, Trade and Commerce met this day at
3:30 p.m. to examine the subject matter of those elements contained in Divisions
1, 3, 6, and 14 of Part 4 of Bill C-45, A second Act to implement certain
provisions of the budget tabled in the House of Commons on March 29, 2012 and
Senator Irving Gerstein (Chair) in the chair.
The Chair: It is a great pleasure to call this meeting of the Standing
Senate Committee on Banking, Trade and Commerce to order. As I think you are
aware, on October 18, the government introduced Bill C-45, the jobs and growth
bill, 2012. On October 30, 2012, the Senate authorized a number of its
committees to undertake pre-studies of various components of the legislation in
order to facilitate its eventual consideration by the Senate.
The Standing Senate Committee on Banking, Trade and Commerce has been tasked
with four divisions of Part 4. Division 1 allows certain public sector
investment pools to directly invest in a federally regulated financial
institution. Division 3 will provide for a limited automatic stay with respect
to certain eligible financial contracts when a bridge institution is
established. It will also facilitate central clearing of standardized
over-the-counter derivatives. Division 6 reflects changes made to the articles
of agreement of the International Monetary Fund as a result of the 2010 quota
and governance reforms. The fourth division, Division 14, amends the Agreement
on Internal Trade Implementation Act, primarily for the enforceability of orders
to pay tariff costs and monetary penalties.
Today, it is a pleasure to welcome, to give us an overview of these four
sections, the Honourable Ted Menzies, Minister of State for Finance, and the
Honourable Christian Paradis, Minister of Industry. Thank you for being here,
particularly on such short notice.
Honourable senators, the ministers are here for an hour, but their respective
officials will be staying for the full two hours.
Ministers, the floor is yours.
Hon. Ted Menzies, P.C., M.P., Minister of State (Finance): Thank you,
chair, for allowing my colleague and I to come and present what we think is some
background on a very important piece of this Budget Implementation Act. As you
will see, we have some learned officials with us should you stump Minister
Paradis or myself with some really tough questions.
The Chair: I am not concerned about Minister Paradis, just the fact
that you made the comment with regard to yourself.
Mr. Menzies: Thank you for your kind consideration, sir. I see I have
his full support.
Thank you for this opportunity to speak today to Bill C-45, the proposed jobs
and growth act, 2012. This is a key legislative piece in continuing to implement
our Economic Action Plan for 2012. I will make my comments quite brief so that
we have lots of time for some questions.
Before I begin my remarks, I would like to briefly thank the chair and
vice-chair and, indeed, all the members of this committee for extensive work to
date on the parliamentary review of the Proceeds of Crime, Money Laundering and
Terrorism Financing Act. I think that is very important work that you are doing,
so thank you for your efforts.
I recognize that the committee's deliberations over the past year have been
very comprehensive, and I applaud your efforts. We are looking forward to the
results of that.
However, before completing that important study, I do appreciate that the
committee has taken time to examine Bill C-45, which deals with the financial
sector reform, as well as with some other related areas. As you know, today's
legislation implements key measures of our Economic Action Plan 2012, a
plan that will help to grow Canada's economy, fuel job creation and secure
Canada's long-term prosperity. It accomplishes that through a few targeted
measures that ensure the continued strength and stability of Canada's financial
That is what I would like to speak to today. As we all know, Canada's
financial system, which we all very much rely on, be it for every day purchases
at a grocery store or for small business loans, is widely recognized as the
soundest, most resilient and best regulated financial system in the world. In
fact, the World Economic Forum has ranked Canada's financial system as the
safest and soundest in the world for five years in a row.
In the words of highly regarded IMF Managing Director Christine Lagarde, just
a few weeks ago, "Canada, a country with one of the strongest financial sectors
in the world, can teach the rest of the world about how to build a stronger,
safer financial system.'' Those are pretty strong words coming from Madam
Nevertheless, despite the impressive international accolades, Canada cannot
be complacent. We must be vigilant by addressing challenges as they emerge. To
help maintain this advantage, the jobs and growth bill proposes new initiatives
to build on this track record. While relatively small, they are important to
ensuring that our financial system stays strong. I will briefly highlight these
three key measures for the committee.
The first one is consequential to a change made in the first piece of
legislation to implement the Economic Action Plan 2012, last spring's Bill C-38.
As you might recall, that legislation included a provision to help to ensure
that Canadian financial institutions were not disadvantaged when competing with
their international counterparts.
Specifically, it allowed public sector investment pools that satisfy certain
criteria, including pursuing commercial objectives, to directly invest in a
Canadian financial institution. This measure was relatively straightforward.
Investments by such public sector investment pools are nothing new as they are
already allowed to invest in other sectors of our Canadian economy.
Furthermore, the practice of public sector investment pools investing in
financial institutions is permitted in jurisdictions that Canada competes
directly with. Those would include Australia, the U.S., Switzerland and the U.K.
Bill C-45 simply reinforces that legislation already adopted by Parliament last
spring by implementing technical and coordinating changes to support the
previously legislated policy.
