Amid chants of “We the North”, this year the Toronto Raptors basketball team brought the National Basketball Association (NBA) championship outside the US for the first time in history. Just as we celebrated a well-deserved championship in the heart of Toronto’s financial district—Canada’s banks, asset managers, pension managers and other financial market stakeholders continue to capture global attention and gain prominence.
As has been the case for nearly a decade, market participants continue to take confidence from Canada’s stable financial sector, robust market infrastructure, efficient settlement mechanisms, effective prudential regulatory environment and, of course, Canada’s status as one of the few remaining triple-A rated sovereigns. Canada’s other advantages continue to play strongly for global investors, including our wealth of natural resources, highly-skilled workforce and status as a growing nexus for innovation.
In line with this year’s SIBOS theme, thriving in a hyper-connected world, the Canadian market has seen tremendous growth and innovation as financial market participants adapt to rapid technological advances.
Among the ongoing changes in investment operational models, evolution of global and domestic regulatory expectations, and the rising importance of new risk focus areas such as digital compliance and cybersecurity, Canadian market participants and regulators continue to work with supporting partners such as accounting firms, legal firms and compliance advisors to achieve robust and sound results. Canadian market participants across the investment lifecycle place a high premium on sound governance and strong risk culture; this, in turn, drives market providers, such as asset servicing providers, to continue to invest in reinforcing the protections and controls in place. Regulators and central banks also play a role in enhancing this stance.
Tax and the regulatory environment
The scale and sophistication of Canada’s investment landscape are often met with high rankings globally for its stability and transparency. Current focus areas for Canadian regulators include digital compliance, integrated data requirements, payments modernisation, regulatory burden reduction, funding rules for defined benefit plans, changing conditions for alternative investments, and a number of general tax changes. As in many global jurisdictions, Canadian regulators and market stakeholders continue to place particular focus on global tax and regulatory changes.
When navigating international waters—across the Canadian border or any other border—institutional investors would be wise to consider the various risks that come with the territory. There are a number of aspects to take into consideration, such as foreign taxes, liquidity principles, political risks, currency risks, transaction costs, and management fees. Different markets have different tax codes and regulations that require compliance.
Investing in foreign markets has the potential to complicate an investor’s tax position—including the potential to incur higher-than-necessary tax expenses if they do not understand the tax requirements or their obligations. This makes it all the more critical to work with asset servicing providers who have a strong on-the-ground presence to help clients better navigate and understand market expectations.
Canada has seen new proposed regulations for withholding on transfers of certain partnership interests with the US Treasury Department (Treasury) and the US Internal Revenue Service (IRS) issuing proposed regulations with guidance on how to apply withholding tax under US Internal Revenue Code (IRC) Section 1446(f) on a transfer by a non-US person of an interest in a partnership that carries on a trade or business in the US or otherwise realises income effectively connected with such a trade or business (ECI). These proposed regulations are potentially relevant to any non-US investor in such a partnership.
Canada’s Department of Finance announced on 21 June 2019 that the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting, also known as the multilateral instrument (MLI) sponsored by the Organisation for Economic Co-operation and Development (OECD), has been enacted into law in Canada.
Canada’s regulatory regime itself is relatively complex, with a number of industry self-regulatory bodies, provincial regulators and federal regulators. A long-term initiative currently underway is the creation of a single securities regulator known as the Cooperative Capital Markets Regulatory System, which recently onboarded Nova Scotia as a regulatory market participant—joining the provinces of British Columbia, New Brunswick, Ontario, Prince Edward Island, Saskatchewan and Yukon as well as Canada’s federal government as a participant in the system.
We also see international commitments to combat tax avoidance and a call for improved beneficial ownership transparency in order to further strengthen Canada’s anti-money laundering (AML) or anti-terrorism financing (ATF). financing regime. For example, Financial Transactions and Reports Analysis Centre of Canada’s (FINTRAC) assessment manual and compliance framework ensures and assesses compliance with proceeds of AML/ATF.
Trade settlements
Clearing and settlement trends within Canada include familiar themes, such as straight-through processing, data, and efficiency—and, of course, strong governance and risk mitigation. One focus area here in Canada is the area of overnight/repo rates, which continue to receive regulatory and industry attention. For example, a consultation paper from The Bank of Canada’s deals with enhancements to the Canadian overnight repo rate average; another paper on behalf of Canadian Alternative Reference Rate (CARR) Working Group proposed improvements to overnight repo rate average risk-free interest-rate benchmark.
