A National Systemic Risk Clearinghouse?

• Author: Cristie Ford and Hardeep Gill
• Pages: 145-184

• 145

 

A National Systemic Risk

Clearinghouse?

Cristie Ford and Hardeep Gill

In Reference re Securities Act,1 the Supreme Court of Canada al-

located to the federal level of government responsibility for two

things: data collection and the management of systemic risk. The

path forward now presumably entails cooperative federalism

and negotiation between the federal and provincial governments

around the relationship between these responsibilities and those

of provincial securities regulators. In view of these negotiations,

and in the interest of protecting Canadian investors, taxpayers,

and capital markets from systemic risk in particular, this essay

-

eral responsibility.

Our claim is that the Reference can be seen as an invitation to

create a meaningful and ambitious national systemic risk regu-

lator, and one deeply connected to the securities markets and

securities regulators. Regulating systemic risk requires deep in-

formation channels into local markets. Systemic risk has always

been a function of myriad smaller, more localized risks, but over



risk even further into the daily operations of capital markets. In

other words, it is simply not possible to manage systemic risk

at some metaphysical distance from the day-to-day operations of

the securities markets themselves. The day-to-day operations of

1 2011 SCC 66 [Securities Reference].

 •      

issuers, registrants, and regulators in the capital markets are

constitutive of systemic risk.

The Reference opens the possibility that the federal govern-

ment can create not an overlapping fourteenth securities regu-

lator, but a different kind of regulatory capacity at the federal

level. In giving data collection responsibilities to the federal gov-

 

valuable tool, and one that complements the federal responsibil-

ity for managing systemic risk. This essay will argue that the

combination of systemic risk and data-collection responsibilities

could generate not a twentieth-century-style frontline regulator

but an active “clearinghouse” regulatory body, as envisioned by

some scholars in law and organizational theory. As we describe

further below,2 a regulatory clearinghouse is an institution that

sets broad goals and regulatory requirements, while leaving

detailed implementation of regulation to more local units. Cru-

cially, such a clearinghouse would have the data analysis cap-

acity and the authority to require more local regulatory units to

produce information, and to demonstrate their compliance with

    

government would have chosen, and it is not a straightforward

path. Nevertheless, with some creative thinking, it may have

some advantages. A commitment to meaningful systemic risk

management and data collection gives the federal government a

principled way to imagine a coherent role for itself in Canadian

securities regulation.

A. e Reference Decision and the Scope of Federal

Authority

The Supreme Court of Canada delivered the Reference on 22 De-

cember 2011. Its contents are thoroughly analyzed throughout

this volume; this essay focuses only on the two areas of respon-



      

risk:3

2 See Part C, below in this chapter.

3 “Manage” is probably a better term than “prevent,” since systemic risk

cannot be prevented even if acute systemic risk crises can be averted.



particula r paragraphs in the Reference.

A National Systemic Risk Clearinghou se? • 147

Prevention of systemic risk may trigger the need for a national

regulator empowered to issue orders that are valid throughout

Canada and impose common standards, under which provin-

cial governments can work to ensure that their market will not

transmit any disturbance across Canada or elsewhere. . . .

We accept that preservation of capital markets to fuel Canada’s



that goes beyond a particular “industry” and engages “trade

as a whole”. . . . Legislation aimed at imposing minimum stan-

dards applicable throughout the country and preserving the

       

well relate to trade as a whole.4

The Court suggested, “without attempting an exhaustive

enumeration,” that some of the proposed federal Act’s provisions

on derivatives, short-selling, credit rating, urgent regulations,

and data sharing seemed to be directed at systemic risk.5 These

provisions do not collectively constitute a coherent mandate. The

Court apparently intended them as broadly illustrative, and we

should take seriously the caveat that this list of topics is not

exhaustive. For many observers familiar with how capital and

       -

not actually manage systemic risk without having substantially

more authority than these provisions provide over the myriad



place.

4 Securities R eference, above note 1 at paras 104 and 114.

5 Ibid



(prohibiting the sale of exchange-traded derivatives except on designated

exchanges), s 90 (prohibiting the sale of designated derivatives unless



(requiring the declaration of short positions), ss 109 and 224 on data

collection and sharing (requiring respectively that market participants

keep records and produce them to the Chief Regulator where required;

and prohibiting persons from representing that the Tribunal has pro-

vided any merit-based approval of persons, products, or the adequacy of

-





Securities Regulatory Authority, the Tribunal, and the Chief Regulator

(as head of the Authority’s regulatory division) are no longer particularly

relevant given the likelihood that the envisioned regulatory architecture

will not come to pass.