The purpose of this letter is to advise you of OSFI’s position on the use of LOCs, in lieu of assets, for the purpose of meeting BAAT requirements. Specifically, section 9 of the Assets (Foreign Companies) Regulations provides that

“The Superintendent may, by order, allow a foreign company to reduce the total value of assets required to be maintained, pursuant to subsection 5(1) by the amount of a letter of credit drawn on a bank, up to a maximum reduction of fifteen per cent of the total value.”

The intention of this provision is to grant temporary relief to branches as required, on a case-by-case basis. Accordingly, a chief agent should contact the relationship manager for the branch before obtaining a new letter of credit to ensure that the particular circumstances satisfy the temporary criteria for acceptance.

Phasing out of existing LOCs

A number of branches appear to have used LOCs on a permanent basis, in lieu of assets, for the purpose of meeting DAT requirements. In conjunction with the introduction of BAAT and to recognize the intended temporary nature, OSFI will require a staged phasing out of the use of these LOCs. Where an institution was holding LOCs, in lieu of assets, as at December 31, 2002, the institution is not to increase the amount of the LOC utilized in the BAAT during 2003. As well, by December 31, 2003, the amount of the LOC permitted is not to exceed 2/3rds of the amount in place at December 31, 2002. By December 31, 2004, the amount permitted is not to exceed 1/3rd of that at December 31, 2002. By December 31, 2005, the phase out will be complete.

Reporting of the LOC

For the purpose of reporting on the BAAT, LOCs used, in lieu of assets, are to be shown on line 7 of page 30.80 of the P&C-2; (i.e. in the numerator of the test).

If you have any further questions on this matter, please contact your relationship manager.