University of Toronto Law School Faculty Blog

Prof. Anita Anand - "Why macro is prudent"

This commentary was first published in the Financial Post on September 23, 2009.

The G20 leaders meet today in Pittsburgh. While macroprudential regulation is likely to be on the agenda, countries continue to wrestle with how, if at all, this concept fits within existing legal frameworks and indeed whether new regulators or committees will be created in each country. But, taking a step back, what does "macroprudential regulation" mean? Should Canada proceed down this road? If so, how?

Macroprudential regulation focuses on the financial system as a whole, seeking to minimize system-wide distress in order to avoid reductions in aggregate output (GDP). This is unlike microprudential regulation which seeks to minimize distress in individual institutions in order to protect depositors. Macroprudential regulation focuses on common exposures across financial systems and institutions rather than the entity-specific focus of microprudential regulation.

Anita Anand - "Canada's banks: conservative by nature"

This commentary was first published in the Financial Post on March 31, 2009.

In a recent interview with a major U.S. news network, Prime Minister Stephen Harper touted the fine regulatory balance that underpins the strength of Canadian financial institutions. Without question, Canadian banks have been relatively insulated from the economic turmoil that has crippled their U.S. counterparts. But why is this case? What characteristics particular to the Canadian economy and corresponding legal regime have protected Canada’s financial institutions?

If we look deeply, we see that Prime Minister Harper is partially right: The regulatory regime is an important factor to consider. Yet other considerations, including a conservative mentality that pervades our financial system and its players, are also relevant in the analysis.

Jeffrey MacIntosh: "Pegged orders: an unfair trade"

This article was first published in the Financial Post on January 13, 2008.

In the old days, stock exchanges had a monopoly on trading listed stocks. Not any more. These days, electronic platforms known as “alternative trading systems” (ATSs) provide investors with a variety of trading forums. Some of these, like BlockBook, Liquidnet and MATCH Now, exist solely to cross large (mostly institutional) blocks of stock. But others, like Pure Trading, Alpha, Chi-X Canada and Omega, serve the entire investment community — trading some or all of the TSX and TSX-V listed stocks.

By introducing competition to stock trading, ATSs have already lowered the cost and increased the speed and efficiency with which stocks are traded. Nonetheless, the ATS phenomenon is still in its infancy in Canada — and so is the regulatory framework. While the regulatory apparatus mostly works very well, some recent trading practices have arisen that materially compromise the fundamental principles of price discovery and liquidity that lie at the very core of a modern trading system.

Jacob Ziegel: "Disappointing catch in the Supreme Court"

This commentary was first published in the Financial Post on November 21, 2008.

One of the important roles of the Supreme Court of Canada is to resolve conflicts among lower courts on difficult issues of law and, in the commercial sphere and other areas of consensual law, to develop rules and doctrines that promote predictability of outcomes and enhance the free-flow of goods and services among contracting parties.

Judged by these standards, the Supreme Court's decision last month in Saulnier vs. Royal Bank of Canada will disappoint many, not because of what the court said but because of what it failed to say.

The immediate issues before the court were whether a bank can acquire a valid security interest in a commercial fishing license issued by the federal Department of Fisheries and Oceans and held by a Nova Scotia fisher, and whether a trustee in bankruptcy acquires the fisher's interest in the license if the fisher becomes bankrupt.

Securities law needs more enforcement, not more laws

Originally posted on Lawyers Weekly: http://www.lawyersweekly.ca/index.php?section=article&articleid=640

Many commentators believe that securities law violations are under-enforced and under-prosecuted in Canada. But quite apart from securities regulatory enforcement, what is the role of the criminal law in the enforcement of financial crimes? Criminal prosecutions are necessary not simply as a supplement to the quasi-criminal jurisdiction of securities regulators, but as a first line in the enforcement of financial crimes. But criminal law has been virtually unused for this purpose even though the law on the books is wholly sufficient. This is because its enforcement and application is the “weak link” in the process.

Consider the purposes in Ontario’s Securities Act which are “to provide protection to investors from unfair, improper or fraudulent practices; and to foster fair and efficient capital markets and confidence in capital markets.” In the quasi-criminal context, where the securities commission pursues an enforcement action in provincial court, the commission is bound to adhere to these objectives and, when adjudicating the matter, the provincial court is similarly bound. So the objectives of securities law are generally prospective and preventative for capital markets.

Income Trusts and the Diversified Investor

This commentary was first published in the Financial Post on November 9, 2006.

With the surprise announcement last week by the Conservative government that distributions by income trusts would no longer be exempt from corporate-level taxation, investors in income trusts have suffered material losses to those investments.

Interestingly, investors with diversified portfolios of Canadian equities would have hardly noticed a difference in their wealth and are probably wondering what all the fuss is about.

While the TSX composite index suffered a substantial loss on the day immediately following the government's announcement, it has already made up most, if not all, of those losses. Since the announcement, then, the TSX Income Trust Index has underperformed the broader TSX Composite Index by approximately 10%. Even taking into account the current yield disparity in the two indexes (approximately 9% for the Income Trust Index and 2% for the TSX Composite Index), the TSX Composite Index still comes out ahead of the Income Trust Index by approximately 3%.

While investors in income trusts have been handsomely rewarded over the past few years, so have investors in the TSX Composite Index, who have been rewarded with double-digit returns over the last five years, without even taking into account dividends. The subsequent divergence in performance in the two sectors has revealed what should have been obvious from the beginning: that investors in the trust sector were taking on greater risk than investors in the broader securities market.

Part of the risk that investors were taking on by investing in the income trust sector was regulatory risk: the risk that Canada would cease preferential taxation of income trusts. Part of the risk was ordinary business risk: while older income trusts represented stable companies with stable and predictable cash flows, over the last eighteen months many income trusts were formed out of otherwise marginal businesses in order to take advantage of retail investors' focus on yield. This obsession with yield has now come home to hurt many retail Canadian investors who invested in income trusts on the assumption that they represented a "safe" source of income, especially in a low interest-rate environment in which it was difficult to earn more than 3% or 4% on fixed-income securities.

Far from being low-risk, income trusts were a riskier than the overall market for at least three reasons. The first was lack of diversification, since income-trusts represented only approximately 10% of the TSX Composite Index on a weighted basis. The second was regulatory risk. Regardless of official representations to the contrary, as more and more Canadian corporations adopted the income trust structure for tax reasons, the pressure to clamp down in order to preserve the integrity of the corporate tax system would have only increased. The third was ordinary business risk. As more and more issuers converted to the income trust structure for tax reasons, the relative quality of the issuers declined, increasing the risk in the sector.