Delivered by e-mail

September 9, 2013

Calculation of excess working capital and the use of subordination agreements

The purpose of this e-mail is to remind registrants of the obligations surrounding the execution and reporting of subordination agreements as required by Section 12 of National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations (NI 31-103). Recently, we observed that firms are not executing and reporting subordination agreements appropriately for the purposes of Form 31-103F1 Calculation of Excess Working Capital (Form 31-103F1). This e-mail outlines these obligations. 

Executing subordination agreements and delivery to the regulator

When firms subordinate long-term related party loans for the purpose of excluding related party debt from Line 5 of Form 31-103F1 in the calculation of excess working capital, firms are to execute a subordination agreement in the form and content prescribed in Appendix B of NI 31-103 and deliver a copy of the agreement to the Ontario Securities Commission (OSC or we). If a copy of the subordination agreement is not delivered to the OSC, the loan is not considered to be subordinated for the purpose of calculating excess working capital on Form 31-103F1. 

When delivering a new subordination agreement, firms should only report the incremental increase of the amount of the related party loan, rather than the full balance. We may request firms to provide a schedule reconciling the total outstanding subordinated loan balance.

Repaying subordinated loans

Section 12.2 of NI 31-103 requires a firm to notify its principal regulator 10 days before the full or partial repayment of a subordinated loan, or the termination of the agreement. We may request further supporting documentation, such as updated interim financial information and Form 31-103F1, to assess whether the firm will have sufficient excess working capital following the loan repayment. If a repayment is made and the repayment causes the firm to have insufficient excess working capital, we may take regulatory action. 

After a partial repayment of a loan, the firm should provide an updated schedule to us indicating the updated outstanding subordinated loan balance.

Delivering subordination agreements and repayment notices

You can send subordination agreements and repayment notices to


If you have any other questions with respect to this e-mail, please contact: 

Jonathan Yeung
Senior Financial Analyst, Compliance and Registrant Regulation
Ontario Securities Commission
(416) 595-8924