The second measure that I would like to highlight serves a dual purpose. It
both reinforces Canada's financial stability framework and delivers on a key G20
commitment to support a major financial sector reform agenda taking place all
around the world by improving regulation of over-the-counter derivative
transactions. When the officials start to answer questions, they will probably
refer to them as OTCs. It is over-the-counter derivatives that we are referring
As the IMF's Global Financial Stability Report recently noted:
During the financial crisis, the credit default swap market, a part of the
OTC derivatives market, took centre stage as difficulties in financial
markets began to intensify and the counter-party risk involved in a largely
bilaterally cleared market became apparent. Authorities had to make
expensive decisions regarding Lehman Brothers and AIG, based on only
partially informed views of potential knock on effects of the firm's
As a result, coordinated international efforts began to increase oversight of
this segment of global finances. To that end, the G20 leaders' statement that
was made in September 2009 in Pittsburgh said, "We committed to . . . [act] to
improve the over-the-counter derivatives market and to create more powerful
tools to hold large global firms to account for the risks that they take.''
Since that time, our government, along with the Bank of Canada and the Canadian
Securities Administrators, as well as the Office of Superintendent of Financial
Institutions, coordinated efforts to implement reform of Canada's
over-the-counter derivatives markets to bring them into line with our G20
As one piece of these reforms, the 2012 jobs and growth bill introduces
necessary legislative amendments to payment clearing and settlement to support
central clearing of standardized over-the-counter derivative transactions as
well as to reinforce Canada's financial stability framework. Simply put, these
challenges will help keep the financial sector well capitalized, while providing
the necessary regulatory and supervisory tools to ensure that OTC derivatives
are used safely and effectively.
In the words of the Bank of Canada's Mark Carney during his recent appearance
before the House of Commons Finance Committee: "We do well to remember that
these are immense markets globally. They bring real true systemic risk to global
financial institutions. The so-called infrastructure of these derivatives market
was found wanting during the crisis and needed to be fixed. We actually want to
know what is going on in these markets so that regulators and authorities can
see the actual level of activity, spot trends, see emerging vulnerabilities and
address them as necessary. Unlike the equity market, one does not have a central
repository of the trades that happen in derivatives, and it is not acceptable.
It is being fixed. It is the first element, and Canada is moving forward on
By championing these legislative changes, Canada will continue to play a
leadership role in promoting sound financial sector regulation both at home and
Bill C-45 also makes amendments to another element of last spring's Bill C-38
legislation, specifically, Canada's international commitment to ratify important
IMF quota and governance reform agreements. The agreement was reached in 2010 at
the G20 finance ministers' and central bank governors meeting in Korea. This
agreement enhanced the effectiveness as well as the legitimacy of the IMF by
increasing the voice and representation of emerging markets and developing
countries in keeping with their growing economies. Canada completed the
ratification of these reforms in the summer of 2012 to meet its G20 commitment
in advance of the IMF annual meetings in Tokyo last month. As a final step, it
is now necessary to update the schedule attached to the Bretton Woods Act to
explicitly reflect those governance reforms. This is a coordinating and
consequential amendment to ensure that our domestic legislation reflects the
updated IMF articles of agreement.
I want to be very clear on this last point. This is a coordinating amendment
to ensure that domestic and international legislation is aligned. It creates no
new obligations for Canada and is unrelated to IMF resources.
Mr. Chairman, to conclude, the measures I have briefly highlighted today may
not be as well known as other measures in our jobs and growth bill, but I
strongly believe that these initiatives will greatly benefit Canadians as well
as the economy by ensuring the continued strength and stability of our financial
system, both at home and abroad.
I thank you very much for your time. I will pass it over to my honourable
colleague, Mr. Christian Paradis.
Hon. Christian Paradis, P.C., M.P., Minister of Industry: Mr. Chair, I
am here today to speak about Part 4, section 14, of the Budget Implementation
This is about the Agreement on Internal Trade. I will give a little
background before explaining what we are doing.
Internal trade has more than doubled since the agreement was signed in 1994
and now exceeds $300 million annually. Services have generally been the most
actively traded economic sector internally. Finance, insurance and real estate
services have come out on top with professional, scientific and technical
services close behind.
Minerals, fuels, petroleum and coal products are the most actively traded
goods, as opposed to services. The most active provinces in internal trade
annually are, in order, Ontario at $120 million, Quebec at $60 million, Alberta
at $58 million, and B.C. at $30 million. For smaller provinces, internal trade
is more important relative to international trade. Therefore, Ontario, Quebec
and Alberta trade twice as much internationally as internally, whereas, for
example, Manitoba, Nova Scotia and Prince Edward Island trade roughly equal
amounts internationally and internally. All provinces and territories trade
mostly with the bigger provinces and with those that are geographically close.
This is the background.
I am appearing before you today to seek support for a proposed bill on the
Agreement on Internal Trade to strengthen its dispute settlement provisions.
The Agreement on Internal Trade is an important mechanism for creating more
efficient, competitive and productive markets within Canada.
The agreement is based on consensus. It is a reflection of the will of
Canada's governments — federal, provincial and territorial — to work together to
remove barriers to the movement of goods, services and people within Canada.
Further, it includes a dispute resolution process open to persons as well as
governments that is intended to encourage the parties to live up to their
There has been one criticism of this process: lack of teeth.
Although decisions were made in the past, they almost always amounted to
nothing. There were a number of requests from members of various associations,
and during the meeting that was held in Yellowknife last summer, it was decided
to move forward in such a way that when a party — either different governments
or individuals — receives a penalty in response to a lawsuit undertaken by
individuals against governments or by government against government, there will
be sanctions for the governments and we will be able to execute them effectively
through legal means if necessary. That is what we want to do at the federal
Until recently, federal, provincial and territorial governments faced few
sanctions for failing to comply, in a timely way, with the terms of an
agreement, and this undermined the credibility of the agreements.
