Related-party asset transactions with a financial institution

Document Properties

   
  • Publication Type: Transaction Instructions
  • Index DA No: 23
  • Revised: June 2015

Legislative Authorities

Information Requirements

The applicant is generally expected to provide:

  1. the name of the counterparty with which the applicant proposes to enter into the arrangement as well as:
    1. an analysis in support of the applicant's conclusion that the counterparty is:
      1. a financial institutionFootnote 1, and
      2. a related partyFootnote 2 of the applicant, accompanied by a current organization chart indicating the relevant parts of the applicant's corporate group (with percentages owned), and
    2. the most recent financial statements (balance sheet, income statement and statement of changes in shareholders' equity) of the related party;
  2. a description of the proposed arrangement, including:
    1. the rationale for the arrangement, including an analysis in support of the applicant's conclusion that the transaction or transactions ("transaction") contemplated in the arrangement would be in the normal course of the applicant's businessFootnote 3,
    2. the type of asset or assets ("asset") involved,
    3. whether the applicant will enter into the transaction directly or through a subsidiaryFootnote 4,
    4. in the case of an acquisition of an asset, a description of the consideration to be paid by the applicant or its subsidiary, including the terms of payment, and
    5. in the case of a disposition of an asset, a description of the consideration to be received by the applicant or its subsidiary, including the terms of payment, and the use or the proposed use of the proceeds;
  3. a confirmation from a senior officerFootnote 5 that the transaction:
    1. will be on terms and conditions that are at least as favourable to the applicant as market terms and conditionsFootnote 6 (such a confirmation is not necessary where the independent third party opinion referred to in item 6 is provided),
    2. will not result in the applicant having material ongoing financial exposure to a related partyFootnote 7 (or alternatively, provide a description of the exposure and of the measures or other safeguards that will be put in place to mitigate the exposure), and
    3. will not have a detrimental effect on the financial position or risk profile of the applicant;Footnote 8
  4. a description of the basis on which the assessment of each of the elements referred to in item 3 was made;
  5. details regarding the level of internal approval required in respect of the transaction (e.g., board of directors, board committee or senior management), based on the applicant's policies, as well as evidence that the transaction was approved at the appropriate level (e.g., relevant excerpts from the minutes of the meeting during which the proposed transaction was approved);
  6. where the asset is not a security that trades on a recognized stock exchange or over-the-counter market, an opinion from an independent third party or, where appropriate, other reliable evidence to demonstrate that the transaction will be carried out on terms and conditions that are at least as favourable to the applicant as market terms and conditions; and
  7. an analysis of the effect the arrangement will have on the financial position and risk profile of the applicant, including:
    1. a comparative pro forma balance sheet (pre- and post-transaction) including relevant assumptions,
    2. a comparative pro forma capital position (pre- and post-transaction) that confirms compliance with the applicant's internal capital target and with OSFI's requirements applicable to the applicant, together with relevant assumptions and, if the transaction is material to the applicant, a breakdown of:
      1. in the case of a deposit-taking institution, all elements used to calculate:
        1. the capital ratios, in accordance with the Capital Adequacy Requirements Guideline,
        2. the leverage ratio, in accordance with the Leverage Requirements Guideline, and
        3. the liquidity coverage ratio, in accordance with the Liquidity Adequacy Requirements Guideline,
      2. in the case of a life insurance company, all elements used to calculate the Minimum Continuing Capital and Surplus Requirements, or
      3. in the case of a property and casualty insurance company, all elements of the Minimum Capital Test,
    3. if the transaction is material to the applicant:
      1. in the case of a deposit-taking institution, a revised internal solvency assessment process document (e.g., Internal Capital Adequacy Assessment Process), or
      2. in the case of an insurance company, a revised scenario stress testing report (e.g.,  Dynamic Capital Adequacy Testing), and
    4. a confirmation that, following the transaction, the applicant will be in compliance with its relevant policies including those related to liquidity, capital management, risk management and investments.

