## 1canea2025005-source-pdf — EXECUTIVE SUMMARY ## Source details **Canonical URL:** [1canea2025005-source-pdf — EXECUTIVE SUMMARY](https://www.imf.org/-/media/files/publications/cr/2025/english/1canea2025005-source-pdf.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2025/english/1canea2025005-source-pdf.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2025/english/1canea2025005-source-pdf.pdf.json) --- ### Systemic resilience and liquidity risks - Findings: - Confidence in the resilience of the Canadian financial system is strong due to a well-capitalized banking sector and well-regulated financial system, with demonstrated resilience during past episodes of turmoil. - Liquidity risks warrant attention because key domestic short-term funding markets are operationally complicated and highly concentrated on relatively few domestic liquidity providers, while short-term funding needs are growing fast. - Key statistics: - Wholesale funding funds about 37 percent of D-SIBs' assets. - Roughly 71 percent of wholesale debt securities are denominated in foreign currencies, up from 58 percent since 2015. - Nearly 70 percent of FX swaps have a maturity of less than seven days. - Recommendations (selected): - Continuously monitor foreign funding risks and assess vulnerabilities from fluctuations in global markets and interest rates. - Scrutinize potential U.S. dollar liquidity shortfalls and hedging practices. - Encourage ongoing diversification in funding strategies. ### Reliance on foreign funding, FX markets, and hedging - Findings: - Canadian institutions increasingly rely on foreign funding, especially from U.S. markets, to meet large-scale funding needs and support international operations. - FX swap activity is the primary driver of increased FX turnover and hedging activity. - Monthly FX turnover in October 2024 of traditional foreign exchange products totaled about US$4.5 trillion, up from US$2.3 trillion in April 2019. - Average daily turnover in October 2024 stood at US$ 204.6 billion. - Canada’s share of global FX turnover increased to 2.3 percent in 2022 from 1.3 percent in 2019. - Recommendations: - Authorities should closely monitor reliance on global funding sources and hedging practices. - Regularly review regulatory frameworks governing foreign funding and improve coordination and data sharing across agencies. ### Canadian secured funding markets (repo), CCMS, and market infrastructure - Findings: - Repo markets are key for CAD liquidity for major Canadian investors but represent a fraction of foreign secured funding. - Market strengths: high-quality collateral. - Market risks: short-term nature of transactions, concentration of collateral types, dominance of a few market participants. - Key operational items: - CCMS launched May 2023 to provide a tri-party repo service and modernize collateral management. - Canadian dealer banks make significant use of the U.S. tri-party repo market; U.S. MMFs provide substantial liquidity to Canadian dealers. - Recommendations: - Support broad adoption and timely delivery of the CCMS. - Leverage the Bank of Canada’s announced participation in CCMS. - Encourage greater participation from a diverse range of institutions, including international liquidity providers. - Explore benefits and practical challenges of expanding central clearing in repo trades to enhance dealer intermediation capacity. ### Unsecured funding markets and Bankers’ Acceptances (BAs) transition - Findings: - Outstanding BAs fell to roughly CAD60 billion at the end of February 2024 (down from over CAD 90 billion a year earlier). - The unsecured segment is shrinking with the end of BAs; newly launched alternatives have not yet accumulated volumes sufficient to offset the decline. - The largest part of the gap has been filled by Government of Canada T-Bills, notably one-month Bills, raising the percent of T-Bills to almost 60 percent. - Money market funds invested almost 20 percent of their assets in BAs prior to cessation. - Recommendations: - Continue monitoring transition progress and bolster alternatives to BAs (e.g., SGC Notes, CCMS repo). - Consider strengthening domestic unsecured funding markets and support a vibrant domestic CP market. - Data recommendation: - Disaggregate outstanding volume data by instrument, maturity, and currency; publish holdings by major holders. ### Government of Canada (GoC) markets, hedge funds, and dealer constraints - Findings: - GoC bond market remains liquid but liquidity appears to have deteriorated compared to pre-COVID-19, partly due to higher interest rate volatility. - Foreign hedge funds have increased participation in GoC cash, futures, and repo, contributing to higher trading volumes and leveraged relative-value strategies. - Hedge funds account for the largest share of client-to-dealer repo transaction volume where GoC bonds are collateral. - Hedge funds reportedly employ leverage around 20 times in basis trades. - Four major U.S.