## EXECUTIVE SUMMARY ## Source details **Canonical URL:** [EXECUTIVE SUMMARY](https://www.imf.org/-/media/files/publications/cr/2020/english/1canea2020007.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2020/english/1canea2020007.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2020/english/1canea2020007.pdf.json) --- ### Overview and Context - Financial market infrastructures (FMIs) have operated normally under a well-established legal and oversight framework that is distinct for Canada. - Major modernization program under way: - The systemically important payment system (SIPS), which has been operational for around 20 years, will be replaced with a real-time gross settlement (RTGS) system. - A fast retail payment system is also being implemented. - Governance structure respects regulatory, supervisory and oversight powers at both the federal and provincial levels. - The Payment Clearing and Settlement Act (PCSA) assigns the Bank of Canada (BOC) the authority to oversee the designated FMIs, with responsibility being shared by three provincial securities regulators based on their respective securities legislation. - The Department of Finance (DOF) is also involved in the oversight of payment systems. - Canada’s SIPS is owned and operated by a non-profit statutory corporation—Payments Canada—distinct from jurisdictions where the central bank normally holds such responsibilities. ### Scope of FSAP Review - Focused review on domestic systemically important FMIs, covering: - Canadian Derivatives Clearing Service (CDCS), a central counterparty (CCP); - CDSX, a central securities depository (CSD), securities settlement system (SSS) and CCP; - Large Value Transfer System (LVTS), a SIPS. - Reviewed fintech developments relating to payment, clearing, and settlement. - Assessment methodology: - Based on the Principles for Financial Market Infrastructures (PFMI) and supplemented by CPMI/IOSCO Guidance on Cyber Resilience for FMIs, the CPMI/IOSCO Guidance on Recovery of FMIs, and the FSB Key Attributes of Effective Resolution Regimes for Financial Institutions. - Authorities’ responsibilities assessed against Responsibilities A to E of the PFMI. ### Key Findings - High-quality and effective oversight of FMIs: - FMIs are expected to meet oversight requirements consistent with international standards. - CPMI-IOSCO monitoring showed complete and consistent implementation of the PFMI. - Oversight of FMIs is sufficiently resourced. - The BOC defines its policies through its guidelines (including on the risk-management standards consistent with the PFMI) and annual oversight reports. - Authorities should formally adopt international guidance into domestic standards: - Formally adopt the CPMI/IOSCO Guidance on Cyber Resilience for FMIs in the BOC Risk Management Standards for Designated FMIs and the Canadian Securities Administrators (CSA)’s National Instrument. - Adopt the CPMI/IOSCO assessment methodology for the oversight expectations for critical service providers in the BOC Risk Management Standards for designated FMIs and CSA National Instrument. - Roles and responsibilities require clarification: - The division of powers between the BOC and provincial securities regulators is not clearly defined. - Where responsibilities overlap, federal and provincial authorities cooperate, but a joint oversight framework should be developed to supplement the existing memorandum of understanding. - At least one authority should take responsibility for establishing efficient and effective cooperation among all relevant authorities for each designated FMI. - Use of assessment ratings and stronger enforcement powers: - Use assessment ratings for designated FMIs and critical service providers (CSPs) to increase transparency and enhance moral suasion. - Ratings for FMIs can be disclosed in the BOC's annual oversight reports; FMI operators can assign ratings to each oversight expectation for CSPs. - The BOC should have stronger authority to use directive powers to ensure effective enforcement on necessary corrective actions; currently use of directives faces a burden of proof on potential for systemic or payment system risks and is subject to prior representations and, for Payments Canada FMIs, approval from the Minister of Finance. - Liquidity and operational risk management enhancements needed: - Improvements in cyber resiliency continue in line with international guidance, including industry-wide exercises by FMI operators and participants. - Compliance to endpoint security needs to be tightened by self-attestations and audits of FMI participants. - Categorization and reporting of operational incident severity levels could be further coordinated. - Liquidity risk exposures following a participant default need improvement for the CDSX. - With the move towards RTGS, assess intraday liquidity risk of wholesale payment system participants under market-wide stress. - Resolution regime for FMIs: - Canada has recently put in place a resolution regime for FMIs; on June 25, 2019, Part I.1 of the PCSA and Payment Clearing and Settlement Regulations came into force giving effect to the Canadian FMI resolution regime. - As a result, the BOC is the resolution authority for all domestic designated FMIs. - Main policy objectives: maintain critical services of a designated FMI, promote financial stability, and minimize potential public funds exposure to loss. - The BOC is responsible for developing resolution plans in consultation with relevant authorities, including provincial securities regulators. - Fintech monitoring and coordination: - The BOC has engaged in fintech research to assess impacts on the financial system and central bank core functions. - The DOF has led efforts to establish a new retail payments oversight framework and review prospects for open banking. - A Heads of Agencies Crypto-Asset Working Group was established to coordinate monitoring of crypto-assets and develop a consistent domestic regulatory framework. ### Recommendations on Oversight of FMIs (Table 1) - Enhancing oversight of FMIs - Define the roles and responsibilities among relevant FMI authorities. (BOC, DOF, CSA) — Priority: M — Timeframe: NT - Develop a joint oversight framework to supplement existing memorandum of understanding. (BOC, CSA) — Priority: H — Timeframe: NT - Enhance BOC directive powers in the Payment Clearing and Settlement Act. (BOC, DOF) — Priority: M — Timeframe: NT - Determine at least one authority who should take responsibility for establishing efficient and effective cooperation among all relevant authorities for each designated FMI. (BOC, CSA) — Priority: H — Timeframe: NT - Formally adopt the CPMI/IOSCO guidance on cyber resilience for FMIs in the BOC Risk Management Standards for designated FMIs and CSA National Instrument. (BOC, CSA) — Priority: H — Timeframe: I - Adopt the CPMI/IOSCO assessment methodology for the oversight expectations for critical service providers in the BOC Risk Management Standards for designated FMIs and CSA National Instrument. (BOC, CSA) — Priority: H — Timeframe: NT - Assign and disclose ratings for domestic designated FMIs. (BOC, CSA) — Priority: M — Timeframe: NT - Establish clear criteria and oversight expectations for critical service providers. (BOC, CSA) — Priority: M — Timeframe: NT - Train FMI oversight staff in advanced quantitative skills to support risk assessments. (CSA) — Priority: M — Timeframe: I - Disclose the BOC/DOF Payments Advisory Committee’s terms of reference. (BOC, DOF) — Priority: M — Timeframe: NT - Strengthening FMIs’ resilience - Enhance risk management frameworks to include concentration risk, reputational risk, human resource risk, and competition risk. (LVTS, CDSX, CDCS) — Priority: M — Timeframe: MT - Analyze liquidity risks exposures following participant default. (CDSX) — Priority: M — Timeframe: NT - Assess liquidity risks for FMI participants under a market-wide stress scenario with collateral deterioration. (LVTS) — Priority: M — Timeframe: MT - Monitor the compliance of endpoint security self-attestations and audits for FMIs and FMI participants. (LVTS, CDSX) — Priority: H — Timeframe: I - Coordinate the categorization and reporting of operational incident severity levels. (LVTS, CDSX, CDCS) — Priority: H — Timeframe: I - Assign ratings for the assessment of FMIs’ critical service providers. (LVTS, CDSX, CDCS) — Priority: M — Timeframe: NT - Enhancing resolution of FMIs - Clarify the use of resolution powers for FMIs established by or under a statute in the BOC Guideline. (BOC, LVTS) — Priority: M — Timeframe: NT Note: Institutions in parentheses are the agencies with responsibilities. Priorities: H, M and L stand for high, medium and low. Timeframes: I, NT and MT stand for immediate (within one year), near-term (within 2–3 years), and medium-term (within 3–5 years). ### The general legal and regulatory framework involves both public and private laws - Major relevant legislation for FMIs - Canadian Payments Act (CP Act) - Introduced in1985. - Sets out the legal framework for Payments Canada, including its mandate, membership eligibility, the role of the Board of Directors, and oversight responsibilities of the Minister of Finance. - The Minister has the power to issue a directive including a directive to make, amend or repeal a by-law, rule or standard. - If a directive is related to the operation of a designated system (LVTS or ACSS), the Minister must consult with the BOC Governor before issuing the directive. - Payment Clearing and Settlement Act (PCSA) - Enacted in 1996. - Assigns the BOC statutory responsibility to designate systemically important clearing and settlement systems, and prominent payment systems. - The BOC oversees them with the objective of managing systemic or payment system risks. - Bank of Canada Act (BOC Act) - Empowers the BOC to provide banking services such as bank accounts, securities accounts and safekeeping services, Canadian dollar-denominated payments, settlement services to payment clearing and settlement systems, and fully collateralized loans. ### Transactions values of designated FMIs (Units: In billions of Canadian dollar; unless indicated otherwise) - LVTS - Daily average settled: 171 (2015), 175 (2016), 173 (2017), 181 (2018) - CDSX - Daily average value of equity and fixed-income securities cleared and settled: 478 (2015), 493 (2016), 541 (2017), 578 (2018) - Average value of securities held at the CSD (in trillions of Canadian dollar): 4.6 (2015), 5.1 (2016), 5.4 (2017), 5.2 (2018) - CDCS - Daily average of OTC repos cleared: 22 (2015), 27 (2016), 27 (2017), 28 (2018) - Daily average notional value cleared for exchange-trade derivatives: 101 (2015), 121 (2016), 134 (2017), 139 (2018) - Daily average notional value cleared for OTC derivatives (in millions of Canadian dollar): 7.9 (2015), 9.7 (2016), 13.3 (2017), 10.6 (2018) - ACSS - Daily average value settled: - (2015), 26 (2016), 28 (2017), 29 (2018) - CLS Bank - Daily average Canadian dollar/foreign exchange settlement: 