All governments recognized that this undermined the credibility of the
Agreement on Internal Trade and that action was needed to give the dispute
resolution process the required teeth.
That is why all governments approved amendments to the dispute resolution
process at meetings of the CIT in 2008 and 2012 that introduced sanctions,
notably monetary penalties.
This proposed bill allows for these amendments — and three things in
particular —to be implemented by the Government of Canada. It ensures that the
payment of any monetary penalty can be made from the Consolidated Revenue Fund
and enforced through the Federal Court of Canada. We are judicializing the
process in a very straightforward way. It provides for higher eligibility
criteria in appointing dispute resolution panels, because these groups are in
charge of making decisions that have real financial impacts, and that requires
It does legislative housekeeping by updating article references included in
the act. There are more inconsistencies in the English version than in the
French version, but we are making sure that we have a comprehensive approach and
that we maintain consistency.
As Canada moves into its year as Chair of Internal Trade Committee, this
initiative reinforces that the government is committed to working with our
provincial and territorial partners to come to agreement on meaningful
improvements to the accord; strengthening the recourse for Canadian businesses,
workers and consumers where they see barriers to internal trade; and signalling
to the world that Canada is an efficient and effective place to do business.
When businesses want to do business in Canada, this is great news for them to
see that all levels of government are willing to cut red tape to improve trade.
Thank you, Mr. Chair.
The Chair: Thank you, minister.
I would like to start the questions with Minister Menzies, if I may, and
relate back to Division 3 where you talked about over-the-counter derivatives. I
noticed an article written recently by Kevin Carmichael in The Globe and Mail.
Perhaps the biggest reason credit markets froze during the financial crisis
was the fact that trillions of dollars of derivatives contracts were being
sold in the dark in private, or "over the counter,'' trades between two
parties. When investors lost confidence in those assets, the global
financial system seized because no one knew who was exposed to all that
Since 2009, the G20 has been trying to ensure that never happens again. The
idea is to force most derivatives through a central clearing party, which
guarantees each side of a transaction gets paid, and to ensure all the
trades are recorded in a repository of some kind.
Could you give us a little more expansive view of how you see this clearing
system working and how Canada will participate?
Mr. Menzies: The fundamental concern — and Mr. Carmichael did a good
job of highlighting this — was lack of transparency. In my former business
before I got involved in politics I used derivatives, but nowhere near the
volume. I used derivatives to cover my risks and I think that is what they were
initially developed for; sort of stretched beyond. No one knew where it all
ended up. No one knew the liabilities that were carried with them and that
caused a lot of the problems. Reducing systemic risk is an important part of
what we are doing here.
However, we listened to the G20 partners and they all agreed that if we left
the system as it was, we were all vulnerable to that happening again. These
changes will simply put this in the same mechanism as an ordinary clearing that
happens at the end of the day in a stock market. It all has to be settled by the
end of the day. This needs to be transparent and very obvious on who is on which
side of each one of these derivatives. Meeting the G20 commitments is important
for protecting what is a very sound financial system we have here.
I do not know if any of the officials want to add anything. That is just my
overview with a personal reflection.
The Chair: Mr. Rudin, is it envisaged that this is a system that each
country of the G20 will have individually, or is it a central system that all
are participating in?
Jeremy Rudin, Assistant Deputy Minister, Financial Sector Policy Branch,
Department of Finance Canada: What is envisaged is that there will be a
number of central counter-parties and some of them will specialize in different
types of derivative products.
The idea of a central counter-party for a bilateral transaction is that it
stands between the two parties. Rather than company A having company B as its
direct counter-party, the central counter-party stands between them. Company A's
counter-party is the central counter-party, and company B's on the other side of
the transaction is also the central counter-party. It is anticipated there would
be a number of central counter-parties and they may have different
specializations. In Canada we have some central counter-parties, particularly
for exchange traded and cash products. We do not have a central counter-party
for over-the-counter derivative products. This may emerge in the future, but it
is not necessary.
The Chair: Thank you very much.
Senator Massicotte: I thank both ministers and their advisers for
being here today to discuss these amendments to some very significant bills.
What I am concerned about is Part 4. We have been talking about the importance
of internal trade for 30 or 40 years. We know it is something important, even
for the quality of lives of Canadians. We also know that the existing
legislation gives a lot of powers to the federal government to make impositions,
since it is very clear that any obstacle goes against the intent of the existing
legislation. However, as the minister pointed out, that is something that has
not been used much, that has not been imposed to this day, despite considerable
obstacles, since it is sometimes not very easy politically to impose it.
My question is for the minister — and Mr. Paradis may also answer. Before,
the problem was a lack of political will, not just from your government but this
has been going on for a long time. Do you think that now, with these amendments,
all of the provinces will adopt it?
In addition, are we really talking about a change in method, through which we
can truly ensure that there will be no obstacles to internal trade, which are
often arbitrary or used as manipulation?
Mr. Paradis: I think it is a step in that direction. I hope to
eventually go further, but as you said, there are some politics involved. We
have had lawsuits in the past; you will recall the case of yellow margarine in
Quebec, or other cases in different provinces. These became political, or even
symbolic, issues. An agreement was good for one thing but not for another. In
the end, after having identified cases like that — highly politicized ones —
that were hurting trade, it was a good thing that, in 2008 and 2012, the
provinces and the federal government were able to agree to implement these
What I find interesting here is that the federal government is sending a
clear signal that if an individual or a government has a ruling against a given
government, the only thing to do is for the ruling to be presented to the clerk
of the Federal Court and it should immediately go to the courts and be binding,
without any chance of appeal.
