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Investors burned by ABCP set for settlement

PHOTO ILLUSTRATION How Ordinary Investors Got Sold On ABCP

Investors who were caught up in the asset-backed commercial paper freeze in 2007 may be in line for a big cheque, as regulators are hoping to distribute as much as $60-million they collected from banks who sold the money market paper.

The Investment Industry Regulatory Organization of Canada and the Ontario Securities Commission will apply to the judge who oversaw the restructuring of the ABCP for permission to distribute the money, which would go to individual and institutional investors who were affected. An announcement is expected as early as Thursday morning, said two people familiar with the plan.

The market for supposedly short-term, safe ABCP froze in mid-2007. Buyers disappeared amid concern that the paper was infected with subprime securities. With no fresh buyers, holders were unable to redeem the paper. Then, as the credit markets fell apart globally, the derivatives backing the paper were almost wiped out.

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The biggest players in the market worked frantically to restructure the ABCP, and after 17 months they succeeded. Under the court-supervised restructuring plan, investors in ABCP were given revamped paper that they were told would be worth par if they held until 2017. But some investors weren't able to hold that long and were forced to sell at a loss. The paper is still trading at a discount, and interest payments are so scant that holders will likely lose money after inflation even if they can hold until 2017.

Smaller investors, with holdings of under $1-million, were largely bought out by the brokers that sold the paper.

The cheques from regulators will help investors erase the memory of the 17 months of not knowing whether all their savings would be lost.

The cash comes from settlements reached in late 2009 with a group of banks that sold the paper. In addition to the OSC and IIROC, Quebec's Autorite des marches financiers collected fines.

The OSC collected a $22-million fine from Canadian Imperial Bank of Commerce and a $6-million penalty from HSBC's Canadian unit. IIROC collected $29.3-million from Bank of Nova Scotia, $3.1-million from Canaccord Financial and $200,000 from Credential Securities.

Quebec's AMF collected the most, bringing in $75-million from National Bank of Canada and $3.2-million from Laurentian Bank. The AMF is not believed to be part of the payout plan.

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