173 (2015), 178 (2016), 199 (2017), 216 (2018) - LCH Swap Clear - Notional outstanding CAD-denominated OTC interest rate swaps as at December 31 (in trillions of Canadian dollar): 8.7 (2015), 9.6 (2016), 12.1 (2017), 18.4 (2018) - Source: Bank of Canada. ### Major changes and reforms - CP Act review and payments modernization - CP Act under review in parallel with payments modernization; DOF led consultations concluded in July 2018. - CP Act amended in 2015 to strengthen governance framework and independent decision-making by Payments Canada’s board. - BOC expected to review broadening of access to settlement accounts. - PCSA amendments to strengthen FMI oversight and establish resolution authority - 2014 amendments: expanded scope of BOC oversight; enhanced powers related to providing settlement accounts, entering cooperative oversight agreements, prohibition/restriction of foreign participation, and charging back of expenses to a designated clearing house. - 2017 amendments: enhanced BOC directive powers to permit timelier intervention; broadened conditions to issue a directive; allowed the right to make representations by the FMI operator prior to the BOC Governor issuing a directive; approval for significant changes at designated FMIs and BOC authority to enter oversight agreements. - 2018 amendments: completed inclusion of a resolution regime for designated FMIs. - As of June 25, 2019, both Part I.1 of the PCSA and accompanying Payment Clearing and Settlement Regulations were in force, completing the implementation of the FMI resolution regime. - Amendments to clearing agency requirements aimed at enhancing operational system requirements in line with international standards. - Technology modernization of FMIs - Move towards RTGS and faster retail payments under Payments Canada’s plans. - LVTS’s deferred net settlement system will be replaced with RTGS system called Lynx, expected to be implemented by 2021. - ACSS will be gradually replaced with a retail batch clearing system named the Settlement Optimization Engine. - A new real-time retail payment system will be developed as a third core payment system. - TMX Group is modernizing technology supporting clearing, depository, and risk management functions for CDSX and CDCS. ### Assessment of FMI oversight: regulation, supervision, and oversight of FMIs - BOC Guideline and PCSA oversight responsibilities - BOC has issued a Guideline defining criteria for identifying FMIs (latest update April 2018). - PCSA provides two main oversight responsibilities to the BOC: - Designating FMIs that have potential to pose systemic or payment system risks. - Overseeing these designated FMIs to ensure adequate control of systemic or payment system risk. - Eligibility for designation: a clearing and settlement system is eligible if it has three or more participants (with at least one Canadian, and at least one headquartered in a different Canadian province or a different country than the FMI’s head office), clears or settles transactions all or partly in Canadian dollar, and provides ultimate settlement of payment obligations at the BOC (except for clearing or settlement of derivatives contracts). - Criteria for designation of FMIs that may pose systemic risk: (i) size of transactions cleared or settled by the FMI; (ii) degree to which the FMI plays a critical role in supporting Canadian financial markets and the Canadian economy; (iii) size of obligations that Canadian participants can incur through participation in the FMI. - Criteria for designation of prominent payment systems that could pose payment system risks: (i) value and volume of transactions; (ii) availability of substitutes; (iii) time criticality of payments; (iv) centrality; (v) interdependence. - Provincial securities legislation and clearing agency recognition - Recognition of a clearing agency is required under provincial securities legislation where terms and conditions and the clearing rule would apply. - Companion Policy 24-102 sets out how the Canadian Securities Administrators (CSA) apply National Instrument 24-102 relating to clearing agency recognition or exemption. - Relevant provincial securities regulators: Alberta Securities Commission (ASC), Autorité des marchés financiers (AMF), British Columbia Securities Commission (BCSC), Ontario Securities Commission (OSC). - CSA view: a clearing agency systemically important to a jurisdiction’s capital markets, or not subject to comparable regulation by another regulatory body, will generally be recognized by a securities regulator. - Guiding factors for systemic importance include: (i) value and volume of transactions processed, cleared and settled; (ii) risk exposures (particularly credit and liquidity) of the clearing agency to its participants; (iii) complexity of the clearing agency; (iv) centrality of the clearing agency with respect to its role in the market, including substitutability, relationships, interdependencies and interactions. - The list of guiding factors is non-exhaustive; no single factor is determinative. ### Division of powers, responsibilities, and coordination - Authorities responsible: BOC, DOF, and certain provincial securities regulators. - PCSA establishes BOC’s authority over SIPSs, CCPs, and CSDs/SSSs. - BOC and DOF have shared responsibility for overseeing payment systems. - BOC and provincial securities regulators jointly oversee CSDs/SSSs and CCPs. - Provincial securities regulators regulate TRs. - Provincial securities regulators are members of the CSA. - The BOC and provincial securities regulators adopted the CPMI-IOSCO PFMI as their risk-management standard for CCPs/CSDs. - Need for clearer delineation of responsibilities - Division of powers and responsibilities could be more clearly defined in the BOC PCSA Guideline. - Preferable that legislation clearly specify which authority has regulatory, supervisory, or oversight responsibility for an FMI designated under a specific legislative mandate. - PCSA includes provisions on securities and derivatives clearing houses and clearly states the BOC as the authority, but does not state the role of provincial securities regulators over CCPs, CSDs/SSSs, and TRs; those roles are provided by provincial securities or derivatives legislation and relevant legal instruments. - The BOC and three provincial securities regulators have had an MoU respecting oversight of certain clearing and settlement systems since 2014. - Recommendation: develop a joint oversight framework (similar to the joint Guide to Intervention developed by OSFI and CDIC). ### Regulatory, supervisory, and oversight powers and resources - PCSA oversight powers for the BOC include: - Information gathering. - Designation of systemically important FMIs and prominent payment systems. - Entering into agreements with a designated FMI. - Auditing. - Issuance of directives. - Application to a superior court to enforce compliance. - Advanced notification of changes by FMIs. - For designation, PCSA requires an opinion from the Minister of Finance that this is in the public interest. - Additional powers: legal enforceability of netting, immunity of settlement rules to legal stays, guarantee of settlement, provision of liquidity loans, acceptance and payment of interest on deposits from FMIs and their participants. - Directive powers and limits - BOC has directive powers; use requires approval from the DOF for FMIs established by or under a statute. - The BOC Governor requires the approval of the Minister of Finance before issuing a written directive to a designated FMI that is established by or under a statute (applies to designated payment systems LVTS and ACSS established under the CP Act). - This requirement is not applicable for designated CSDs/SSSs and CCPs, which are privately-operated. - The powers to issue directives are intended to make the FMI cease and refrain from actions likely to result in systemic or payment system risk, or to take remedial action within a time frame where such risks are inadequately controlled. - If an FMI operator or participant fails to comply with the (i) PCSA; (ii) directive issued by the BOC Governor; or (iii) a binding agreement entered with the BOC under the PCSA, the BOC Governor may apply to a superior court for an order directing the FMI operator or participant to enforce compliance. - Assessment of enforcement powers - Current oversight approach could benefit from stronger enforcement powers available to the BOC. - BOC has no independent enforcement powers to underpin its oversight. - Use of directives faces a burden of proof on potential systemic or payment system risks and is subject to the right of FMI operators to make prior representations. - Burden of proof includes identifying specific risks from FMI design, ownership and control, or corporate governance; risks may involve legal risk, credit risk, liquidity risk, general business risk, custody and investment risks, and operational risk. - Approval is required from the Minister of Finance in the case of Payments Canada FMIs. - BOC resources for FMI oversight - 25 staff assigned to FMI oversight across three divisions (payment systems oversight, other market infrastructure oversight, and resolution and crisis preparedness). - Function is led by a senior director and has two dedicated research assistants. - Recruitment efforts are ongoing to staff new hires to support the BOC’s new mandate as the FMI resolution authority. - FMI oversight staff generally have relevant educational and professional backgrounds. - Analysts lead oversight work (significant changes, core assurance reviews, modernization projects, review of audit reports) and draw on specialized BOC resources as required (cyber resiliency, legal, banking operations, financial services, internal audit). - DOF resources for FMI oversight - DOF has no dedicated resources for FMI oversight. - FMI oversight activities fall under the responsibility of the BOC. - Minister of Finance responsible for setting policy frameworks for the financial sector, including FMIs. - DOF conducts periodic reviews of legislation governing FMI oversight and makes amendments where necessary. - Multiple DOF teams provide policy advice and analysis on payment systems and other FMIs. - Provincial securities regulators’ resources and skill needs (staff assigned to FMI oversight) - OSC: 10 staff (legal counsel, clearing specialists, risk specialists, accountants, systems/IT experts). - AMF: 10 staff with expertise in law, accounting, audit, clearing, risk analysis, and IT. - BCSC: 4 staff assigned to FMI oversight (market oversight, derivatives, legal services). - ASC: 4 staff assigned to FMI oversight. - Recommendation: provincial securities regulators encouraged to train FMI oversight staff in advanced quantitative skills to support risk assessment. ### Policy disclosure and supervisory instruments - BOC guideline related to oversight activities under the PCSA (latest update on April 2018). - BOC’s Oversight Activities for FMIs Annual