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Eligible financial contracts

In the spring of 2007, Canada's parliament amended several federal insolvency statutes so as to transfer the definition of the class of protected contracts known as eligible financial contracts (EFCs) from the federal insolvency statutes themselves to their respective associated regulations. A wide range of products, including margin loans, is now covered. On November 15, the treasury board approved the finalised regulations to the Bankruptcy and Insolvency Act, the Winding-up and Restructuring Act, the Companies' Creditors Arrangement Act, and the Canada Deposit Insurance Corporation Act. The changes were effective from November 17 2007. The long-awaited EFC definition includes the following types of agreement:

(a) a derivatives agreement, whether settled by payment or delivery, that
(i) trades on a futures or options exchange or board, or other regulated market; or
(ii) is the subject of recurrent dealings in the derivatives markets or in the over-the-counter securities or commodities markets;
(b) an agreement to
(i) borrow or lend securities or commodities, including an agreement to transfer securities or commodities under which the borrower may repay the loan with other securities or commodities, cash or cash equivalents;
(ii) clear or settle securities, futures, options or derivatives transactions; or
(iii) act as a depository for securities;
(c) a repurchase, reverse repurchase or buy-sellback agreement with respect to securities or commodities;
(d) a margin loan insofar as it is in respect of a securities account or futures account maintained by a financial intermediary;
(e) any combination of agreements referred to in any of paragraphs (a) to (d);
(f) a master agreement insofar as it is in respect of an agreement referred to in paragraphs (a) to (e);
(g) a master agreement insofar as it is in respect of a master agreement referred to in paragraph (f);
(h) a guarantee of, or an indemnity or reimbursement obligation with respect to, the liabilities under an agreement referred to in any of paragraphs (a) to (g); and
(i) an agreement relating to financial collateral, including any form of security or security interest in collateral and a title transfer credit support agreement, with respect to an agreement referred to in any of paragraphs (a) to (h).

The term derivatives agreement in paragraph (a) is in turn defined as follows: derivatives agreement means a financial agreement whose obligations are derived from, referenced to, or based on, one or more underlying reference items such as interest rates, indices, currencies, commodities, securities or other ownership interests, credit or guarantee obligations, debt securities, climatic variables, bandwidth, freight rates, emission rights, real property indices and inflation or other macroeconomic data. It includes:

(a) a contract for differences or a swap, including a total return swap, price return swap, default swap or basis swap;
(b) a futures agreement;
(c) a cap, collar, floor or spread;
(d) an option; and
(e) a spot or forward.

Industry observers will be pleased that the definition now encompasses a full range of products that have become prevalent in the market, including equity, credit and weather derivatives, as well as emerging products such as freight and emissions allowance derivatives. Margin loans have also been included. The relocation of the definition to the regulations will make it easier to add new products in the future as the market evolves further.

The regulation also makes some changes as to how securities loans and repos are described. Notably, commodities loans have also been included to cover such products as gold loans. It is also now clearer than it was under the previous definition that guarantees of any of the obligations under any type of eligible financial contract are covered.

Margaret Grottenthaler

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