CDIC Eligible Financial Contracts By-law

Summary#

This is the final registration of the Canada Deposit Insurance Corporation Eligible Financial Contracts By-law under the Canada Deposit Insurance Corporation Act. It tells federally regulated banks how to change certain financial contracts so that CDIC’s temporary stay rules can apply to contracts governed by foreign law. The by-law was registered on March 14, 2022 and came into force that day.

What it does#

• Prescribes that the class of affected institutions is all federal member institutions of the Canada Deposit Insurance Corporation (CDIC).
• Identifies which eligible financial contracts (EFCs) must be covered:
  • Contracts that allow counterparties to take termination or close-out steps, unless the counterparty is a government, central bank, clearing house, or central counter-party.
  • Contracts that are not governed by Canadian law or that involve at least one counterparty that is not a Canadian resident individual or a Canadian entity.
  • Contracts that meet timing conditions:
    • If a counterparty is a federal member institution or a global systemically important bank (or their affiliate), the rule applies when the contract is entered into, amended or renewed on or after October 1, 2023.
    • For other contracts, the rule applies when entered into, amended or renewed on or after October 1, 2024.
    • Also applies if the contract is linked to another contract already covered by the by-law.
• Requires federal member institutions to make sure covered contracts include language agreeing that CDIC’s temporary stay provisions apply. In plain terms: parties must accept that CDIC can limit certain counterparty actions during a resolution.

Who's affected#

• Federal member institutions (the banks and other institutions that are members of CDIC) must update or use the required contract language.
• Counterparties to those contracts, especially:
  • Foreign counterparties or contracts governed by foreign law.
  • Large international banks identified as global systemically important banks.
• Contracts purely governed by Canadian law with a Canadian resident individual or a Canadian entity on the other side are not caught, unless other conditions apply.
• It may be unclear in some complex multi-contract relationships which specific contracts are covered; parties will need to review their agreements.

Why it matters#

• The rule makes it more likely that CDIC’s temporary stay on certain counterparty actions will be recognized and usable in cross-border situations. That helps prevent a cascade of contract terminations during a bank resolution.
• The change is intended to support an orderly resolution of a failing federally regulated institution and reduce risks to financial stability.
• Practically, banks and their foreign counterparties will need to accept or add standard contract language when they enter, amend, or renew covered agreements after the October 1, 2023 and October 1, 2024 milestones.