Report published as a standalone document since 2015. - Policies publicly disclosed on the BOC website; provincial securities regulators have defined policies through legal instruments and supplementary policy guidance, notably CSA’s National Instrument 24-102. - Recommendation: Authorities could describe through policy statements whether their mandate focuses on FMI overall oversight, on-site inspection, or both, and consider defining the lead authority for each designated domestic FMI. - Recommendation: BOC and DOF are encouraged to publicly disclose the Payments Advisory Committee (PAC)’s terms of reference. ### Application of the PFMI and international guidance - BOC adopted the PFMI into its risk-management standards for designated systemically important FMIs since 2012. - Designated systemic FMIs expected to observe all the principles from December 31, 2016. - A National Instrument came into force in February 2016 which adopts the PFMI, in full, at the provincial level (CSA’s National Instrument 24-102 and related Companion Policy). - CPMI/IOSCO Level 2 Implementation Assessment generally confirmed complete and consistent implementation of the PFMIs. - Recommendation: formally adopt CPMI/IOSCO Guidance on Cyber Resilience for FMIs (June 2016) and CPMI/IOSCO PFMI Assessment Methodology for the Oversight Expectations Applicable to CSPs (December 2014) into domestic standards. - Recommendation: apply ratings for domestic designated FMIs and consider disclosure in the BOC’s Oversight Activities for FMIs Annual Report. ### Cooperation, resolution, and crisis arrangements - Domestic cooperative arrangements: - BOC-DOF Payments Advisory Committee (PAC) terms of reference for coordination related to payment systems. - MOU Respecting the Oversight of Certain Clearing and Settlement Systems (OSC, AMF, BCSC and BOC) since 2014. - MOU Respecting the Oversight of Clearing Agencies, Trade Repositories and Matching Service Utilities among provincial securities regulators to coordinate CSA jurisdictions for information sharing with the BOC. - FMI resolution arrangements: - Federal committee chaired by the BOC with senior representation from OSFI, CDIC and the DOF to be consulted in FMI resolution. - BOC would consult with relevant provincial securities regulators in lead up to and during resolution of CDSX and CDCS. - BOC, AMF, BCSC, and OSC have nearly finalized an MOU on matters related to the resolution of CDSX and CDCS. - International cooperation: - For CLS, the BOC participates in a cooperative oversight arrangement led by the Federal Reserve. - For SwapClear, the BOC, AMF and OSC participate in multilateral arrangements led by the Bank of England; BOC participates in the oversight college and the crisis management group. ### Cyber resiliency and operational risk - CSA’s Market Disruption and Cybersecurity Coordination Group (MDCCG) published a notice in October 2018 on coordination and protocol to manage market disruptions. - Federal government plans to introduce a new critical cyber systems framework to protect Canada’s critical cyber systems, including in the finance sector. - Operational incident severity categorization could be better coordinated across FMIs; practices vary (two levels, three levels, or none). - FMIs should monitor compliance of participants with SWIFT Customer Security Program and ensure that self-attestations are audited (note: does not pertain to the CDCS where SWIFT is used indirectly by participants). ### Liquidity risk — payments and securities infrastructures - Payments Canada (operator of LVTS): - Payments Canada is not exposed to liquidity risk; liquidity is borne by LVTS participants for intraday payment flows and end-of-day settlement obligations. - Payments Canada can perform system-wide liquidity monitoring and uses throughput monitoring on a best effort basis. - Liquidity risk mitigated for a single largest default because the collateral pool is sufficient to cover the single largest default of a participant. - BOC Standing Liquidity Facility (SLF) provides liquidity against collateral to direct participants of LVTS; eligible collateral includes securities issued by the Government of Canada, commercial paper, and others. - Recommendation: analyze LVTS’s liquidity risk management under market stress scenarios given move to RTGS and potential increase in intraday liquidity risks. - CDSX and CDCS liquidity notes: - CDSX’s liquidity risk management does not meet the BOC risk management standards; gaps are being addressed. - CDS lines of credit for CNS and NYL services are sized based on estimated liquidity risk exposure at a 97 percent degree of confidence under normal market conditions. - Canadian authorities expect qualifying liquidity resources to be estimated at 100 percent confidence under extreme but plausible market conditions. - CDS has renegotiated agreements with its lenders to increase size of existing credit facilities and has routine access to BOC facilities for end-of-day payment exchanges; CDS does not have access to BOC SLF. ### CDSX’s liquidity risk management under stress scenarios - Findings and remedial actions - Analysis of liquidity adequacy following a participant default under market stress conditions is encouraged. - Authorities required CDSX to: - review intraday liquidity risks on a regular basis to account for both intraday changes in participant positions (volume) and price movements; - review and measure additional sources of liquidity risk such as foreign exchange and intraday settlement processes; - enhance stress tests; - establish new CNS settlement procedures to address inability to fully access committed liquidity facilities. - Operational risk monitoring and incident severity categorization - FMI operational incidents are monitored, but reporting and categorization of severity levels could be coordinated to induce prompt remedial actions. - TMX Group FMIs are subject to two separate reporting and notification requirements. - CSP assessments and oversight - CSP assessments have progressed at different levels across FMIs; identification of CSPs differs across FMIs. - Recommendation: assign a rating of CSPs by the FMI operator to each oversight expectation to reflect gravity and urgency. - Cyber resiliency posture and controls - FMIs have controls and independent assessments; participation in Joint Operational Resilience Management exercises noted. - Recommendation: ensure SWIFT Customer Security Program self-attestations are audited where applicable. - Recovery planning and resolution regime findings - FMIs have developed and tested recovery plans; opportunities for improvement in stress scenarios and recovery tools. - Resolution regime in force covering LVTS, CDSX, CDCS, and ACSS; BOC required to develop resolution plans and consult with relevant authorities. - Clarify BOC resolution powers for FMIs established by or under a statute in the BOC Guideline; Payments Canada is a statutory corporation and certain resolution powers (for example, vesting orders) may not apply. - FMI resolutions require Minister of Finance approval for actions on using government funds and developing a plan for exit from resolution; exit for Payments Canada FMIs could not contemplate a sale of the FMI without legislative amendments. ### Fintech, payments modernization, DLT, and crypto-asset oversight highlights - Retail payments oversight framework - Federal government plans to propose legislation to implement the new oversight framework for retail payment to strengthen oversight of non-traditional retail payment service providers. - Framework will leverage BOC mandate and expertise and implement financial, operational-risk management and registration measures. - Open banking - DOF reviewing merits of open banking; consultations concluded in February 2019. - If government proceeds, appropriate staging and alignment with payments modernization would be required. - Bank of Canada fintech research and Project Jasper - BOC staff have produced over 40 research papers related to fintech since 1996, including 13 papers completed in 2018. - Project Jasper phases examined wholesale interbank payments, delivery versus payment using central bank money and DLT, and cross-border payments (Canada–Singapore model). - Any eventual DLT-based payment and securities settlement system would be required to be in compliance with the PFMI. - Crypto-assets regulatory coordination and monitoring - Heads of Agencies Crypto-Asset Working Group chaired by the BOC to coordinate efforts across 10 authorities on crypto-assets. - Federal and provincial authorities share authority over crypto-assets depending on characteristics; BOC monitors but does not regulate crypto-products. - International conclusions considered applicable to Canada: crypto-assets lack key attributes of sovereign currencies and do not pose a material risk to global financial stability, but vigilant monitoring is needed. - No explicit legislation governing crypto-assets in Canada; DOF proposed AML/CFT regulations for virtual assets service providers. - CSA actions: guidance, notices, draft framework for regulating crypto-asset trading platforms; Joint CSA/IIROC Consultation Paper 21-402 published on March 14, 2019. ### Cryptocurrency payments and ATMs - Canadian authorities are not aware of financial institutions undertaking payments using cryptocurrencies in Canada. - Crypto automated teller machines are available in Canada. - AMF is responsible for all non-bank owned ATMs in Québec. *Source: IMF staff technical note as part of the 2019 Canada FSAP.