-based HFTs account for almost 40 percent of GoC futures trade. - Risks: - Dealer balance sheet capacity constraints and limited netting (many dealer-client repo trades are uncleared) can amplify stresses and crowd out traditional repo clients. - Negative GoC swap spreads indicate increasing cost of holding large bond inventories for dealers. - Recommendations: - Enhance transparency around dealer positions and publish aggregated dealer balance sheet data akin to primary dealer reporting. - Promote diverse liquidity providers and consider expanded central clearing for GoC cash and repo trades. - Closely monitor hedge fund strategies, leverage levels, and concentration of HFTs. ### Data gaps, data sharing, and market transparency - Findings: - Despite trade-level repo data progress, comprehensive market views are missing, especially on securities lending, FX and non-listed derivatives, leveraged investor exposures, and dealer activities. - Data priorities: - Regular collection and publication of aggregate outstanding and trading volumes for core funding markets (repo, securities lending, CP, ABCP) by market segment, maturity, currency and holders. - Initiate regular data collection in securities lending markets. - Improve data collection on dealer activity, foreign hedge fund leverage, CTA and HFT trading, and repo transactions—especially those with foreign dealers and non-CAD collateral. - Enhance data sharing in FX and other derivatives markets; the BOC currently lacks access to FX trade repository data but is pursuing data-sharing agreements. - Timing (selected recommendations and lead agencies): - Improve data collection on dealer activity and leveraged investor exposures — OSFI, CSA — ST. - Initiate securities lending data collection — OSFI, CSA — MT. - Enhance FX derivatives data sharing — AMF, OSC, BOC — ST. ### Bank of Canada liquidity management framework and facilities - Framework structure: - Three main types of facilities: (i) active liquidity operations to support monetary policy execution; (ii) standard liquidity operations accessible to financial institutions for short-term funding needs; and (iii) emergency liquidity facilities for financial distress. - Key facilities and pricing (as stated): - Overnight Standing Repo Facility and SLF: priced at Bank Rate +25 bps. - STLF: priced at one-month OIS +35 bps for marketable securities collateral and one-month OIS +75 bps for non-marketable collateral. - The STLF’s one-month OIS +75 bps noted as the costliest BOC liquidity tool and exceeds the minimum pricing of ELA. - Operational notes: - CTRF was activated during the pandemic and is currently suspended; CTRF remained active for 12 months since announcement but saw no uptake other than testing. - Many operational processes for CTRF and other facilities remain highly manual; BOC is automating and streamlining processes. - Recommendations: - Continue automation and preparedness efforts to increase CTRF and facility scalability and reliability. - Clarify in official communications that instruments such as SLF and STLF are only available for deposit-taking financial institutions. ### Bilateral standing support, ELA eligibility, and ELA pricing - Rationale: - The Canadian financial system is highly interconnected; central bank liquidity may be needed when stress in a large, interconnected NBFI poses contagion risks or disrupts intermediation. - Recommendations on scope and eligibility: - Identify systemically important and regulated NBFIs and consider granting well-regulated and supervised NBFIs access to bilateral liquidity support for severe idiosyncratic shocks, under strict conditionalities. - Reserve CTRF for system-wide stress and avoid premature activation for idiosyncratic events. - Clarify BOC’s ELA policy that liquidity support is not restricted to recovery and resolution cases and emphasize that viability of the institution remains a key factor. - ELA pricing findings and recommendation: - Current practice: the minimum price that can be charged for ELA is the same as for SLF operations; historically ELA has been provided at the Bank rate. - IMF recommendation: recalibrate ELA minimum pricing to a risk-sensitive structure reflecting higher credit and liquidity risk, signaling ELA is an extraordinary, non-subsidized tool. ### Collateral framework, haircuts, prepositioning, and testing - Collateral scope and limits: - SLF is most restrictive; ELA accepts the broadest collateral, including less liquid securities and broader mortgage pools. - No more than 5 percent of pledged collateral may be from a single private sector issuer. - Minimum principal amount per security: CAD 1 million. - Haircuts and review cycle: - Current haircut calibration review cycle is five years. - IMF recommendation: shorten haircut calibration review cycle to two to three years. - Prepositioning and capacity: - After applying haircuts, the total value of prepositioned collateral exceeds CAD 300 billion. - Operational testing: - STLF tests: 55 tests since 2020 across a range of institutions. - ELA testing: typically one ELA test annually for FMIs and occasionally for other institutions. - Recommendations: - Increase frequency of tests for standing facilities and broaden scope to more institution types. - Ensure test parameters reflect realistic liquidity needs and support transition to new operational systems. ### Supervisory framework, SMSBs, LAR and NBFI oversight - OSFI segmentation of SMSBs: - Category I: SMSBs with more than $10 billion in total assets. - Category II: SMSBs with less than US$10 billion in assets but meeting at least one risk-based criterion (e.g., holding over US$100 million in total loans; engaging in derivatives; off-balance sheet exposures exceeding 100 percent of total capital). - Category III: SMSBs with less than US$10 billion in assets that do not meet Category II criteria. - Liquidity Adequacy Requirements (LAR) framework: - Two minimum standards: Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR). - Supplementary metrics: Net Cumulative Cash Flow (NCCF), Operating Cash Flow Statement (OCFS), LAM, intraday tools. - Observations: - On average, banks maintain LCRs and NSFRs well above the 100 percent regulatory requirement. - LCR limitations noted: not designed for extreme liquidity