Administrative Guidance

  1. In determining whether an asset transaction is in the normal course of the applicant's business, OSFI generally considers whether the transaction is consistent with the applicant's usual business practices and not a "one-off" transaction.
  2. OSFI generally considers the following elements when assessing applications for related-party asset transactions with a financial institution:
    1. No ongoing financial exposure: The transaction should generally not result in the applicant having material ongoing financial exposure to a related party, unless adequate mitigation measures or other safeguards have been put in place. Where there will be material ongoing financial exposure, it should generally only continue for a short period of time. OSFI generally considers an applicant to have ongoing financial exposure to a related party where it has a receivable from the related party, holds securities of the related party, has provided a guarantee for the benefit of the related party or holds a guarantee from the related party; and
    2. No detrimental effect: The transaction should not have a detrimental effect on the financial position or risk profile of the applicant. In this regard, OSFI will generally assess the impact of the transaction on the applicant's business, asset mix, capital, income and liquidity position.
  3. Asset transactions contemplated in this Transaction Instruction must be carried out on terms and conditions at least as favourable to the applicant as market terms and conditions. OSFI may, where appropriate, commission an independent evaluation, at the applicant's expense.
  4. If the arrangement provides for asset transactions between the applicant and the related party on an ongoing basis, the Superintendent may impose terms and conditions to the approval which could include granting the approval for a limited time (e.g., approval of recurring asset transactions up to a specified date) or imposing a limit on the total value of assets that can be acquired or disposed (e.g., approval to acquire or dispose of assets up to a specified amount).
  5. Where the asset transaction is permitted without approval under another related party provisionFootnote 9 (e.g., nominal value transaction), the federally regulated financial institution (FRFI) may proceed with the transaction under that other provision.
  6. Paragraph 6(1)(c) of the National Housing Act generally provides that a FRFI that is designated as an approved lender by the Canada Mortgage and Housing Corporation (CMHC) may, notwithstanding any restrictions on the power of the FRFI contained in any other statute, dispose of or acquire loans insured by CMHC together with the security taken in respect of those loans. The effect of this provision is that the FRFI may proceed with such a transaction without approval under the provisions set out in the Legislative Authorities.
  7. Assets, other than real property, acquired or disposed of under an arrangement that has been approved under the provisions set out in the Legislative Authorities are exempted from the calculation and application of the 10% threshold for purposes of asset transactions addressed in Transaction Instruction DA No. 18. – Asset Transaction Greater than 10% of Assets.Footnote 10
  8. The Superintendent may consider whether the proposed arrangement would hinder the effective implementation of corrective measures in the future, and may request information to that effect.
  9. Requests for approval(s) that are addressed in this document are not subject to a service charge.Footnote 11

The information requirements and administrative guidance are intended to satisfy typical applications. They have been derived from OSFI's experience in assessing applications. Applicants who provide all information and material requested can generally expect a more timely assessment of their applications. As appropriate to the circumstances, OSFI may request additional information, take into account other matters, impose terms and conditions, or require undertakings.

Footnotes

Footnote 1

Please see the definition of "financial institution" in section 2 of the BA, the TLCA, the ICA and the CCAA.

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Footnote 2

Please see the definition of "related party" in section 486 of the BA, section 474 of the TLCA, section 518 of the ICA and section 410 of the CCAA.

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Footnote 3

Please see item 1 of the Administrative Guidance below.

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Footnote 4

Please see subsection 489(2) of the BA, subsection 477(2) of the TLCA, subsection 521(2) of the ICA and subsection 413(2) of the CCAA.

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Footnote 5

In this Transaction Instruction, "senior officer" means the chief executive officer or a person that reports to the chief executive officer or the board of directors.

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Footnote 6

Please see the definition of "market terms and conditions" in section 501 of the BA, section 489 of the TLCA, section 534 of the ICA and section 425 of the CCAA.

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Footnote 7

Please see item 2(a) of the Administrative Guidance below.

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Footnote 8

Please see item 2(b) of the Administrative Guidance below.

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Footnote 9

Please see for example section 490 and subsections 494(1) and (2) of the BA, section 478 and subsections 482(1) and (2) of the TLCA, section 522 and subsections 527(1) and (2) of the ICA and section 414 and subsections 418(1) and (2) of the CCAA.

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Footnote 10

Please see paragraph 482(2)(j) of the BA, paragraph 470(2)(f) of the TLCA, paragraph 512(2)(f) of the ICA and paragraph 406(3)(e) of the CCAA.

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Footnote 11

Please see Charges for Services Provided by the Office of the Superintendent of Financial Institutions Regulations 2002.

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