* ### EXECUTIVE SUMMARY __________________________________________________________________________ 6 ### EXECUTIVE SUMMARY ### Overview and Context - Financial market infrastructures (FMIs) have operated normally under a well-established legal and oversight framework that is distinct for Canada. - A major modernization program is ongoing: - The systemically important payment system (SIPS), which has been operational for around 20 years, will be replaced with a real-time gross settlement (RTGS) system. - A fast retail payment system is also being implemented. - The governance structure respects regulatory, supervisory and oversight powers at both the federal and provincial levels. - The Payment Clearing and Settlement Act (PCSA) assigns the Bank of Canada (BOC) the authority to oversee the designated FMIs, with responsibility being shared by three provincial securities regulators based on their respective securities legislation. - The Department of Finance (DOF) is also involved in the oversight of payment systems. - Canada’s SIPS is owned and operated by a non-profit statutory corporation—Payments Canada—distinct from jurisdictions where the central bank normally holds such responsibilities. ### Scope of FSAP Review - The FSAP conducted a focused review on domestic systemically important FMIs, covering: - Canadian Derivatives Clearing Service (CDCS), a central counterparty (CCP); - CDSX, a central securities depository (CSD), securities settlement system (SSS) and CCP; - Large Value Transfer System (LVTS), a SIPS. - The FSAP also reviewed fintech developments relating to payment, clearing, and settlement. - Assessment methodology: - Based on the Principles for Financial Market Infrastructures (PFMI) and supplemented by CPMI/IOSCO Guidance on Cyber Resilience for FMIs, the CPMI/IOSCO Guidance on Recovery of FMIs, and the FSB Key Attributes of Effective Resolution Regimes for Financial Institutions. - Authorities’ responsibilities assessed against Responsibilities A to E of the PFMI. ### Key Findings - High-quality and effective oversight of FMIs: - FMIs are expected to meet oversight requirements consistent with international standards. - CPMI-IOSCO monitoring showed complete and consistent implementation of the PFMI. - Oversight of FMIs is sufficiently resourced. - The BOC defines its policies through its guidelines (including on the risk-management standards consistent with the PFMI) and annual oversight reports. - Authorities should formally adopt international guidance into domestic standards: - Formally adopt the CPMI/IOSCO Guidance on Cyber Resilience for FMIs in the BOC Risk Management Standards for Designated FMIs and the Canadian Securities Administrators (CSA)’s National Instrument. - Adopt the CPMI/IOSCO assessment methodology for the oversight expectations for critical service providers in the BOC Risk Management Standards for designated FMIs and CSA National Instrument. - Roles and responsibilities require clarification: - The division of powers between the BOC and provincial securities regulators is not clearly defined. - Where responsibilities overlap, federal and provincial authorities cooperate, but a joint oversight framework should be developed to supplement the existing memorandum of understanding. - At least one authority should take responsibility for establishing efficient and effective cooperation among all relevant authorities for each designated FMI. - Use of assessment ratings and stronger enforcement powers: - The current oversight approach can benefit from the use of assessment ratings for designated FMIs and critical service providers (CSPs) to increase transparency and enhance moral suasion. - Ratings for FMIs can be disclosed in the BOC's annual oversight reports; FMI operators can assign ratings to each oversight expectation for CSPs. - The BOC should have stronger authority to use directive powers to ensure effective enforcement on necessary corrective actions; currently use of directives faces a burden of proof on potential for systemic or payment system risks and is subject to prior representations and, for Payments Canada FMIs, approval from the Minister of Finance. - Liquidity and operational risk management enhancements needed: - Improvements in cyber resiliency continue in line with international guidance, including industry-wide exercises by FMI operators and participants. - Compliance to endpoint security needs to be tightened by self-attestations and audits of FMI participants. - Categorization and reporting of operational incident severity levels could be further coordinated. - Liquidity risk exposures following a participant default need improvement for the CDSX. - With the move towards RTGS, assess intraday liquidity risk of wholesale payment system participants under market-wide stress. - Resolution regime for FMIs: - Canada has recently put in place a resolution regime for FMIs; on June 25, 2019, Part I.1 of the PCSA and Payment Clearing and Settlement Regulations came into force giving effect to the Canadian FMI resolution regime. - As a result, the BOC is the resolution authority for all domestic designated FMIs. - Main policy objectives: maintain critical services of a designated FMI, promote financial stability, and minimize potential public funds exposure to loss. - The BOC is responsible for developing resolution plans in consultation with relevant authorities, including provincial securities regulators. - Fintech monitoring and coordination: - The BOC has engaged in fintech research to assess impacts on the financial system and central bank core functions. - The DOF has led efforts to establish a new retail payments oversight framework and review prospects for open banking. - A Heads of Agencies Crypto-Asset Working Group was established to coordinate monitoring of crypto-assets and develop a consistent domestic regulatory framework. ### Recommendations on Oversight of FMIs (Table 1) - Enhancing oversight of FMIs - Define the roles and responsibilities among relevant FMI authorities. (BOC, DOF, CSA) — Priority: M — Timeframe: NT - Develop a joint oversight framework to supplement existing memorandum of understanding. (BOC, CSA) — Priority: H — Timeframe: NT - Enhance BOC directive powers in the Payment Clearing and Settlement Act. (BOC, DOF) — Priority: M — Timeframe: NT - Determine at least one authority who should take responsibility for establishing efficient and effective cooperation among all relevant authorities for each designated FMI. (BOC, CSA) — Priority: H — Timeframe: NT - Formally adopt the CPMI/IOSCO guidance on cyber resilience for FMIs in the BOC Risk Management Standards for designated FMIs and CSA National Instrument. (BOC, CSA) — Priority: H — Timeframe: I - Adopt the CPMI/IOSCO assessment methodology for the oversight expectations for critical service providers in the BOC Risk Management Standards for designated FMIs and CSA National Instrument. (BOC, CSA) — Priority: H — Timeframe: NT - Assign and disclose ratings for domestic designated FMIs. (BOC, CSA) — Priority: M — Timeframe: NT - Establish clear criteria and oversight expectations for critical service providers. (BOC, CSA) — Priority: M — Timeframe: NT - Train FMI oversight staff in advanced quantitative skills to support risk assessments. (CSA) — Priority: M — Timeframe: I - Disclose the BOC/DOF Payments Advisory Committee’s terms of reference. (BOC, DOF) — Priority: M — Timeframe: NT - Strengthening FMIs’ resilience - Enhance risk management frameworks to include concentration risk, reputational risk, human resource risk, and competition risk. (LVTS, CDSX, CDCS) — Priority: M — Timeframe: MT - Analyze liquidity risks exposures following participant default. (CDSX) — Priority: M — Timeframe: NT - Assess liquidity risks for FMI participants under a market-wide stress scenario with collateral deterioration. (LVTS) — Priority: M — Timeframe: MT - Monitor the compliance of endpoint security self-attestations and audits for FMIs and FMI participants. (LVTS, CDSX) — Priority: H — Timeframe: I - Coordinate the categorization and reporting of operational incident severity levels. (LVTS, CDSX, CDCS) — Priority: H — Timeframe: I - Assign ratings for the assessment of FMIs’ critical service providers. (LVTS, CDSX, CDCS) — Priority: M — Timeframe: NT - Enhancing resolution of FMIs - Clarify the use of resolution powers for FMIs established by or under a statute in the BOC Guideline. (BOC, LVTS) — Priority: M — Timeframe: NT Note: Institutions in parentheses are the agencies with responsibilities. Priorities: H, M and L stand for high, medium and low. Timeframes: I, NT and MT stand for immediate (within one year), near-term (within 2–3 years), and medium-term (within 3–5 years). *Source: IMF staff technical note as part of the 2019 Canada FSAP.* ### 6. The general legal and regulatory framework involves both public and private laws. ### 6. The general legal and regulatory framework involves both public and private laws. ### Major relevant legislation for FMIs - Canadian Payments Act (CP Act) - Introduced in1985. - Sets out the legal framework for Payments Canada, including its mandate, membership eligibility, the role of the Board of Directors, and oversight responsibilities of the Minister of Finance. - The Minister has the power to issue a directive including a directive to make, amend or repeal a by-law, rule or standard. - If a directive is related to the operation of a designated system (LVTS or ACSS), the Minister must consult with the BOC Governor before issuing the directive. - Payment Clearing and Settlement Act (PCSA) - Enacted in 1996. - Assigns the BOC statutory responsibility to designate systemically important clearing and settlement systems, and prominent payment systems. - The BOC oversees them with the objective of managing systemic or payment system risks. - Bank of Canada Act (BOC Act) - Empowers the BOC to provide banking services such as bank accounts, securities accounts and safekeeping services, Canadian dollar-denominated payments, settlement services to payment clearing and settlement systems, and fully collateralized loans. ### Transactions values of designated FMIs (Table 2) - Units: In billions of Canadian dollar; unless indicated otherwise - LVTS - Daily average settled: 171 (2015), 175 (2016), 173 (2017), 181 (2018) - CDSX - Daily average value of equity and fixed-income securities cleared and settled: 478 (2015), 493 (2016), 541 (2017), 578 (2018) - Average value of securities held at the CSD (in trillions of Canadian dollar): 4.6 (2015), 5.1 (2016), 5.4 (2017), 5.2 (2018) - CDCS - Daily average of OTC repos cleared: 22 (2015), 27 (2016), 27 (2017), 28 (2018) - Daily average notional value cleared for exchange-trade derivatives: 101 (2015), 121 (2016), 134 (2017), 139 (2018) - Daily average notional value cleared for OTC derivatives (in millions of Canadian dollar): 7.9 (2015), 9.7 (2016), 13.3 (2017), 10.6 (2018) - ACSS - Daily average value settled: - (2015), 26 (2016), 28 (2017), 29 (2018) - CLS Bank - Daily average Canadian dollar/foreign exchange settlement: 173 (2015), 178 (2016), 199 (2017), 216 (2018) - LCH Swap Clear - Notional outstanding CAD-denominated OTC interest rate swaps as at December 31 (in trillions of Canadian dollar): 8.7 (2015), 9.6 (2016), 12.1 (2017), 18.4 (2018) - Source: Bank of Canada. ### Major changes and reforms - CP Act review and payments modernization - The CP Act is under review in parallel with payments modernization. - The Department of Finance (DOF) led consultations which concluded in July 2018. - Review focused on governance arrangements and membership rules for Payments Canada. - CP Act amended in 2015 to strengthen governance framework and independent decision-making by Payments Canada’s board. - BOC expected to review broadening of access to settlement accounts. - PCSA amendments to strengthen FMI oversight and establish resolution authority - 2014 amendments: expanded scope of BOC oversight responsibilities to cover systems that pose payment system risk; enhanced powers related to providing settlement accounts, entering cooperative oversight agreements, prohibition/restriction of foreign participation, and charging back of expenses to a designated clearing house. - 2017 amendments: enhanced BOC directive powers to permit timelier intervention; broadened conditions to issue a directive; allowed the right to make representations by the FMI operator prior to the BOC Governor issuing