On March 1, 2011, John enters into a secured loan arrangement with InvestBank under which John agrees to borrow, and InvestBank agrees to lend, an amount equal to 90% of the FMV of the ABC Inc. shares, or $900. The loan bears interest at 6 per cent per annum. The loan has a term of approximately five years, and matures on March 1, 2016. As security for the loan, John pledges the 10 ABC Inc. shares. Recourse under the loan is limited to the pledged securities (or identical collateral substituted therefor). (In other words, John may settle his obligations under the loan on a cash settlement basis or by physical delivery of 10 ABC Inc. shares.) InvestBank hedges its risk under the contract through a hedging strategy involving short sales into the secondary market.
Insider Reporting Requirement: John is required to file an insider report within five (calendar) days of March 1, 2011. (See Part 3 of NI 55-104.) For an example of how to report this transaction, see below. Unless InvestBank is also a reporting insider of ABC Inc., InvestBank is not required to file an insider report.
Instructions for Example 4
In the above example, the term of the loan agreement limiting recourse to the collateral (or to identical collateral delivered in substitution for the original collateral) effectively operates as a “put” option. John can repay the principal amount of $900 at the term of the loan. Alternatively, John can satisfy his obligation under the loan agreement to repay the principal amount of $900 by releasing his interest in the collateral (or by delivering another 10 ABC Inc. shares in substitution for the pledged shares), regardless of their value at the term of the loan.
John can report this transaction in a number of ways. One approach would be to report this transaction as an acquisition of an OTC Put Option. (See example no. 2 for instructions as to how this may be reported.)
Another approach would be to define the secured loan agreement as an insider-defined derivative, as follows.
- Repeat steps 1 to 8, inclusive, under example no. 1.
SCREEN: File insider report – Add insider-defined security designation
9. Under the heading Security designation, in the drop-down menu under the subheading Security name, select and highlight Other.
10. Then, for the Additional description, briefly describe. For example, “Loan secured by pledge (limited recourse) matures March 2016”.
Note: This adds the security designation “Loan secured by pledge (limited recourse) matures March 2016” to your list of insider-defined securities.
- Repeat steps 11 to 24, inclusive, under example no. 1, with necessary changes.
25. Under the field Unit price or exercise price, enter 0.
26. Under the field Conversion or exercise price, enter 900.
Note: Under the loan agreement, John can repay the principal amount of $900 at the term of the loan. Alternatively, John can satisfy his obligation under the loan agreement to repay the principal amount of $900 by releasing his interest in the collateral (or by delivering another 10 ABC Inc. shares in substitution for the pledged shares), regardless of their value at the term of the loan. Effectively, John has an option to put 10 shares to InvestBank at a notional price of $900 (or $90 per share). Since the put option exercise price is $900, John would enter 900 in the field Conversion or exercise price.
27. In the Date of expiry or maturity field, select March 1, 2016.
Note: Since the anticipated date of settlement is March 1, 2016, this will be the date of expiry or maturity.
28. Enter the following information in the General remarks field:
Pledge of shares as collateral for loan (principal amount $900; interest at 6 per cent per annum). Loan may be repaid in cash or settled by delivery of 10 shares.
Note: If it is not possible to adequately describe a transaction or to include all of the material terms of a transaction in the space provided, consider making reference to a public document (e.g., a news release issued by the issuer) that further describes the transaction. Alternatively, this information may be included in a schedule that may be filed in paper format by facsimile in accordance with the provisions of Part 3 of NI 55-102. Fax the schedule to the facsimile number of the securities commission set out on Form 55-102F6. We recommend that you refer to this filing by facsimile in the General remarks field on SEDI. Staff will make this schedule available to the public on request. SUMMARY – The information should appear as follows:
- Repeat steps 29 to 36, inclusive, under example no. 1, with necessary changes.