BUSINESS

ABCP Meltdown: Canadian Banks To Pay $60 Million To Investors Over 2007 Financial Crisis

03/13/2012 04:47 EDT
Flickr: nouspique

TORONTO -- An Ontario court has approved a plan to distribute $60 million of penalties collected by regulators to some investors who bought asset-backed commercial paper before the ABCP market collapsed about five years ago.

The money will come from five Canadian financial institutions that reached settlements in 2009 with two of the country's financial market regulators.

Scotia Capital agreed to pay $28.95 million, CIBC paid $21.8 million, HSBC Canada agreed to $5.93 million, Canaccord Financial Ltd. $3.1 million and Credential Securities Inc. $200,000.

WHAT ARE ASSET-BACKED COMMERCIAL PAPERS?

A short-term investment vehicle with a maturity that is typically between 90 and 180 days. The security itself is typically issued by a bank or other financial institution. The notes are backed by physical assets such as trade receivables, and are generally used for short-term financing needs.

Source: Investopedia

The Ontario Securities Commission and Investment Industry Regulatory Organization of Canada asked for the Ontario Superior Court to decide whether it was legal for them to distribute the penalty money to investors who bought the ABCP through the five investment firms.

The IIROC, which is a self-regulating organization recognized by all of Canada's provincial and territorial regulators, requires special permission to make the distributions to investors.

Normally, the money collected by IIROC must be used to defray costs of running its organization, for education of investors and market professionals and for contributions to a non-profit organization established to protect investors.

The OSC faces fewer restrictions but must ensure that distributions of any restitution money it receives is done in a fair manner.

The two organizations recommended that clients of the five investment firms receive compensation from the funds if they meet certain criteria. Details varied slightly from company to company but, in essence, the money is to be distributed to investors who weren't adequately warned by the sellers of the risks involved.

Canada's ABCP crisis began in mid-2007 when about $32 billion of asset-backed commercial paper became frozen _ affecting pensions, companies and individuals who couldn't redeem their notes.

Fines were paid into the fund by some of the banks and investment managers who sold ABCP.