a directive; approval for significant changes at designated FMIs and BOC authority to enter oversight agreements. - 2018 amendments: completed inclusion of a resolution regime for designated FMIs. - As of June 25, 2019, both Part I.1 of the PCSA and accompanying Payment Clearing and Settlement Regulations were in force, completing the implementation of the FMI resolution regime. - Amendments to clearing agency requirements aimed at enhancing operational system requirements in line with international standards. - Technology modernization of FMIs - Move towards RTGS and faster retail payments under Payments Canada’s plans. - LVTS’s deferred net settlement system will be replaced with RTGS system called Lynx, expected to be implemented by 2021. - ACSS will be gradually replaced with a retail batch clearing system named the Settlement Optimization Engine. - A new real-time retail payment system will be developed as a third core payment system. - TMX Group is modernizing technology supporting clearing, depository, and risk management functions for CDSX and CDCS. ### Assessment of FMI oversight: regulation, supervision, and oversight of FMIs - BOC Guideline and PCSA oversight responsibilities - The BOC has issued a Guideline defining criteria for identifying FMIs. - PCSA provides two main oversight responsibilities to the BOC: - Designating FMIs that have potential to pose systemic or payment system risks. - Overseeing these designated FMIs to ensure adequate control of systemic or payment system risk. - Eligibility for designation: a clearing and settlement system is eligible if it has three or more participants (with at least one Canadian, and at least one headquartered in a different Canadian province or a different country than the FMI’s head office), clears or settles transactions all or partly in Canadian dollar, and provides ultimate settlement of payment obligations at the BOC (except for clearing or settlement of derivatives contracts). - Criteria for designation of FMIs that may pose systemic risk: (i) size of transactions cleared or settled by the FMI; (ii) degree to which the FMI plays a critical role in supporting Canadian financial markets and the Canadian economy; (iii) size of obligations that Canadian participants can incur through participation in the FMI. - Criteria for designation of prominent payment systems that could pose payment system risks: (i) value and volume of transactions; (ii) availability of substitutes; (iii) time criticality of payments; (iv) centrality; (v) interdependence. - Provincial securities legislation and clearing agency recognition - Recognition of a clearing agency is required under provincial securities legislation where terms and conditions and the clearing rule would apply. - Companion Policy 24-102 sets out how the Canadian Securities Administrators (CSA) apply National Instrument 24-102 relating to clearing agency recognition or exemption. - Relevant provincial securities regulators: Alberta Securities Commission (ASC), Autorité des marchés financiers (AMF), British Columbia Securities Commission (BCSC), Ontario Securities Commission (OSC). - CSA view: a clearing agency systemically important to a jurisdiction’s capital markets, or not subject to comparable regulation by another regulatory body, will generally be recognized by a securities regulator. - Guiding factors for systemic importance include: (i) value and volume of transactions processed, cleared and settled; (ii) risk exposures (particularly credit and liquidity) of the clearing agency to its participants; (iii) complexity of the clearing agency; (iv) centrality of the clearing agency with respect to its role in the market, including substitutability, relationships, interdependencies and interactions. - The list of guiding factors is non-exhaustive; no single factor is determinative. ### Division of powers, responsibilities, and coordination - Authorities responsible: BOC, DOF, and certain provincial securities regulators. - PCSA establishes BOC’s authority over SIPSs, CCPs, and CSDs/SSSs. - BOC and DOF have shared responsibility for overseeing payment systems. - BOC and provincial securities regulators jointly oversee CSDs/SSSs and CCPs. - Provincial securities regulators regulate TRs. - Provincial securities regulators are members of the CSA. - The BOC and provincial securities regulators adopted the CPMI-IOSCO PFMI` as their risk-management standard for CCPs/CSDs. - Need for clearer delineation of responsibilities - The division of powers and responsibilities could be more clearly defined in the BOC PCSA Guideline. - Preferable that legislation clearly specify which authority has regulatory, supervisory, or oversight responsibility for an FMI designated under a specific legislative mandate. - PCSA includes provisions on securities and derivatives clearing houses and clearly states the BOC as the authority, but does not state the role of provincial securities regulators over CCPs, CSDs/SSSs, and TRs; those roles are provided by provincial securities or derivatives legislation and relevant legal instruments. - The BOC and three provincial securities regulators have had an MoU respecting oversight of certain clearing and settlement systems since 2014. - Recommendation: develop a joint oversight framework (similar to the joint Guide to Intervention developed by OSFI and CDIC). ### Regulatory, supervisory, and oversight powers and resources - PCSA oversight powers for the BOC include: - Information gathering. - Designation of systemically important FMIs and prominent payment systems. - Entering into agreements with a designated FMI. - Auditing. - Issuance of directives. - Application to a superior court to enforce compliance. - Advanced notification of changes by FMIs. - For designation, PCSA requires an opinion from the Minister of Finance that this is in the public interest. - Additional powers: legal enforceability of netting, immunity of settlement rules to legal stays, guarantee of settlement, provision of liquidity loans, acceptance and payment of interest on deposits from FMIs and their participants. - Directive powers and limits - BOC has directive powers; use requires approval from the DOF for FMIs established by or under a statute. - Directive power extends to FMI participants. - The BOC Governor requires the approval of the Minister of Finance before issuing a written directive to a designated FMI that is established by or under a statute (applies to designated payment systems LVTS and ACSS established under the CP Act). - This requirement is not applicable for designated CSDs/SSSs and CCPs, which are privately-operated. - The powers to issue directives are intended to make the FMI cease and refrain from actions likely to result in systemic or payment system risk, or to take remedial action within a time frame where such risks are inadequately controlled. - If an FMI operator or participant fails to comply with the (i) PCSA; (ii) directive issued by the BOC Governor; or (iii) a binding agreement entered with the BOC under the PCSA, the BOC Governor may apply to a superior court for an order directing the FMI operator or participant to enforce compliance. - Assessment of enforcement powers - Current oversight approach could benefit from stronger enforcement powers available to the BOC. - BOC has no independent enforcement powers to underpin its oversight. - Use of directives faces a burden of proof on potential systemic or payment system risks and is subject to the right of FMI operators to make prior representations. - Burden of proof includes identifying specific risks from FMI design, ownership and control, or corporate governance; risks may involve legal risk, credit risk, liquidity risk, general business risk, custody and investment risks, and operational risk. - Approval is required from the Minister of Finance in the case of Payments Canada FMIs. - BOC resources for FMI oversight - 25 staff assigned to FMI oversight across three divisions (payment systems oversight, other market infrastructure oversight, and resolution and crisis preparedness). - Function is led by a senior director and has two dedicated research assistants. - Recruitment efforts are ongoing to staff new hires to support the BOC’s new mandate as the FMI resolution authority. - FMI oversight staff generally have relevant educational and professional backgrounds. - Analysts lead oversight work (significant changes, core assurance reviews, modernization projects, review of audit reports) and draw on specialized BOC resources as required (cyber resiliency, legal, banking operations, financial services, internal audit). - DOF resources for FMI oversight - DOF has no dedicated resources for FMI oversight. - FMI oversight activities fall under the responsibility of the BOC. - Minister of Finance responsible for setting policy frameworks for the financial sector, including FMIs. - DOF conducts periodic reviews of legislation governing FMI oversight and makes amendments where necessary. - Multiple DOF teams provide policy advice and analysis on payment systems and other FMIs. - Provincial securities regulators’ legal basis and instruments - Provincial securities and derivatives legislation provide the legal basis for securities regulators over CSDs, SSSs and CCPs. - CSA’s National Instrument 24-102 on Clearing Agency Requirements provides a uniform rule that all CSA authorities impose on CSDs, SSSs, and CCPs. - Companion Policy 24-102 sets out how CSA authorities interpret or apply National Instrument 24-102. - Other relevant instruments include Local Rules 91-507 and Multilateral Instrument 96-101 on Trade Repositories and Derivatives Data Reporting together with related Companion Policy. - Provincial securities regulators’ resources and skill needs - Staff assigned to FMI oversight: - OSC: 10 staff (legal counsel, clearing specialists, risk specialists, accountants, systems/IT experts). - AMF: 10 staff with expertise in law, accounting, audit, clearing, risk analysis, and IT. - BCSC: 4 staff assigned to FMI oversight (market oversight, derivatives, legal services). - ASC: 4 staff assigned to FMI oversight. - Recommendation: provincial securities regulators encouraged to train FMI oversight staff in advanced quantitative skills to support risk assessment (e.g., evaluating risk modelling). - As FMIs adopt new technologies, additional technical skills may be required to understand impacts on the intermediation function and achieve effective supervision. - Continued participation in international forums recommended to enhance oversight capacity. *Source: IMF staff summary of the chapter “6. The general legal and regulatory framework involves both public and private laws.”