Further reassurances offered on commercial paper

Canadian financial institutions continue to reassure the public that their investments are stable and safe, as another firm announced it would buy back potentially illiquid asset-backed commercial paper from its money market funds.

Industrial Alliance is the latest firm to assume the risk associated with these investments, promising to pay 100% of their purchase price along with accrued interest. The buyback includes all non-bank-sponsored ABCP held in money market funds by the Quebec-based insurer’s subsidiaries, IA Clarington and Industrial Alliance Pacific.

Industrial Alliance stresses, however, that it does not have any investments in high-risk sub-prime mortgages in the U.S.

“Our goal in taking this initiative, which is in the best interest of our clients, distribution networks and financial partners, is to offer a solution to the ABCP market’s liquidity crunch,” said Yvon Charest, president and CEO of Industrial Alliance.

The buyback is subject to regulatory approval. The move to accept the risk associated with ABCP follows the lead of National Bank, which made a similar announcement on Monday.

Industrial Alliance says the ABCP purchase will cost it about $77 million. The firm says there is an additional $114 million in non-bank ABCP held in non-money market funds, but that it accounts for less than 2.7% of each fund, and that IA does not anticipate liquidity problems in these funds.

Third party ABCP is essentially a bundle of debts, ranging from residential mortgages to credit card debt. With growing fears of consumer defaults, there is some question whether such debt belongs in a supposedly risk-free money market fund.

Industrial Alliance is not alone in addressing the third-party ABCP issue.

Laurentian Bank has announced it will support the “Montreal agreement” struck on August 16, in which large institutions led by Quebec’s Caisse de depot et placement agreed to provide liquidity to non-bank, third-party issuers of ABCP, in exchange for a conversion of ABCP to longer duration floating rate notes.

Laurentian said in a press release that it had “limited exposure to the conduits covered by this agreement,” totalling about $20 million through the bank itself and its subsidiaries. Laurentian assured its clients that the exposure was the bank’s and posed no risk to their investments.

“No retail client of Laurentian Bank or Laurentian Bank Securities owns, with the institution, paper issued by these conduits,” it said in a release.

HSBC Bank Canada has reaffirmed its commitment to its bank-sponsored asset-backed commercial paper program, namely Performance Trust, and that there is “no exposure to third party asset backed commercial paper” in any of the funds it manages.

HSBC is one of the signatories of the August 16 liquidity agreement.

Several of the big banks have issued additional — and virtually identical — releases promising “global-style” liquidity. Traditional “Canadian-style” liquidity relies on standby liquidity lines that are only accessible in times of very broad market disruption, whereas global-style liquidity is much easier to access.

Filed by Steven Lamb, Advisor.ca, steven.lamb@advisor.rogers.com