There is a strong desire for this. Is there still progress to be made? The
answer is yes, but a large part of the solution has to do with political will.
That is the main issue.
Everyone is talking more and more about the merits of free trade agreements
and of opening markets with different countries, whether we are talking about
emerging countries, European countries or others, but here, within our country,
it is alarming to hear that sometimes the cost of transportation or other things
are too high to do businesses. This is one example; will it go further in the
future? I hope so, but I think that binding dispute resolution is a step in the
Senator Massicotte: There is a lot to be done, also with
professionals. To continue with my question, I do not know if I understand the
bill. Let us say that a decision is made by an expert committee and that a
province disagrees. The court has the right to impose on Quebec, for example, a
penalty of up to $5 million. Can Quebec say, "Okay, I will pay the $5 million;
that is nothing, but I am opposed to opening my market up to this trade.''? Is
Mr. Paradis: No; here is what will happen. First, there were gradual
penalties, prorated per capita. A group of experts will render the initial
decision. There is a chance to appeal with an appeal group. Once that is over,
when the decision is to be executed, it is given to the clerk of the Federal
Court, in the case of the federal government, and the federal government must
pay from the treasury if the court's ruling is binding. It continues after that;
there can be other litigation. If a government continues to oppose the
agreement, the litigation can carry on.
Where it gets interesting and where I want to clarify is that the provinces
have agreed that now, individuals can file lawsuits against governments.
However, we were careful to determine that the individual would be compensated
for expenses only and that the balance would be invested in a fund to advance
internal trade, in order to avoid frivolous lawsuits.
We are moving forward carefully, but I think that there is ultimately a
desire to improve trade within the federation.
The Chair: I will interject because I believe there will be a vote in
the Senate chamber 4:30 p.m. With that, Senator Massicotte, I will move through.
How long would everyone like to get over to the chamber? 10 minutes? We will go
until 4:20 p.m.
Mr. Paradis: What is interesting, as I was saying, is that the federal
government will chair the meeting in 2013. This will be a great opportunity to
test the provinces' desire to move forward. As minister, I will certainly go in
that direction. I think we need to seize this opportunity.
Senator Massicotte: That is very important.
Senator Tkachuk: Welcome, ministers. I want to follow up on a couple
of questions: the one on over-the-counter derivatives and the question of a
clearing house. Senator Gerstein asked whether it was international or national.
I did not understand the answer. Is it an international clearing house and, if
so, made up of what countries? Is it a Canadian trading house, or is it North
American? How will this work and how will it be more transparent?
Mr. Rudin: The existing clearing houses are not government entities,
although they are supervised and regulated by governments. They have
participating members from a variety of countries. In the case of those
specializing in over- the-counter derivatives, at the moment firms are members
of central counter-parties, the existing of which are abroad; they are not in
Canada. We do have central counter-parties in Canada, but for different products
and not for over-the- counter derivatives.
There is a variety of them, so it is not a government entity. The system that
is emerging and will emerge is one that has been motivated and to some extent
required by governments, but it is not run principally by governments.
Senator Tkachuk: Who is it made for? Is the transparency for citizens,
banks or governments? Who will be watching this, and will it be watchable? They
are over-the-counter derivatives after all.
Mr. Rudin: The transparency part of the initiative is to require that
over-the-counter trades be reported to what is called a trade repository, which
is an organization that would collect information about trades and then provide
summary information about it. Some of that information might be made public.
Much of it would be available only to regulators.
Senator Tkachuk: I am never sure if I understand this stuff.
I want to go to interprovincial trade, which is something the Banking
Committee has been studying for a number of years. It has been a source of
frustration, in a way. Is it a program that would identify some of the major
barriers to trade that would be part of a federal-provincial agenda of trade
ministers that would get together on a regular basis to see if they can make
progress on clearing up?
I am thinking of the private member's bill on wine. It was a simple thing. It
is unbelievable that in a country like ours we would have to have a private
member's bill —
The Chair: Senator Tkachuk, ask the question, please.
Senator Tkachuk: Some context is needed, senators. This is a finance
Mr. Paradis: I share your source of frustration. That is why I said
earlier that this is a step-by-step process. There is a lot political will in
this. I think this achievement we have now to have more enforceable decisions;
this is a step in the right decision.
Once a year we have a federal-provincial meeting. This coming year, in 2013,
the Government of Canada will be the chair of this meeting. I share the same
view: As I said, this is a good opportunity to push this agenda and try to see
more opportunities, if provinces are on board.
There is a new thing in this, also, which will be interesting — and it is
still work in progress for finalizing the parameters of this — but I spoke about
a fund. When a person will have a favourable decision against the government,
the person will be indemnified for the cost incurred, but the rest of the money
will go into a fund for promoting the internal trade.
The work is in progress between provinces and the federal government to see
how this money can be spent for promoting internal trade. This is possibly an
avenue to study, to see how we can improve and better identify the barriers.
This is a work in progress. This thing has been immoveable for years, and now
it seems to move a bit. I hope it will move more and more, because we are
struggling to have free trade agreements with other countries. We should do it
within our own country. There are a lot of opportunities. When a region is
booming, others can help.
The Chair: Minister, I must interject. We must have these other
Senator Ringuette: I will have some short questions and hopefully
What was our IMF commitment five years ago and what is our commitment now? In
regard to the changes being proposed to the executive board, how will this
affect our representation on that board?