* ### 22. The BOC has defined and disclosed policies with respect to FMIs through its ### 22. The BOC has defined and disclosed policies with respect to FMIs through its ### Policy disclosure and supervisory instruments - The guideline related to the BOC’s oversight activities under the PCSA was issued in respect of the BOC’s administration or enforcement of the PCSA (latest update on April 2018). - The guideline describes BOC powers under the PCSA, the FMI designation process, and the oversight of designated FMIs. - The BOC’s Oversight Activities for FMIs Annual Report has been published as a standalone document since 2015 and provides details on BOC expectations for designated domestic FMIs and BOC oversight activities (BOC oversight activities under the PCSA had also been reported in the BOC Financial System Review since 2006). - Staff publications supporting public communication about FMI policies include the BOC’s Financial System Review, working papers, and discussion papers. - Policies have been publicly disclosed to the BOC website. - Provincial securities regulators have defined policies through legal instruments and supplementary policy guidance, notably the CSA’s National Instrument 24-102 on Clearing Agency Requirements and the Related CP, which provides a uniform rule for CSDs, SSSs, and CCPs. - Supplementary guidance issued covers governance, collateral, liquidity risk, general business risk, custody and investment risk, and disclosure of rules, procedures and market data. - Policies have been posted to a securities regulator’s website. ### Recommendations on clarity of mandates and disclosure - Authorities could describe through policy statements and supporting materials whether their mandate focuses on FMI overall oversight, on-site inspection, or both, and, if both, efforts should be made to minimize overlapping responsibilities. - Authorities could consider defining the lead authority for each designated domestic FMI (practice currently uses a co-lead and consensus-based approach) to facilitate inter-agency coordination and decision-making during a crisis. - The BOC and DOF are encouraged to publicly disclose the Payments Advisory Committee (PAC)’s terms of reference. The PAC is a non-statutory body establishing cooperative arrangements relating to payment systems between the BOC and DOF; the terms of reference were updated in 2017 but are not disclosed. ### Application of the PFMI - The BOC has adopted the PFMI into its risk-management standards for designated systemically important FMIs since 2012. - The BOC has developed risk-management standards for prominent payment systems based on the PFMI, designed to be proportional to their level of risk. - BOC risk-management standards fully incorporate the principles and key considerations contained in the PFMI. - Supplementary guidance was developed in coordination with the CSA to provide clarity on certain aspects of the PFMI in the Canadian context and to support implementation. - Designated systemic FMIs have been expected to observe all the principles from December 31, 2016. - A National Instrument came into force in February 2016 which adopts the PFMI, in full, at the provincial level (CSA’s National Instrument 24-102 and related Companion Policy). - The CPMI/IOSCO Level 2 Implementation Assessment generally confirmed that the PFMIs were implemented in a complete and consistent manner through Canadian implementation measures. - Recommendation: Canadian authorities should formally adopt recent international guidance on cyber resiliency and critical service providers (CSPs) that supplement the PFMI into domestic standards, including: - CPMI/IOSCO Guidance on Cyber Resilience for FMIs (June 2016). - CPMI/IOSCO PFMI Assessment Methodology for the Oversight Expectations Applicable to CSPs (December 2014). - Authorities could make explicit their adoption in the BOC’s Risk Management Standards for Designated FMIs and the CSA’s National Instrument 24-102; amendments to National Instrument 24-102 (published in October for public consultation) have contemplated more explicit expectations that additional CPMI guidance be considered and/or adopted as ancillary to the PFMI. - Recommendation: Canadian authorities are encouraged to apply ratings for domestic designated FMIs to improve incentives for FMIs to make necessary changes, enhance transparency, increase effectiveness of moral suasion, and minimize use of enforcement or corrective action under the PCSA or National Instrument 24-102. The disclosure of assessment ratings could be considered in the BOC’s Oversight Activities for FMIs Annual Report. ### Cooperation with other authorities - Under the PCSA, the BOC is responsible for designation and regulatory oversight of clearing and settlement systems to control systemic risk; objectives include ensuring designated FMIs operate to properly control risk and promote efficiency and stability. - Provincial securities regulators are responsible for protecting investors and ensuring fairness, efficiency and confidence in capital markets; their regimes cover recognition, oversight and on-site inspection of FMIs, and decisions on terms and conditions of recognition have the force of law. - Domestic cooperative arrangements include: - BOC-DOF’s terms of reference establishing the PAC for coordination of oversight activities related to payment systems (information sharing, consultation and coordination). - MOU Respecting the Oversight of Certain Clearing and Settlement Systems between three provincial securities regulators (OSC, AMF, BCSC) and the BOC for coordination and information sharing (FMIs under the MOU include CDSX and CDCS) and a protocol for urgent matters. - MOU Respecting the Oversight of Clearing Agencies, Trade Repositories and Matching Service Utilities among provincial securities regulators to coordinate CSA jurisdictions for information sharing with the BOC. - Recommendation: Consider PFMI recommendation that at least one authority take leading responsibility to establish efficient and effective cooperation among all relevant authorities and that at least one authority ensure an FMI is periodically assessed against the PFMI, consulting with other authorities in developing assessments. - Recent amendments to the PCSA have provided clarity on the role of the BOC being the lead authority for FMI resolution; this appears less clear for cooperation in other areas. ### FMI resolution arrangements - Canadian authorities are finalizing formal arrangements for FMI resolution: a federal committee chaired by the BOC with senior representation from OSFI, CDIC and the DOF will be consulted in the case of the resolution of LVTS, CDSX, CDCS, and ACSS to assess impact of resolution actions on FMI participants or coordinate joint resolution of financial institutions and the FMI. - The BOC would consult with relevant provincial securities regulators (OSC, AMF, BCSC) in lead up to and during resolution of CDSX and CDCS. - The BOC will share information and consult with the federal committee and any government or regulatory body that has an MOU with the BOC. - The BOC, AMF, BCSC, and OSC have nearly finalized an MOU on matters related to the resolution of CDSX and CDCS. ### International cooperation arrangements - For CLS, the BOC participates in a cooperative oversight arrangement led by the Federal Reserve with participation from central banks whose currencies are settled in CLS. - For SwapClear, the BOC, AMF and OSC participate in multilateral arrangements for oversight cooperation led by SwapClear’s lead regulator, the Bank of England; the BOC participates in the oversight college and the crisis management group. ### Cyber resiliency coordination - The CSA’s Market Disruption and Cybersecurity Coordination Group (MDCCG) published a notice in October 2018 about CSA coordination process and protocol to manage market disruptions, including large-scale cybersecurity incidents. - The MDCCG has discussed the plan with other regulatory authorities that would have a role in a market-wide disruption. - A CSA working group comprising staff from CSA Oversight Committees will periodically review and update the plan and conduct periodic testing; the working group will continue outreach to other authorities to enhance coordination during market disruption events. - The federal government has announced plans to introduce a new critical cyber systems framework to protect Canada’s critical cyber systems, including in the finance sector, and intends to propose new legislation and make necessary amendments to existing legislation. ### Analysis of selected issues — Framework for the comprehensive management of risks - Canadian FMIs have made public disclosure based on the CPSS/IOSCO Disclosure Framework for FMIs: - LVTS disclosure completed in 2015; a revised report expected in 2019. - CDSX disclosures made in 2016 and 2017. - CDCS disclosures made for 2015 through 2018. - Authorities have partly based assessments on such disclosures and identified gaps associated with modernization, liquidity risk, and recovery and resolution planning in FMIs’ risk management frameworks. - Canadian FMIs have established enterprise risk management (ERM) frameworks, reviewed annually and including the three lines of defense; ERM identifies key enterprise-wide risks, defines risk appetite, performs monitoring and assessment, and establishes governance of risk management. - Identified risk scenarios include cyber incidents, deterioration of critical service offerings, major outages, human resource risks, and reputational risks; financial recovery plans have been developed based on these scenarios. - Key risk categories and considerations: - Concentration risk: increasing dependencies on multiple and common CSPs. - Reputational risk: potential result of cyber risks. - Human resource risk: sudden changes in key staff and need to develop and retain skills in risk modelling and information security. - Competition risk: emergence of alternative arrangements for interbank wholesale payments and securities settlements based on distributed ledger technology (DLT). - Recommendation: Continuously review and update the framework to reflect risks associated with multi-year payments modernization initiative and ensure appropriate metrics to monitor human resource risks; FMIs encouraged to incorporate the CPMI/IOSCO analytical framework to examine benefits and risks from using DLT as technology matures. ### Liquidity risk — payments and securities infrastructures - Payments Canada (operator of LVTS): - Payments Canada is not exposed to liquidity risk; liquidity is borne by LVTS participants for intraday payment flows and end-of-day settlement obligations. - Payments Canada can perform system-wide liquidity monitoring and uses throughput monitoring on a best effort basis, examining median values of daily payment flows of each participant on a quarterly basis. - Liquidity risk is mitigated for a single largest default because the collateral pool is sufficient to cover the single largest default of a participant. - The BOC can provide liquidity against collateral to direct participants of LVTS through its Standing Liquidity Facility (SLF). A broad range of assets are eligible as collateral, including securities issued by the Government of Canada, commercial