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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 other measures.

Senator Irving Gerstein (Chair) in the chair.

[English]

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 sector.

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 Lagarde.

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 to.

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 failures.

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 commitments.

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 that.''

By championing these legislative changes, Canada will continue to play a leadership role in promoting sound financial sector regulation both at home and abroad.

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.

[Translation]

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 Act.

[English]

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.

[Translation]

The Agreement on Internal Trade is an important mechanism for creating more efficient, competitive and productive markets within Canada.

[English]

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 commitments.

There has been one criticism of this process: lack of teeth.

[Translation]

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 level.

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.

[English]

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.

[Translation]

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 experts.

[English]

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. He said:

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 worthless paper.

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.

[Translation]

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 processes.

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 right direction.

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 that possible?

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.

[English]

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.

[Translation]

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.

[English]

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 bill.

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 questions asked.

Senator Ringuette: I will have some short questions and hopefully short answers.

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 short enough?

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 is now.

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 every dispute.

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 players there?

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 it.

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 for appearing.

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 swaps.

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 around.

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 territories.

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, for example.

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 attention?

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 that.

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 some time.

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 Canada?

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 share?

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. and France?

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 announced.

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 penalty.''

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 decision?

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 issue.

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 us today.

(The committee adjourned.)