Minister Paradis, you talked about experts in regard to the panel review. Do
we have one panel with representation? There is also an issue of representation
from the provinces on this panel. Do we have one for manufacturing and one for
services, or do we have only one panel that looks at all the issues? Is that
Mr. Menzies: Wonderful. You are the ones with the vote.
Quickly, we are not changing any of our financial commitments. We are not
increasing our financial commitments. If that is what you —
Senator Ringuette: I was asking what it was five years ago and what it
Mr. Menzies: I will pass that to Mr. Stewart. However, this is to
include the emerging markets because they are larger player than they were when
they first joined the IMF. It is to reflect their influence and voting capacity.
I will turn to Mr. Stewart to answer the tough question.
Rob Stewart, Assistant Deputy Minister, International Trade and Finance,
Department of Finance Canada: Forgive me, minister, but I have a modest
correction. Relative to five years ago, our total support for the IMF is rising
by just over $1 billion Canadian.
Senator Ringuette: What was it?
Mr. Stewart: It is rising from $23.4 to $24.5 billion.
Senator Ringuette: In the billions you said?
Mr. Stewart: Yes.
On your question of representation, it does not change our representation at
the executive board.
Mr. Paradis: In terms of the panels, we are putting more provisions in
place to ensure that Governor-in-Council can have extra requirements in terms of
expertise. However, for the details, I will pass it on to Ms. Campbell.
Krista Campbell, Director General, Strategic Policy Branch, Industry
Canada: All jurisdictions are able to appoint individuals to roster lists.
If a panel needs to be convened, we select from those lists. The individuals
need to have expertise in administrative law and/or dispute resolution, so they
are not necessarily sector specific to automotive or agriculture, but they do
have broad expertise.
Senator Ringuette: The short answer is that there is a new panel at
Ms. Campbell: Yes.
Senator L. Smith: Mr. Menzies, you mentioned the importance of
ratification of governance by the IMF in terms of regulations and reforms. How
confident are you that all the players will follow these recommendations? As an
example, going from Basel I to Basel II and III, various countries are at
various stages and it will impact the world stage in terms of finance. From your
own interaction with these folks, what is your impression?
Mr. Menzies: I do not have the interaction that Minister Flaherty
does. I have met with a number of them and I have been at different forums,
though not at the board level that Minister Flaherty would be at. I am
confident. However, perhaps one of the officials might give us a bit of an idea
of whether there are penalties in place, what the requirements are and whether
it is consensus or not. I do not have that answer.
Mr. Rudin: Basel III is the agreed-upon minimum international
standards for bank capital and potentially for bank liquidity when that phases
in over time. It is an important issue to be aware of and to support full
implementation around the world.
The mechanisms that have been put in place are principally those of peer
review and accountability. Through the Financial Stability Board, chaired by our
own Governor Carney, it is a process of close examination of the plans of all
the member countries to implementation of Basel III and a process of
transparency and largely peer pressure to keep people on track.
Senator L. Smith: What does that mean from a practical perspective?
Obviously, it is critical that these things are implemented. Is the will of the
Mr. Rudin: The G20 leaders quite recently said the following: "We
agree to take the measures needed to ensure full, timely and effective
implementation of . . . Basel III and its consistency with the internationally
agreed standards.'' This, I think, is strongest guarantee we have.
Senator Moore: I want to follow up on Senator Tkachuk's question with
regard to the Canadian Derivatives Clearing Corporation. On their website, they
talk about their exclusive position and say that they have more than 30 clearing
members, including major financial institutions and brokers in Canada. Can you
provide the clerk with a list of those members, please?
Mr. Rudin: As long as the list is publicly available, we will provide
Senator Moore: What do you mean by that? It is being legislated here.
Is it not a Canadian, legal entity?
Mr. Rudin: CDCC is a subsidiary of the TMX Group, and I assume that
its membership list is public. If so, we will provide it to the committee.
Senator Moore: Mr. Menzies, you mentioned that the idea each day is to
reduce the systemic risk and that things must be settled each day. Are the
amounts and the respective parties listed somewhere each day, and is that
information made public?
Mr. Menzies: I will leave that to Mr. Rudin.
Mr. Rudin: Sorry, senator, I did not follow the question.
Senator Moore: Each day, there is to be a settling of the trading in
these derivatives. What I am asking is each day, when the markets are settled,
do we know the amounts and respective parties, and is that information public?
Mr. Rudin: I believe your question is whether we know, for example,
with any particular central counter-party, what exposure or contracts particular
banks have with it? The answer is no. This is commercially confidential
information. Banks will not want to transact with central counter-parties if
they need to reveal how they are positioned relative to the market. It is
information that, through the trade repository process, should be available, on
a confidential basis, to their regulators.
Senator Moore: CDCC holds the information. How does that give
assurance to the marketplace if they do not know what is going on? I do not
understand how that makes things better than it was in 2008-09.
Mr. Rudin: The main purpose of the central counter-party is to ensure
that both parties to the transaction will be protected even if the other party
fails. The central counter-party stands between the two counter-parties and
essentially assumes the risk.
Risk-proofing a central counter-party is a whole profession in itself, so the
central counter-party needs to be well capitalized. It has rules that require
the individual members, or the parties to the transaction, to post collateral
that will be available in the event that one of them fails. It is quite an
operation. These things are supervised. The amendments that we are proposing
would extend the reach of the Bank of Canada to supervise central
counter-parties. This has the strong potential to make the financial system more
robust because it means that if there is a counter-party — let us say an
investment bank — that has a great number of over-the-counter derivative
contracts with a great number of counter- parties, we can be assured that those
counter-parties will not be brought down or endangered by the failure of this
bank because the central counter-party, in its capitalization and its
collateral, is there to protect the transaction.