paper, and others. - Recommendation: LVTS’s liquidity risk management under market stress scenarios should be analyzed: - The move from deferred settlement towards a RTGS environment could increase intraday liquidity risks for FMI participants. - Removal of the BOC as the residual guarantee is expected. - Assessment could benefit from analysis of intraday liquidity risks under market-wide stress scenarios with collateral deterioration. - BOC staff and Payments Canada have prior involvement with modelling and simulation of payments and market infrastructures; recent central bank efforts elsewhere have stressed testing of payment networks under tighter liquidity conditions. - Past studies suggest relatively less liquid securities with fewer alternative uses are more likely to be pledged for liquidity in the LVTS. - CDSX and CDCS liquidity notes: - CDSX’s liquidity risk management does not meet the BOC risk management standards; gaps are being addressed. - CDS is exposed to liquidity risks if users of its cash equity CCP service (CNS) or its foreign links (New York Link or DTC Direct Link) default on their obligation. - CDS lines of credit for both the CNS and NYL services are sized based on estimated liquidity risk exposure at a 97 percent degree of confidence with respect to the estimated distribution of potential liquidity exposures under normal market conditions. - Canadian authorities expect improvements such that qualifying liquidity resources would be estimated at 100 percent confidence under extreme but plausible market conditions. - CDS has renegotiated agreements with its lenders to increase size of existing credit facilities, which could be further increased on demand in the event of insufficient liquidity to cover end-of-day liquidity requirements. - CDS has routine access to BOC facilities (BOC settlement account for end-of-day payment exchanges) and has access to central bank liquidity under extraordinary circumstances; CDS does not have access to BOC SLF. *IMF Financial Sector Assessment Program — Canada (excerpt).* ### 43. CDSX’s liquidity risk management under stress scenarios could be further enhanced. ### CDSX’s liquidity risk management under stress scenarios could be further enhanced ### Liquidity risk management findings and remedial actions - Analysis of liquidity adequacy following a participant default under market stress conditions is encouraged. - Authorities required CDSX to undertake remedial actions including: - reviewing intraday liquidity risks on a regular basis to account for both intraday changes in participant positions (volume) and price movements; - reviewing and measuring any additional sources of liquidity risk such as foreign exchange and intraday settlement processes; - enhancing stress tests; - establishing new CNS settlement procedures to address the inability to fully access committed liquidity facilities. ### Operational risk monitoring and incident severity categorization - FMI operational incidents are monitored, but reporting and categorization of severity levels could be coordinated to induce prompt remedial actions. - Domestic designated FMIs largely provide details on level of severity, nature of incident, duration of disruption, and remedial actions. - TMX Group FMIs are subject to two separate reporting and notification requirements. - Severity levels have been used differently across FMIs, creating potential discrepancies: - One FMI initially distinguished between two severity levels but grouped into one categorization in 2016. - A second FMI distinguished between three severity levels and has used this categorization through 2018. - A third FMI has no categorization. - Importance of severity categorization: - Heightened international cyber risk and expectations for meeting the recovery time objective of two hours and end of day settlement make categorization important. - Severity levels could be based on duration of disruptions, impact on processes, and nature of cyber risk (data breaches, system availability, confidentiality). ### CSP (Critical Service Provider) assessments and oversight - CSP assessments have progressed at different levels across FMIs. - Examples of current practice: - One FMI has clear vendor risk management procedures for CSPs and requires periodic assessments (self-evaluation or an independent audit). - Other FMIs have recently implemented a CSP oversight policy and a materiality assessment program. - CSP identification differs across FMIs: - One FMI considers critical information technology or telecommunication infrastructures as CSPs, largely aligned with the PFMI. - Others have included banks as CSPs. - Recommendation: - To induce remedial action, a rating of CSPs could be assigned by the FMI operator to each oversight expectation to reflect gravity and urgency. ### Cyber resiliency posture and controls - FMIs have put in place controls and processes to manage cyber risk with independent assessments to determine security posture. - FMIs and some participants have participated in the Joint Operational Resilience Management exercises, including a simulated failure of a Canadian FMI. - To meet common expectations in ensuring cyber resilience: - FMIs should monitor compliance of participants with the mandatory controls of the Society for Worldwide Interbank Financial Telecommunication (SWIFT) Customer Security Program and ensure that self-attestations are audited. - Note: This recommendation does not pertain to the CDCS, where SWIFT is used indirectly by participants to make LVTS payments to CDCC’s account at the BOC; CDCC itself accesses SWIFT indirectly through a commercial bank. ### Recovery planning and resolution regime findings - Recovery plans: - FMIs have developed and tested recovery plans, which could be enhanced in the areas of stress scenarios and recovery tools. - For TMX FMIs, the first annual test of recovery plans pointed to opportunities for improvements. - Risk scenarios: clarification on the trigger for recovery in non-default scenarios could be considered in addition to scenarios such as system failures and physical securities losses. - Recovery tools: need for guidelines to prioritize the use of financial recovery funds and set up a pre-emptive communication plan to request Board-level approval for use of such funds. - Resolution regime: - FMIs are subject to the new resolution regime, which is now in force. - Main policy objectives: maintain critical services of a designated FMI, promote financial stability, minimize potential losses of public funds. - Scope covers four domestic designated FMIs, including LVTS, CDSX, CDCS, and ACSS. - Under the PCSA amendments, the BOC is required to develop resolution plans for all domestic designated FMIs and will consult with any government or regulatory body that has entered into an agreement or arrangement with the BOC. - Clarity and transparency on BOC resolution powers: - The BOC’s use of resolution powers for FMIs established by or under a statute could benefit from greater transparency and clarification through the BOC Guideline. - Payments Canada is a statutory corporation created by an Act of Parliament and may only be wound up by Parliament; Payments Canada is not considered a crown corporation or central bank; therefore, LVTS is not a central bank FMI. - For Payments Canada FMIs, the BOC Governor can only issue a receivership order since there are no shares that could be vested in the BOC. - The BOC plans to publish guidance to clarify that certain resolution powers could not be applied to Payments Canada because it is a statutory corporation (for example, that the Governor could not apply a vesting order to Payments Canada because it does not issue shares). - Approval and coordination for resolution actions: - FMI resolutions require the approval of the Minister of Finance for actions on using government funds and developing a plan for exit from resolution. - Exit strategy: for Payments Canada FMIs, exit could not contemplate a sale of the FMI; legislative amendments may be required to implement an exit strategy, which would need to be passed by Parliament. - For all resolution actions there would be close consultation and coordination among members of the federal committee, including the DOF, and the federal-provincial committee. ### Fintech, payments modernization, DLT, and crypto-asset oversight highlights - Retail payments oversight framework: - The Canadian government plans to propose legislation to implement the new oversight framework for retail payment. - Motivation: strengthen oversight of non-traditional retail payment service providers not currently subject to a comprehensive oversight framework; driven by fintech developments. - The new retail payments oversight framework will leverage the mandate and expertise of the BOC, and would implement financial, operational-risk management and registration measures. - Open banking: - The DOF is reviewing the merits of open banking; consultations concluded in February 2019. - Review balances potential benefits (efficiency) and risks (consumer protection, privacy, cyber security, safety and soundness). - Authorities view that if government proceeds with open banking, appropriate staging and alignment with payments modernization would need to be undertaken. - Bank of Canada fintech research and Project Jasper (DLT experiments): - BOC staff have produced over 40 research papers related to fintech since 1996, including 13 papers completed in 2018. - Project Jasper: - Phases 1 and 2: experimentations with wholesale interbank payments examining credit and liquidity risks, settlement finality, and operational risks relative to the PFMI. - Phase 3: collaboration with Payments Canada and TMX Group to examine delivery versus payment for securities settlements using central bank money and DLT. - Phase 4: explored cross-border payments including a model of funds transfers operating on two different platforms between Canada and Singapore. - For Phases 3 and 4, implicit understanding that any eventual DLT-based payment and securities settlement system would be required to be in compliance with the PFMI. - Crypto-assets regulatory coordination and monitoring: - A Heads of Agencies Crypto-Asset Working Group, chaired by the BOC, was established to coordinate efforts across 10 authorities to assess regulatory gaps, identify inconsistencies across provinces, and make recommendations on classification and follow-up actions. - Focus areas: investor/consumer protection, market integrity, financial integrity. - Federal and provincial authorities share authority over crypto-assets depending on characteristics of each crypto-asset; BOC monitors but does not regulate crypto-products. - International conclusions considered applicable to Canada: - Crypto-assets lack key attributes of sovereign currencies, do not serve as common means of payments, a stable storage of value, or a mainstream unit of accounts. - Crypto-assets do not pose a material risk to global financial stability, but