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Rows of folders were set up to hold the documents that were part of the restructuring of the ABCP market.Tibor Kolley/The Canadian Press

A group of Canada's biggest banks and investment dealers have struck regulatory settlements expected to total more than $130-million related to their role in the $32-billion meltdown of the country's asset-based commercial paper market in 2007.

Canadian Imperial Bank of Commerce and its CIBC World Markets unit, Bank of Nova Scotia's Scotia Capital, HSBC Bank Canada, Canaccord Financial and Credential Securities are all scheduled to appear before Ontario-based regulators Monday to approve the penalties, which were finalized this week. The tallies are expected to range from less than $1-million for Credential to as much as about $30-million for Scotia, said people familiar with the negotiations.

National Bank of Canada , which has been dealing with Quebec's securities regulator, has already had its settlement approved. However, the deal won't be announced until the other banks' deals have been approved in Monday's hearings. National will pay the biggest fine of about $70-million, reflecting its role as the biggest player in the ABCP market, sources said.

Laurentian Bank has also reached an agreement to settle with Quebec regulators, at a cost of about $3-million to $5-million, sources said.

These sanctions are well below the $300-million-plus in penalties that regulators initially sought from the investment banks. Market watchdogs opened negotiations by asking for much higher amounts, and as the numbers came down the banks became more willing to settle to put the ABCP affair behind them.

All of the settlements are on the same theme, that the banks and dealers "did not take adequate steps to ensure that its Approved Persons understood the complexities of the third-party asset-backed commercial paper product made available for purchase to its retail clients," to quote from the press release early Friday that explained Credential Securities' date with the Investment Industry Regulatory Organization of Canada.

The Ontario Securities Commission is also holding settlement hearings Monday.

ABCP was a supposedly low-risk investment that investment dealers sold to clients as an alternative to cash or government paper. However, a portion of the domestic ABCP market seized up in August, 2007, as investors grew increasingly concerned with the subprime mortgages and other derivative assets that underlie this commercial paper.

National and other big players worked for the first 18 months of the crisis to restructure the paper to give investors new bonds they could sell. Once that was completed in early 2009, regulators opened their investigation.

Firms that refused to settle will have to fight the regulators in court. Market watchdogs are taking that route as they push for sanctions against Coventree Capital Group Inc. and the local unit of Deutsche Bank AG, a seller of the paper.

CIBC World Markets is expected to pay about $20-million. HSBC between $5-million and $10-million, Canaccord Capital $3-million hit, and Credential Securities about $200,000, sources said.

Former Bank of Canada governor David Dodge said Friday Canada still has some lessons to learn from the ABCP situation.

"It was a very bad chapter in our history that I think points to a very important thing going forward, and that is the need to think very hard about what the mandate for [securities]commissions is going to be, because fundamentally every basic principle of good securities was violated in those contracts," he said in an interview, noting that the commercial paper was opaque and investors were unable to determine what the underlying assets were.

The complexity of the product "violates every first principle of what the [securities]commissions should be doing, and points to a need for a rethink of the mandate we're going to give to the [securities]commissions going forward," Mr. Dodge said.

It's not only Canada that needs to take action on this front, he added. Regulators and bodies such as the Financial Stability Board have been more focused on reforming banks than they have on reforming capital markets, he said. The recent announcement that the Bank of Canada and securities industry in this country are taking action to support so-called repo or repurchase agreements is a step in the right direction, but many other markets are still not operating in a transparent manner, he said.

With files from Tara Perkins

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National Bank of Canada

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