Monday, December 21, 2009

Canada banks to pay C$139 mln in ABCP settlement

Original posted on Reuters by Pav Jordan and Jennifer Kwan:

A group of Canadian banks and brokerages will pay about C$139 million ($131 million) in penalties for allowing investors to buy asset-backed commercial paper that traded in a market that seized up during the U.S. subprime credit crisis.

A total of seven banks or brokerages on Monday were ordered to pay fines by regulators in Ontario, British Columbia and Quebec.

National Bank of Canada (NA.TO), the country's sixth-largest lender, agreed to pay C$75 million in fines and fees, including C$4 million for a financial education campaign.

Canadian Imperial Bank of Commerce (CM.TO) and its capital markets arm will pay C$22 million, including legal fees, while Scotia Capital Inc. (BNS.TO) agreed to C$29 million in fines and fees.

Smaller settlements were reached with HSBC Bank Canada, (C$6 million), Canaccord Financial Ltd. (CF.TO), (C$3.1 million) and Credential Securities (C$200,000).

Laurentian Bank Securities Inc (LB.TO) agreed to a settlement of C$3.2 million.

Banks and brokerages accepted the settlements after hearings with Canadian regulators, including securities commissions in the provinces of Quebec, Ontario and British Columbia, and the Investment Industry Regulatory Organization of Canada (IIROC), a self-regulatory body, in Toronto.

In each case the banks or brokerages are accused of failing to take appropriate steps to protect the interests of their clients by selling them the asset-backed commercial paper. The short-term investments had been considered to be a relatively risk-free investment but their complex structure proved a decided weakness when the housing crisis hit in 2007.

"CIBC has admitted it engaged in conduct contrary to the public interest," the OSC said in announcing the settlement.

Similar statements came with the rulings for the other banks and brokerages involved in the ABCP saga, which began when the market collapsed in August 2007.

The market seized up because investors balked at rolling over the paper on concern that the securities were backed by subprime mortgages during a wave of defaults and foreclosures in the U.S. housing market. The frozen market left those holding the ABCP unable to redeem some C$32 billion ($30.2 billion) of the paper.

"There's lessons (here) to investors in understanding what they are buying. There's lessons to brokers in understanding what it is they're selling," Dan Williams, a partner at Kilgour Advisory Group and expert on ABCP, said as regulators were mulling Monday's settlement rulings.

"Hopefully, there's lessons to structurers as well in that there was a fairly significant underestimation of the risk that was underlying these assets."

The former sellers of the ABCP, a short-term debt instrument with typical maturities of 30 to 180 days, also agreed in the settlements on Monday to submit to a review of their compliance practices and procedures.

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