Asset-Backed Commercial Paper: A Canadian Crisis

• Author: Anita Indira Anand
• Pages: 79-87

79

 9

Asset-Backed Commercial Paper:

ACanadian Crisis

As Chapter 8 explained, Canada’s sound regulatory structure and

other factors insulated our economy from the most negative of

impacts of the global nancial crisis. But while Canada’s economy

was one of the most secure in the world, it was not immune to mar-

ket failures. One important example of Canadian market troubles

was the crisis involving asset-backed commercial paper (known as

ABCP), which rattled our capital markets shortly before the global

crisis reached its climax. The ABCP crisis revealed that Canada has

regulatory “gaps,” some of which persist today.

ABCP is a short-term investment that is collateralized by other

nancial assets and generally used to fulll short-term nancing

needs. The security is issued by asset-backed commercial paper pro-

grams or “conduits” — trusts holding pools of assets that issue notes

or commercial paper (that is, bonds issued by a corporation) — estab-

lished and managed by third party sponsors (most oen corporations

and banks), which provide standby liquidity to the conduits. Once

the ABCP is issued, ratings agencies rate it, and investment dealers

can market and sell it to investors.

ABCP typically matures in thirty days, aer which the investor

receives a principal payment. Because of their structure, ABCP con-

duits are considered to be part of the shadow banking system: they

are used by non-bank nancial intermediaries that provide services

similar to traditional commercial banks while escaping nancial

regulation. Specically, ABCP’s short maturity dates mean that they