Senator Moore: I understand that, but does that not create an
opportunity for a party to take undue risk knowing that they are backed up? Who
is backing them up? I assume it is not the taxpayers. I hope it is not.
Mr. Rudin: Part and parcel of this initiative are three things. First
of all, there are capital requirements on regulated financial institutions,
capital that needs to be held against these transactions even if they go through
a central counter- party. Then there are requirements to reduce or minimize, if
not eliminate, the risk of failure of the central counter- party itself.
The Chair: First, we express our great appreciation to the ministers
Second, I will ask if the officials will be good enough to stay. I assume it
will take us a few minutes to get over to the chamber. The vote usually takes
about 10 minutes, and it will take us 10 minutes to get back.
(The committee suspended.)
(The committee resumed)
The Chair: We will reconvene the meeting. I will start by thanking our
witnesses for staying and putting up with these votes, which I am sure you are
accustomed to in both houses.
Mr. Rudin, there have been three questions so far from Senator Tkachuk,
Senator Moore and me as to the clarity of how this concept of a market will be
made and how it will function. I did not know if I took from your comments that
this was functioning within the framework of the TSX. How does it deal
internationally? Could I ask you to expand on that to the extent that you can?
Mr. Rudin: I would be glad to do that. Perhaps it would be helpful if
I were more concrete.
The issues that we are bringing forward in the bill before you today are in
support of central clearing for over-the- counter derivatives. Currently, the
most important type of over-the-counter derivative in Canada — the one that is
most used by Canadian counter-parties — is called an interest rate swap. We will
get into the details of that if you wish. Important in this regard is that
currently there is no central counter-party in Canada that clears interest rate
The one that has the most volume, and Mr. Wayne Foster will correct me if I
am wrong, is LCH.Clearnet, with its swaps unit SwapClear, which is in London. A
number of Canadian financial institutions are already members of LCH.Clearnet.
This bill will make it easier for them to do central clearing on behalf of their
clients. Sometimes their clients will be counter-parties to bilateral,
over-the-counter derivatives or an interest rate swap agreement. If passed,
these amendments will support the Canadian financial institutions that are
members of LCH SwapClear, which is in London, to do central clearing on behalf
of their clients.
As I said, we have central clearing and some central counterparties in
Canada. Canadian Derivatives Clearing Corporation, or CDCC, does central
clearing principally, although not exclusively, for exchange-traded derivatives
as opposed to over-the-counter derivatives. Other enterprises are interested in
getting into the central clearing of over-the- counter derivatives — businesses.
There is variety all over the world. It is possible that Canadian financial
institutions might decide to be members of other CCPs for over-the-counter
derivatives, perhaps in the United States or some other country. It is also
possible, although not obligatory, that someone will create a central
counter-party in Canada that will generate a large volume of business. To date,
that is not the case.
Senator Moore: We have the Canadian Derivatives Clearing Corporation.
You say there is a London clearing house and you mentioned there is one in the
United States. Is that correct?
Mr. Rudin: Yes.
Senator Moore: Is there no central entity hauling in that information
at the end of each day so that we know what the exposure and risk that we are
trying to manage is?
Mr. Rudin: I think I understand the question. A related but distinct
initiative is to have all of these over-the-counter trades reported to trade
repositories. A trade repository is an information assembler. It is not a
central counter-party. Part of the G20 initiative is to get all of these trades
reported to trade repositories. If all goes well, the repository will get all of
the information relative to a particular type of —
Senator Moore: From all these clearing entities.
Mr. Rudin: Yes. It is possible that there would be specialization
nonetheless. There may be one global trade repository for a certain type of
depository and another trade repository for a different type of derivative, like
interest rate swaps. However, all of the information within the same category
would come to the same repository. That is the goal.
Senator Moore: I do not even know if the Canadian public at large
knows what a derivative is. Some days I think I understand it and then I hear
these other terms. It is a very difficult topic for me to try to get my head
Is one entity betting that the other financial instrument will or will not be
realized? Tell me how an interest rate swap would work. What is that? How does
that work? That is a derivative, I assume.
Mr. Rudin: Yes, it is. I hesitate because some people do not call it a
derivative; they use the expression swaps and derivatives but let us not trouble
ourselves with that.
An interest rate swap is an agreement between two counter-parties to exchange
a flow of payments. The flow of payments is typically that I will pay you a
fixed interest rate. For example I will pay you the interest rate that is paid
on a Canadian five-year bond and you will pay me a floating interest rate. You
will pay me an interest rate that resets periodically. It might be based on some
index or some other thing that you observe in the market. We would have a
particular notional amount that we pick and would have a duration of that. We
might say for five years I will pay you fixed — the five-year Government of
Canada rate — and for that period you will pay me floating, and we pick some
reference. That is a swap.
There is a very big market in interest rate swaps in Canada, and the
Government of Canada uses interest rate swaps.
Senator Tkachuk: To follow up on that, previous to 2008 and probably
until now, were people deliberately hiding their risk, or was it the nature of
the beast that hid the risk?
Mr. Rudin: That is a very good question. I would say that it was a
combination of the two. The nature of these bilateral trades was such that it
was difficult to summarize and determine what positions individual institutions
or players had. I think it was sometimes a challenge for the individual
institutions, as we discovered in the course of the financial crisis.