vigilant monitoring is needed. - Regulatory measures and guidance: - No explicit legislation or regulation governing crypto-assets in Canada; Canadian authorities view many crypto-asset offerings involve securities or derivatives. - DOF has proposed AML/CFT regulations for virtual assets service providers that provide exchange or value transfer services. - CSA has issued guidance, notices, and a draft framework for regulating crypto-asset trading platforms and has taken measures to protect investors and prevent illegal crypto-asset offerings. - CSA Regulatory Sandbox (as of March 31, 2018): evaluated 25 applications, provided exemptive relief orders for two ICOs, and registered or amended registrations for five firms managing private crypto-asset investment funds. - CSA staff notices: - CSA Staff Notice 46-307 on Cryptocurrency Offerings (issued on August 24, 2017) — guidance on applicability of securities laws to ICOs and related matters. - CSA Staff Notice 46-308 on Securities Law Implications for Offerings of Tokens (issued on June 11, 2018) — guidance on whether token offerings may involve securities. - No crypto-asset trading platforms are currently recognized as an exchange or otherwise authorized to operate as a marketplace or dealer in Canada. - Joint CSA/IIROC Consultation Paper 21-402 Proposed Framework for Crypto-Asset Trading Platforms was published on March 14, 2019, seeking input on areas including: - protection of client assets (custody and verification of assets); - price discovery and transparency; - surveillance of trading activities; - systems’ resiliency and security (including cybersecurity and business continuity planning); - conflicts of interest (including proprietary trading by platforms); - insurance; - clearing and settlement. *Source: 1canea2020007 - 43. CDSX’s liquidity risk management under stress scenarios could be further enhanced.* ### 60. Canadian authorities are not aware of financial institutions undertaking payments ### 60. Canadian authorities are not aware of financial institutions undertaking payments using cryptocurrencies in Canada ### Cryptocurrency payments and ATMs - Canadian authorities are not aware of financial institutions undertaking payments using cryptocurrencies in Canada. - Crypto automated teller machines are available in Canada. - AMF is responsible for all non-bank owned ATMs in Québec. ### Appendix I. Authorities in Securities Legislation to Direct FMI Actions — Ontario Securities Commission - Under the Securities Act (Ontario), the OSC has powers vis-à-vis a recognized clearing agency: - power to impose terms and conditions on recognition orders (s. 21.2(2)); - power to make any decision in respect of clearing agencies (s. 21.2(3)); - power to conduct inspections (s.20); - general power to make orders in the public interest (s. 127); - authority to make rules in respect of clearing agencies (s. 143(1)12). ### Appendix I. Authorities in Securities Legislation to Direct FMI Actions — Alberta Securities Commission - Under the Securities Act (Alberta), the ASC has powers vis-à-vis a recognized clearing agency: - generally, carrying on business as a clearing agency in Alberta is prohibited unless the person or company is recognized by the Commission (s. 67(1)); - power to impose terms and conditions in a recognition order (s. 67(4)); - power to make any decision with respect to any bylaw, rule, regulation, policy, procedure, interpretation or practice of a recognized clearing agency, or the manner in which a recognized clearing agency carries on its business (s. 67(6)); - power to compel production of any information, documents or records for purposes related to the administration of Alberta securities laws (s. 40); - power to examine the business, conduct, financial affairs, books, records and other documents (s. 58); - general power to make a wide variety of orders against a recognized clearing agency in the public interest (s. 198); - broad authority to make rules in respect of clearing agencies (s. 223(w)). ### Appendix I. Authorities in Securities Legislation to Direct FMI Actions — Autorité des Marchés Financiers (AMF) - The three principle laws impacting the supervision of FMIs at the AMF include: - Act Respecting the Regulation of the Financial Sector. This act concerns the establishment of the AMF and the powers granted. The Financial Markets Administrative Tribunal was also created by this act (Section 92). - Securities Act (QSA). This act provides information on the provisions of securities markets in Québec including the recognition of securities related FMIs. - Derivatives Act (QDA). This act deals with the provisions specific to derivatives in Québec including recognition of derivatives FMIs. - Pursuant to such legislation, a clearing house may not carry on activities in Québec unless it is recognized or exempted from recognition by the AMF. Therefore, a clearing house is subject to a formal duty of recognition under sections 169 QSA and 12 QDA. - The recognition of a clearing house, central securities depository or a settlement system is usually subject to terms and conditions as the AMF may impose in the public interest (ss. 170 and 316 QSA and ss. 15 and 100 QDA). ### Appendix I. Authorities in Securities Legislation to Direct FMI Actions — British Columbia Securities Commission - Under the BC Securities Act (BCSA), the BCSC derives its powers to regulate FMIs, and more particularly clearing agencies as follows: - Section 24 of the BCSA provide the Commission with the authority to recognize a person under a number of categories, including a clearing agency; - Section 25 of the BCSA precludes a person from carrying on, in BC, business as a clearing agency unless it has been recognized by the Commission under section 24; - Section 27 of the BCSA provides the Commission with a broad power to make decisions, including decisions relating to the terms and conditions of a recognition order, in relation to a variety of matters, including: - decisions relating to a by-law, rule or other regulatory instrument policy, or a direction, decision, order or ruling made under a by-law, rule or other regulatory instrument policy of a clearing agency; - the procedures of practices of a clearing agency; - the manner that a clearing agency carries on business; - Section 141.1 of the BCSA gives the Commission the power to review the business or conduct of a variety of persons, including a clearing agency, to determine whether the person being reviewed is: - complying with the BCSA and regulations under the BCSA and any decisions of the Commission, including the Commission’s recognition orders; and - enforcing and administrating its own by-laws, rules or other regulatory instruments or policies; - Section 183 of the BCSA provides a broad power to make regulations about trading in securities (or derivatives) and the securities and derivatives industries, including the regulation of trading whether that trading occurs on an exchange (under subsection (1)) or off of an exchange (under subsection (2). This power includes the power to regulate clearing of trades by a clearing agency. Paragraph (2)(c) of section 184 of the BCSA provides the Commission the same power to make rules. National Instrument 24-102—Clearing Agency Requirements (NI 24-102); and - Clearing agencies carrying on business in BC are subject to NI 24-102, including requirements relating to compliance with PFMI requirements, and are subject to the requirements relating to the recognition order made by the Commission under section 24 of the BCSA. ### Appendix II. Fintech Research by the Bank of Canada — Selected entries - No. 1 2019 Crypto ‘Money’: Perspective of a Couple of Canadian Central Bankers - No. 2 2019 A Framework for Analyzing Monetary Policy in an Economy with E-money - No. 3 2018 2017 Methods-of-Payment Survey Report - No. 4 2018 Should the Central Bank Issue E-money? - No. 5 2018 Is a Cashless Society Problematic? - No. 6 2018 Blockchain-Based Settlement for Asset Trading - No. 7 2018 Central Bank Digital Currency and Monetary Policy - No. 8 2018 Incentive Compatibility on the Blockchain - No. 9 2018 A Look Inside the Box: Combining Aggregate and Marginal Distributions to Identify Joint Distributions - No. 10 2018 Bitcoin Awareness and Usage in Canada: An Update - No. 11 2018 Swedish Riksbank Notes and Enskilda Bank Notes: Lessons for Digital Currencies - No. 12 2018 The Scale and Scope of Online Retail - No. 13 2018 A Policy Framework for E-Money: A Report on Bank of Canada Research - No. 14 2018 Blockchain Revolution Without the Blockchain - No. 15 2018 Merchant Acceptance of Cash and Credit Cards at the Point of Sale - No. 16 2017 Bitcoin Awareness and Usage in Canada - No. 17 2017 Competing Currencies in the Laboratory - No. 18 2017 Central Bank Digital Currency: Motivations and Implications - No. 19 2017 Acceptance and Use of Payments at the Point of Sale in Canada - No. 20 2017 Fintech: Is This Time Different? A Framework for Assessing Risks and Opportunities for Central Banks - No. 21 2017 Adoption of a New Payment Method: Theory and Experimental Evidence - No. 22 2017 Project Jasper: Are Distributed Wholesale Payment Systems Feasible Yet? - No. 23 2017 The Bank of Canada 2015 Retailer Survey on the Cost of Payment Methods: Calibration for Single-Location Retailers - No. 24 2017 The Costs of Point-of-Sale Payments in Canada - No. 25 2017 Canadian Bank Notes and Dominion Notes: Lessons for Digital Currencies - No. 26 2016 Central Bank Digital Currencies: A Framework for Assessing Why and How - No. 27 2016 On the Value of Virtual Currencies - No. 28 2016 A Bitcoin Standard: Lessons from the Gold Standard - No. 29 2015 On the Essentiality of E-Money - No. 30 2015 Government and Private E-Money-Like Systems: Federal Reserve Notes and National Bank Notes - No. 31 2015 The Use of Cash in Canada - No. 32 2015 2013 Methods-of-Payment Survey Results - No. 33 2015 The Efficiency of Private E-Money-Like Systems: The U.S. Experience with National Bank Notes - No. 34 2014 The Role of Card Acceptance in the Transaction Demand for Money - No. 35 2014 Competition in the Cryptocurrency Market - No. 36 2014 Retail Payment Innovations and Cash Usage: Accounting for Attrition Using Refreshment Samples - No. 37 2014 Understanding the Cash Demand Puzzle - No. 38 2014 Consumer Cash Usage: A Cross-Country Comparison with Payment Diary Survey Data - No. 39 2014 Understanding Platform-Based Digital Currencies - No. 40 2014 E-Money: Efficiency, Stability and Optimal Policy - No. 41 2014 The Efficiency of Private E-Money-Like Systems: The U.S. Experience with State Bank Notes - No. 42 2014 Electronic Money and Payments: Recent Developments and Issues - No. 43 2013 Some Economics of Private Digital Currency - No. 44 1996 The Electronic Purse: An Overview of Recent Developments and Policy Issues - Source: Bank of Canada. *International Monetary Fund* --- _Source: https://www.imf.org/-/media/files/publications/cr/2020/english/1canea2020007.pdf_