Recent Cross-border Financial Activity Working Party on Trade on Goods and Services November 2009

Cross-border financial activity increased in recent years…  Increased liberalization of international flows (online brokers, mergers and acquisitions activity)  Increased use of new investment vehicles (Asset- backed securities, derivatives)  Increased number of participants in the market (small investors, public pension plans)  Regulatory changes  Increased outward direct investment; increased M&A activity

Canada’s exposure to foreign financial markets has increased

Impact of regulatory changes on foreign investment

Canadian holdings of foreign securities: a country perspective

Concentration of investment in foreign equities: % Share for selected countries

Increased outward FDI activity and geographical diversification $79.8 B. $637.3 B.

Less geographical diversification for inward FDI $114.2 B. $504.9 B.

 Higher Canadian demand for foreign securities: Increased exposure to global financial markets Increased exposure to markets’ volatility Increased exposure to currency fluctuations Increased exposure to financial shocks  Higher Canadian direct investment abroad: Increased exposure to foreign economies Summary

Recent financial events evidenced by the international accounts program  Key issue: Canadian institutional investors’ reactions to deteriorating global credit conditions in 2007 ● Immediate ● Marked ● Sustained

Rapid-sustained change in Canadian portfolio investment at outset of global credit concerns

Reduction in holdings of foreign debt in response to global credit concerns

Holdings of foreign short-term paper reduced drastically in August 2007

Investment in foreign long-term debt instruments also declined

Canadians repatriated funds for the first time in 30 years

… to invest in relatively safe government of Canada T-bills

Foreign demand for T-bills continued in 2009 and expanded to federal bonds Foreign portfolio investment in Canada

Canadians returned to foreign markets, mostly stock markets in 2009 Canadian portfolio investment abroad 1

Foreign direct investment lost steam as of 2008

Mergers and acquisitions mostly explained the reduced inward activity

Survey vehicles for the measurement of portfolio investment  Canada’s international transactions in securities (monthly) Foreign investment in Canadian securities Canadian investment in foreign securities  Other position surveys – Annual Inward Outward - CPIS Book and market value

Summary Immediate, marked and sustained reaction of Canadian institutional investors in mid-2007 with respect to their holdings of foreign securities … prelude to financial crisis that erupted in the late summer and fall of 2008? Current reluctance of these same investors to rebuild holdings of foreign securities, especially debt instruments … sending a signal about perception of some degree of fragility in global financial markets? Comments/questions?