Office of the Superintendent of Financial Institutions
This bulletin establishes criteria for determining whether a transaction
with a related party is nominal or immaterial for banks, trust and loan
companies and cooperative credit associations.
Parts XI of the Bank Act and the Trust and Loan Companies Act
and Part XII of the Cooperative Credit Associations Act define
who are related parties of banks, trust and loan companies and cooperative
credit associations and set out rules for undertaking transactions with
related parties. Except as provided in these Parts, transactions with
related parties are prohibited whether entered into directly or
indirectly. The legislation subsequently identifies a number of situations
where related party transactions are permitted, one of these being
transactions that are of "nominal or immaterial" value.
The legislation provides that federally regulated financial institutions
(FRFIs) may enter into a transaction with related parties, if the value of
the transaction is nominal or immaterial to the FRFI when measured by
criteria established by the FRFI's conduct review committee, and approved
in writing by the Superintendent.
To establish a uniform definition for transactions of "nominal or
immaterial" value, OSFI worked with the Canadian Bankers Association and
met with industry officials. The outcome of this process is the attached
table that sets out the materiality criteria for related party
transactions for banks, trust and loan companies, and cooperative credit
associations. These criteria require that nominal or immaterial
transactions be carried out on terms and conditions that are at least as
favourable to the FRFI as market terms and conditions.
The attached table divides related party transactions into 11 categories
based on the nature of the transaction and the degree of risk associated
with it. Each category has a transaction threshold and an aggregate
threshold. There are also specific rules for determining the materiality
of a transaction and for aggregating transactions. Except for the
commercial and corporate credit transactions thresholds, the thresholds
restrict transactions on a per related party basis. These rules are set
out at the end of the table.
The materiality criteria are designed to allow FRFIs to undertake
transactions with related parties in a timely manner, while simultaneously
respecting the mandate of the conduct review committee. Accordingly,
transaction and aggregate thresholds are generally linked to regulatory
capital as defined in the legislation. Transactions that are "nominal or
immaterial" based on these criteria do not have to be individually
approved by the conduct review committee.
OSFI believes that the term "transaction" should be interpreted broadly,
consistent with the manner in which it is defined in the legislation.
Virtually any act or agreement in which more than one person is concerned,
and through which relations between the persons are altered, will be
considered a transaction. Further, OSFI requires that all transactions be
valued on a "gross" basis. OSFI considers it inappropriate for a FRFI to
measure a transaction against materiality criteria based on the
transaction's "net" impact. Accordingly, for example, the sale of a $10
million building to a related party for consideration of another building
valued at $9.9 million and cash of $100,000 constitutes a $10 million
transaction. OSFI does not subscribe to the view that this transaction has
no net impact on the FRFI and hence, is immaterial to it.
OSFI expects that FRFIs will adopt materiality criteria at least as
stringent as the criteria set out in this bulletin. FRFIs that adopt such
criteria will be deemed to have OSFI approval. If a FRFI wishes to
establish other materiality criteria, OSFI will assess these individually.
A. CREDIT TRANSACTIONS
B. NON-CREDIT TRANSACTIONS
Note: All transactions to be on
terms and conditions at least as favourable to the FRFI as market terms
For commercial and corporate credit transactions, transactions with
related parties that are a common risk should be totalled to determine
whether the "transaction threshold" or "aggregate threshold" has been
exceeded. (Common risk should be determined according to the credit
policy of the bank, trust and loan company, or cooperative credit
Transactions under the "transaction threshold" are nominal or immaterial
and are not included in calculating the "aggregate threshold."
Transactions over the "transaction threshold" are included in
calculating the "aggregate threshold."
Calculation of the "aggregate threshold" does not include a transaction
that has been specifically approved by the conduct review committee.
Transactions over the "transaction threshold" are nominal or immaterial
until their total value exceeds the "aggregate threshold."
Once the "aggregate threshold" has been surpassed, transactions
exceeding the "transaction threshold" require approval of the conduct