At the same time there is evidence that some, by no means all, financial
institutions sought to obscure the amount of risk they were taking on. I do not
think there is any question about that.
Senator Day: My questions will go to the internal free trade side of
things. Was the figure that Minister Paradis gave us earlier internal, that is
trade in and out as a combination, or just out of province?
Ms. Campbell: That is trade within Canada between provinces and
Senator Day: When a figure was given for Ontario, is that in Ontario
trade with other provinces both ways?
Ms. Campbell: Yes.
Senator Day: For Nova Scotia, the figure was about 50-50 internal
trade and international trade.
Ms. Campbell: Yes.
Senator Day: New Brunswick would be of interest to me, since it is my
province, if you have that figure.
Ms. Campbell: I do not have that figure with me. It would be somewhere
around the same trend of about 50-50, but we can follow up.
Senator Day: There is a lot of lumber sold into the U.S. market and I
wondered if that might have changed.
I support the initiatives with respect to internal trade, and I have been so
disappointed for many years that we have not moved ahead on that. My first
substantive question is why these amendments appear in this budget
implementation bill as opposed to a stand-alone separate bill such as Bill C-14,
Ms. Campbell: That would be not a question of a technical nature that
I could answer. That would be more about how the budget bill itself got together
with regard to house management and parliamentary affairs.
Senator Day: You do not have an answer on that.
Ms. Campbell: I do not.
Senator Day: Let us talk about the dispute resolution. Is that
something you can talk about with me?
Ms. Campbell: Absolutely, yes.
Senator Day: Is it the same method of dispute resolution that appears
in the Canada-China FIPA agreement that was just recently brought to our
Ms. Campbell: I am not here to speak to the Canada-China FIPA. I can
say the dispute provisions here are similar to NAFTA, which allows for
consultation between the parties to see if there is a way to come to consensus
on what the outcome should be, and bring different parties into compliance on a
voluntary basis first. It then sets up a number of steps and stages where
parties are able to work together to come to resolution before going to some
adjudicated panel. Once we get to an adjudicated panel, it facilitates saying
there is an opportunity for a jurisdiction to come into compliance voluntarily
before a penalty would be levied. The goal would be to reduce the internal trade
irritants on a voluntary and consensus basis.
Senator Day: I do not have Bill C-45 here, but I will find all of
Is that scheme that you have just described — the mediation, conciliation and
then arbitration — all outlined in the legislation?
Ms. Campbell: It is not in the legislation; it would be found in the
agreement itself. The legislation only implements monetary penalties, so all of
the description that I have given you of how the dispute resolution works is an
existing part of the agreement and is available on the Agreement on Internal
Trade website. We can forward additional information. As I said, the bill itself
just facilitates implementation of the monetary penalties.
Senator Day: I misunderstood the remarks that suggested to me that
there had not been dispute resolution prior to it being agreed to last summer at
Ms. Campbell: It had no teeth.
Senator Day: Surely there has to be some legislation to implement an
agreement between the parties.
Ms. Campbell: There is a piece of legislation called the Agreement on
Internal Trade, but the nuts and bolts of it are actually found in an agreement
that is published by all the parties. This format allows for changes to be made
with implementing legislation that does not require going back to all of
jurisdictions — every house of Parliament across Canada — to make even minor
modifications. This is effectively a way of almost dealing with regulations.
Ministers come to agreements. They sign a protocol of amendment agreeing that
all jurisdictions have come to a consensus. We make the modifications in the
legislation, but it is really this document, the Agreement on Internal Trade,
that would lay out the steps that would interest you.
Senator Day: The dispute resolution mechanism is something that is
already in law and is not being implemented by any amendments to Bill C-45?
Ms. Campbell: The bulk of the procedures for dispute resolution
existed as chapter 17 in the agreement. It outlined government-to-government
disputes and how they would be handled and person-to-government disputes and how
they would be handled. This bill, as the minister said, puts teeth in it in
terms of saying that there are monetary penalties and that a government will be
brought to answer if it continues to drag its feet in resolving internal trade
irritants. The federal government could be forced, as a result of an order of
the federal court, to make a payment, or a province, as a result of an order of
one of their courts, could be forced to make a payment.
Senator Day: Thank you. I understand.
The Chair: I understand that Mr. Stewart would like to revisit a
statement that he made earlier in our meeting.
Mr. Stewart: I would like to apologize. I misled the committee on the
question asked by Senator Ringuette about the position of the IMF. I answered
that it went up by just over $1 billion. Going back five years, the change in
our position would be $11 billion because that includes a bilateral loan
commitment made by the government in 2009.
Senator Moore: It went from 3.4 up to 11?
Mr. Stewart: It went from 13 to 23 to 24 now.
The Chair: Thank you very much for that clarification.
Mr. Stewart: I apologize.
The Chair: Not at all.
Senator Stewart Olsen: On a point of clarification, would I be right
in assuming that all countries are upping the totals as well, or is it just
Mr. Stewart: Yes. In the 2010 agreement around quota, all members of
the IMF agreed to increase their commitment. On the margins of that, there are
bilateral commitments to the IMF, some of which were made in 2009 and some of
which other countries, not Canada, made in 2012.
Senator Moore: I want to ask a question about the IMF portion of the
bill and then go back to the internal trade item.
