As we noted in Chapter 2, commercial paper is short-term, unsecured debt issued by corporations, = typically for financing accounts receivable and inventories. Asset-backed commercial paper, like traditional commercial paper, is also a short-term security (with a maturity that is typically less than nine months). It is issued by conduits (that is, bankruptcy-remote Special Purpose Vehicles), but instead of being an unsecured promissory note, is backed by physical assets such as mortgages, trade receivables, credit card receivables, automobile loans and leases, and other types of assets. Because of this backing, the quality of the ABCP depends on the underlying securities and thus ABCP could be very risky. For example, if there are negative developments in the underlying markets, the risk of ABCP will increase and investors will switch out of ABCP and into safer money market instruments such as traditional commercial paper, bankers acceptances, and Treasury bills. As a result, conduits will not be able to roll over their ABCP and will face a liquidity crunch. The ABCP market in Canada expanded very rapidly from the 1990s to 2007. As at July 31, 2007, the size of the Canadian ABCP market was $115 billion (equal to about 32.5% of the Canadian money market), of which $80 billion was bank-sponsored and $35 billion was non-bank-sponsored. At the same time, the ABCP market in the United States was approximately US$1.2 trillion, equal to about 50% of the U.S. commercial paper market. Bank-sponsored ABCP conduits are invested in plain vanilla assets such as residential mortgages and credit card receivables. Non-bank-sponsored ABCP conduits are invested in structured finance assets such as collateralized debt obligations (CDOs) and subprime mortgages. Canadian banks are involved in the distribution of ABCP and also provide liquidity back-stop facilities to nonbank- sponsored ABCP conduits under the so-called general market disruption clause. In August of 2007, investors in the Canadian ABCP market declined to roll over maturing notes because of concerns about exposure to the U.S. subprime mortgage sector in the underlying assets. As a result, the market was divided into those ABCP conduits that could honour their obligations (bank-sponsored) and those that could not honour their obligations (non-bank sponsored). In the case of bank-sponsored ABCP, the Big Six banks took back onto their balance sheets significant amounts of their own sponsored ABCP. Moreover, valuation and fair-value issues led to significant write downs in the fourth quarter of 2007 and the first quarter of 2008. In the case of non-bank sponsored ABCP, a number of conduits faced significant liquidity shortages, seeking liquidity funding support from their liquidity providers (banks). However, major liquidity providers denied requests for liquidity support, arguing that the general market disruption clause was not met. They interpreted the clause to mean that the majority of the conduits in the entire Canadian ABCP market would need to be unable to roll over before a liquidity provider had to step in. As a result, the Canadian non-bank-sponsored ABCP market froze and investors, including Quebec s huge pension fund, Caisse de d p t et placement du Qubec, Alberta s ATB Financial, the National Bank of Canada, and about 2000 individual small investors, had their cash frozen in non-bank-sponsored ABCP. At the time, the Bank of Canada indicated that it would not accept ABCP as collateral for loans to banks and that a solution from participants in the ABCP market was deemed to be appropriate. As a result, major market participants, including non-bank-sponsored ABCP conduits, institutional investors, liquidity providers (ABN AMRO Group, HSBC, Deutsche Bank, Merrill Lynch, Barclays Capital), and the Affected Trusts, reached an agreement on August 16, 2007, known as the Montreal Accord. Under the Montreal Accord, investors agreed to a standstill period (initially 60 days, to October 16, 2007,extended three times to February 22, 2008), with the objective of restructuring the frozen ABCP into long-term floating rate notes with maturities matching the maturities of the underlying assets in the conduits. However, the agreement had to be renegotiated again 16 months later, in December 2008, with the participation of the federal government and three provinces (Ontario, Quebec, and Alberta), where publicly owned institutions held over $20 billion of frozen non-bank sponsored ABCP. Small investors (holding less than $1 million of the paper) were fully paid out in cash by the brokerage firms that had sold them the paper, whereas the larger investors were given bonds. The final cost of the ABCP restructuring was in excess of $200 million in fees, with the big investors footing the bill.