Another relevant development in today’s post-London Inter-bank Offered Rate (LIBOR) world was the Bank of Canada’s announcement of its intention to become the administrator of the Canadian Overnight Repo Rate Average (CORRA), a key interest rate benchmark for Canada’s financial markets. In its announcement, Canada’s central bank will take over this role when enhancements to CORRA take effect next year.
The Bank of Canada has worked closely with industry participants through the CARR Working Group to improve the methodology for calculating CORRA.
Fund administration with Canadian firms
Canadian market utilities are very robust and offer shared platforms for sales and distribution. Central utilities such as Fundserv connect fund manufacturers, distributors, intermediaries and service providers—delivering efficiency and connectivity for market participants. Of course, for global market players seeking to enter the Canadian market, the complexities and specifics of the local market further underscore the need to leverage on-the-ground knowledge from a local player.
We see shifts in reliance on partnerships as market stakeholders recognise the value of further collaboration between client firms and their providers in the area of fund administration. This collaborative approach is perhaps most evident in the technology area as participants openly and collaboratively explore changing access points, processes, interfaces and amalgamation of support and outsourced services.
As in many other aspects of the business, the world of Canadian fund administration is seeing an increased focus on digitalisation of processes and products in keeping with the themes of scale, risk mitigation, efficiency and cyber risk management. Likewise, the fund administration space continues to see increased pressures from regulators, boards and underlying clients to drive confidence, efficiency and results.
Canadian pension funds
Canada continues to extend its status as a global leader in the pension investment landscape, with our nation’s pension plans among the world’s most sophisticated. Large Canadian pension plans are characterised by a joint trustee model, with appointees from organisational and plan member stakeholders, and with plans operating independently from their sponsoring organisations (such as governments) and charged with taking a very long-horizon approach to pension investment management.
The success of the Canadian model can be attributed to the collaboration between diverse stakeholders as well as reinforcing a long-term cycle. This cycle consists of: the building and maintenance of trust among a diverse range of relevant pension stakeholders; adherence to a set of pension design and management principles that cut across a variety of pension disciplines, including governance, people and organisation, investment, administration, plan design and funding, and regulation and public policy; and results-focused execution that puts the principles into practice on a day-to-day basis and delivers superior results.
Canadian pension plans have driven success with a clear and long-horizon focus on portfolio growth. CIBC Mellon’s research in this area—published earlier this year in the company’s “Race for Assets: Canada vs. the World” paper—documents how pension plans and other institutional investors are leading a global shift toward investments in alternative asset classes such as real estate, infrastructure, private equity, private debt and hedge funds, supported by highly sophisticated, experienced and dedicated internal teams.
Large Canadian pension plans were some of the earliest and most consistent allocators to alternative investments, and that trend shows no sign of slowing. According to a survey we conducted, 58 percent of Canadian institutional investors intend to increase their allocations to alternatives, and 42 percent intend to maintain them—an even higher portion than global peers. Top trends in Canada include a focus on transparency, fee compression and a rising focus on environmental, social and governance factors.
Asset servicing in Canada over the next five years
Canada is a stable market, but that also means that some of the structural changes we see will continue going forward. We expect to continue to see an ongoing focus on efficiency and risk mitigation, coupled with expanding demand for new technology, efficient integration and ever-stronger cybersecurity. Clients will continue to focus on data and to identify opportunities to more efficiently and rapidly leverage it to drive and support decision-making. The ongoing march of optimisation will continue to push market participants to consider their internal operations carefully and how to enhance them, as well as whether they might be suitable targets for outsourcing.
Working with a sub-custodian, local presence matters
As always, a critical factor in the ability of asset servicing providers to support their global clients depends on on-the-ground expertise, in-depth knowledge of the local market, and active involvement with relevant local industry associations and self-regulatory groups.
As Canadian examples, these include the Investment Funds Institute of Canada, the Portfolio Management Association of Canada, the Mutual Fund Dealers Association, the Pension Investment Association of Canada, the Canadian Association for Alternative Strategies and Assets and the Association of Canadian Pension Management, to name a few. Institutional investors should expect their local asset servicing provider to play an active role in industry associations and working groups, in an effort to help bolster and shape industry practices within the domestic market.
Additionally, a reliable provider should be expected to keep well appraised of global regulatory and industry changes as they relate to the local market. In addition to providing outstanding service, dependable execution and knowledgeable insights supported by knowledgeable subject-matter-experts at all levels of the organisation matter.
The Canadian market still retains the fundamental character that it is globally known for, anchored by strength, stability and a prudent regulatory environment—together with pride in our strong financial service segment, world-leading pension plans and, of course, one basketball team.
image: Steve Russell/Getty Images