With regard to the briefing notes, it says that, at the October G20 finance
ministers' meeting in Korea, shifts in quota shares were agreed to. What is
that? What is a quota share? Is that the amount of money that each country
undertakes to and does deposit with the MIF, and is voting based on that? It
indicates that some smaller countries are hurt a bit by this. What is a quota
Mr. Stewart: A quota share is the fundamental element of IMF
participation. It is a subscription amount to the IMF, for which it is liable.
Senator Moore: For which each country is liable, okay.
They agreed to shifts in the quota shares to dynamic, emerging markets in
developing countries and to underrepresented countries. I guess India, Russia
and Brazil were then moved into the top 10. However, more than half of the 6 per
cent shift will come from other developing countries that are losing voting
share as a result of the reform. What is going on there? Are they being asked to
reduce their quota share? Why is there a negative impact on those countries?
Mr. Stewart: It was a relative shift. All countries agreed to
increase, but developed countries increased by slightly less, on a relative
basis, to some dynamic emerging markets. As a result of the overall change in
composition of shareholdings, these markets attained a slightly greater degree
of influence and governance of the fund.
Senator Moore: It is still basically dominated, I guess, by the U.S.
Mr. Stewart: Correct, with a modest shift.
As an addendum to that, there was the change in shareholding, and there was
also a change in the governance arrangements whereby the Europeans relinquished
two of the seats they held at the board.
Senator Moore: To whom? To the emerging markets?
Mr. Stewart: Not necessarily to dynamic, emerging market countries, as
it turns out, but to other countries that are not European. That was a change in
the 24-member board, so it constituted a shift in representation and, therefore,
power away from Europe.
Senator Moore: Which two countries got admission to the board?
Mr. Stewart: That has not yet been finalized because the 2010 reforms
that we are speaking about have yet to become effective on that issue. Canada
approved them in the prior budget bill.
Senator Moore: Is who they are public?
Mr. Stewart: It is common knowledge; it has not been publicly
Senator Moore: What is the rumour?
Senator Day: Turn on a television.
Mr. Stewart: There is an understanding that there is a shift within
European constituencies to give more voting power to Eastern European countries.
Senator Moore: I will switch to the question I have on internal trade.
The Library of Parliament note talks about that, and it says, "Division 14 would
amend the AIT to provide for the enforceability of orders resulting from
disputes.'' We talked about this. You mentioned foot dragging. Is there that
much taking place that we have to legislate that provinces or jurisdictions
implement the decision that is arrived at by the dispute settlement process? Are
decisions coming down such that people are saying, "If it is not favourable to
me, I am not going to implement it''? Is that what is happening? Is that why we
have to do this?
Ms. Campbell: There have been instances where jurisdictions have been
slower to respond to discussions or to bring themselves into compliance. On
average, we would see about three disputes going as far as a panel struck for
discussion. The vast majority of them are resolved, and penalties would not have
been required. However, stakeholders have come forward and said that it is one
of the weaknesses in the agreement that there is not that ultimate calling to
account and holding a government publicly responsible for saying, "You have
continuously dragged your feet and we have given you multiple opportunities to
come into compliance voluntarily, so now we are going to impose some kind of
Senator Moore: Is that quantity of three over a certain period or an
average per annum?
Ms. Campbell: It is an average per annum. There have been 52, I think,
since the agreement came into effect in 1995. It takes a lot for either a
government or a person to launch a complaint against a government. There is
considerable effort, as I have outlined, to ensure they do not come to the
requirement to go to a panel. However, there are not a significant number of AIT
disputes every year.
Senator Moore: There are not?
Ms. Campbell: There are not.
Senator Moore: Is three the number?
Ms. Campbell: Fifty-two have been implemented, so that works to about
three, on average, per year.
Senator Moore: Of those, is one of them a "foot dragger,'' or do you
mean all of them? Have all 52 been instances of non-compliance with the
Ms. Campbell: I do not have the number in front of me. However, I
think there were 42 government-to-government disputes. I think 33 of those were
resolved. I will double-check the figures and confirm that. There are a couple
still outstanding, but for the most part, governments want to be seen to be
reducing these barriers. However, as I said, some stakeholders have come forward
quite vociferously and said that there are no teeth. If a jurisdiction does not
bring themselves into compliance, does that give either a stakeholder or another
government incentive to say, "This is very important to me and I know something
will come of it''?
Senator Moore: Regarding the stakeholders that have come to you for
this, are we talking provincial governments or are most of them individuals?
Ms. Campbell: The provinces all have agreed to this, so the Agreement
on Internal Trade is entirely consensus- based; they have all agreed to these
changes. Stakeholder organizations would be the Canadian Federation of
Independent Business, for example, and the CGA, Chartered General Accountants. A
number of business organizations have highlighted the lack of teeth as being an
The Chair: Senators, as you know, we are charged with examining the
subject matter of four divisions of Part 4 of Bill C- 45. We have heard from the
two ministers today. We have witnesses from Finance and Industry Canada here.
Therefore, my first question would be: Are there any further questions any
member of the committee would like to ask about any clause that has been
circulated to you that you feel you would like to have clarified?
We have two subsequent meetings, tomorrow and Thursday, at which we will have
external witnesses appearing before the committee to discuss various aspects. I
just wanted to ensure that there were no further questions anyone would like to
ask about any of the clauses while we have our witnesses from Finance Canada and
Industry Canada before us.
Hearing none, on behalf of the members of the committee, I want to thank Mr.
Rudin, Ms. Campbell, Mr. Stewart, Mr. Foster and Ms. Pearse for appearing before
(The committee adjourned.)