shocks and may not reflect actual deposit behavior during crises. - NBFI oversight: - Oversight is shared between federal and provincial authorities; NBFIs generally do not have direct access to central bank liquidity facilities except in extraordinary times. - Data and supervisory improvements needed to monitor NBFI liquidity and systemic risk. ### Historical stress experience and crisis lessons - COVID-19 and March 2020 market stress highlighted: - Rapid evaporation of liquidity, increased demand for dealer balance sheet space, and collective behaviors that can exacerbate shortages. - Maple Eight pension funds ran down BA stocks and shifted to longer-term repos at higher cost. - Mutual funds experienced net outflows totaling about 4.5 percent of assets under management. - Dealers increased recourse to the BOC’s Extended Term Repo Facility (ETRF) and Fed facilities amid declining U.S. repo funding. - Policy implications: - Target interventions to system-wide liquidity distortions, calibrate interventions proportionally, use market-based auctions where possible, and avoid creating adverse incentives that weaken discipline. - Ensure clear exit strategies and transparent operational metrics for extraordinary programs. ### Quantitative Tightening (QT) end, reserves, and transition - BOC policy decisions and timeline: - In February 2025, the BOC announced that QT would end in the first half of 2025. - Transition operations: start replacing assets via term repo operations and start Treasury bill purchases in the fourth quarter of this year. - Long-run purchases of GoC bonds in the secondary market to begin beginning in late 2026 (at the earliest). - The BOC may not reach steady state composition until 2030. - Reserves and steady-state estimates (verbatim): - Latest announcement foresees a higher steady state of reserve balances between CAD 50 billion and CAD 70 billion (from the earlier CAD20 billion to CAD 60 billion range). - The BOC acknowledges that only CAD 20–30 billion is needed to support the payments system and the rest is precautionary. - Operational imperative: - Maintain liquidity-providing facilities that can be drawn timely to balance reserve demand and supply. - Continue improving automation and operational readiness as QT ends and transition proceeds. *International Monetary Fund — EXECUTIVE SUMMARY (content unit: 1canea2025005-source-pdf - EXECUTIVE SUMMARY __________________________________________________________________________ 6)* ### EXECUTIVE SUMMARY __________________________________________________________________________ 6 ### 1canea2025005-source-pdf - EXECUTIVE SUMMARY __________________________________________________________________________ 6 ### Systemic resilience and liquidity risks - Confidence in the resilience of the Canadian financial system is strong due to a well-capitalized banking sector and well-regulated financial system, with demonstrated resilience during past episodes of turmoil. - Liquidity risks warrant attention because key domestic short-term funding markets are operationally complicated and highly concentrated on relatively few domestic liquidity providers, while short-term funding needs are growing fast. ### Reliance on foreign funding and FX market implications - Canadian institutions increasingly rely on foreign funding, especially from the United States (U.S.) markets, to meet large-scale funding needs and support international operations. - This reliance has led to a notable increase in turnover in the foreign exchange market, particularly driven by foreign exchange (FX) swaps associated with heightened hedging activity. - Recent global trading uncertainty has arguably increased risks to foreign funding, though cross-border market functioning has so far appeared smooth. - Recommendations: - Continuously monitor foreign funding risks and assess vulnerabilities from fluctuations in global markets and interest rates. - Scrutinize the system for potential U.S. dollar liquidity shortfalls and assess hedging practices. - Encourage ongoing diversification in funding strategies to balance domestic and international funding. ### Canadian secured funding markets (repo) and market infrastructure - Repo markets in Canada are key for Canadian Dollar (CAD) liquidity by major Canadian investors, albeit a fraction of foreign secured funding. - Market strengths: high-quality collateral. - Market risks: short-term nature of transactions, concentration of collateral types, dominance of a few market participants. - Policy/operational recommendations: - Strengthen the repo market through timely delivery and broad adoption of the Canadian Collateral Management Service (CCMS). - Leverage the Bank of Canada’s announced participation in CCMS to optimize collateral management. - Encourage greater participation from a diverse range of institutions, including international liquidity providers. - Explore benefits and practical challenges of expanding central clearing in repo trades to enhance dealer intermediation capacity. ### Unsecured funding markets and transition from Bankers' Acceptances (BAs) - The unsecured segment is shrinking with the end of Bankers' Acceptances (BAs), a key funding instrument. - The transition from BAs has been well communicated and smoothly implemented, but alternatives have not accumulated sufficient volumes to offset the decline. - Recommendations: - Continue monitoring transition progress and take steps to bolster alternatives to BAs in a timely fashion. - Consider strengthening domestic unsecured funding markets to enhance funding flexibility and diversification. ### Government of Canada (GoC) markets, hedge funds, and market functioning - Increasing participation of foreign hedge funds in GoC markets (cash, futures and repo) presents opportunities (enhanced liquidity and efficiency) and risks (vulnerabilities from sudden deleveraging, dealer balance sheet constraints, crowding out in repo trades with GoC collateral, pressure on benchmark short-term funding rates). - Hedge funds have been a significant contributor to these trends; monitoring of hedge fund engagement, leverage levels, and trading strategies is essential. - Recommendations to support GoC markets: - Foster a diverse range of liquidity providers. - Enhance transparency around dealer positions. - Encourage central clearing of repo trades with government collateral. - Improve transparency of the benchmark rate and monitor its dynamics amid balance sheet normalization and potential liquidity interventions. ### Data gaps, data sharing, and market transparency - Despite progress in trade-level data for the repo market, a comprehensive market view is missing. - Data priorities: - Regular collection and publication of aggregate outstanding and trading volumes for core funding markets (repo, securities lending, Commercial Paper (CP), Asset-Backed Commercial Paper (ABCP)) by market segment, maturity, currency and holders. - Expand data collection and fill data gaps in critical market segments such as securities lending, in consultation with the Bank of Canada. - Refine bank reporting to provide detailed insights into dealer activities and holdings to understand dealer intermediation practices and balance sheet allocation in Canadian and global operations. - Enhance understanding of risk profiles and leverage sources for leveraged investors (identified as a significant data blind spot). - Improve data sharing in the derivatives market, notably the non-listed segment, to better capture FX and interest rate swap related risks. ### Bank of Canada (BOC) liquidity management framework and facilities - The BOC’s liquidity management framework comprises a comprehensive set of facilities, categorized into 3 main types: - (i) active liquidity operations to support monetary policy execution; - (ii) standard liquidity operations accessible to financial institutions for short-term funding needs; and - (iii) emergency liquidity facilities for financial distress. - The Contingent Term Repo Facility (CTRF) was activated for the first time during the pandemic but is currently suspended; it addresses systemic liquidity shocks. - Emergency Lending Assistance (ELA) is aimed at mitigating idiosyncratic liquidity strains. - These mechanisms, although seldom or never utilized in Canada in practice, strengthen market confidence and serve as backstops for potential liquidity stresses. - The BOC is undertaking efforts to automate and streamline processes for eventual liquidity provision operations through CTRF and other facilities to improve efficiency, reduce operational risk, and enhance response times during market stress; currently a large part of execution remains highly manual and requires coordination across multiple departments. - Recommendation: - Continue automation and preparedness efforts to increase CTRF and facility scalability and reliability. ### Bilateral standing support, ELA eligibility, and ELA pricing - Rationale: - The Canadian financial system is highly interconnected; central bank liquidity may be needed when stress in a large, interconnected nonbank financial institution (NBFI) poses contagion risks or disrupts intermediation. - Recommendation on bilateral support: - Consider granting systemic and regulated nonbanks access to bilateral standing support for severe idiosyncratic shocks, under strict conditionalities and ex ante clear eligibility, limited to well-regulated, domestically systemic NBFIs with appropriate safeguards. - Reserve CTRF for system-wide stress and broad eligibility to avoid premature activation that could fuel market speculation. - Recommendation on eligibility transparency: - Clarify eligibility of bilateral standing facilities and ELA policy, explicitly confirming that liquidity support is not restricted to recovery and resolution cases. - Clarify distinctions between references in BOC guidance (2015 guidelines, 2020 rules) and current practice to reduce uncertainty about whether ELA can be extended beyond institutions in formal recovery or resolution. - Confirm that viability of the financial institution remains a key factor when granting ELA outside resolution. - Recommendation on ELA pricing: - Adjust ELA pricing to better reflect higher risk exposure and broader collateral and counterparty scope. - Current practice: the minimum price that can be charged for ELA is the same as for SLF operations; the minimum interest rate for ELA does not incorporate a tiered pricing structure that reflects risk exposure. - Rationale: Unlike SLF, ELA accepts fewer liquid assets, increasing the BOC’s credit and liquidity risk while haircuts remain unchanged for the same pool of assets. - Recommendation: Adopt a risk-sensitive pricing structure that signals ELA is an extraordinary, non-subsidized tool—sufficiently discouraging use but not so high as to exacerbate strains. ### Collateral framework calibration and operational testing - Current practice for calibration frequency: - Haircut calibration review cycle is five years. - Recommendations: - Shorten haircut calibration review cycle to two to three years to better reflect evolving market conditions while balancing stability. - Increase the frequency of operational tests for standing liquidity facilities, incorporating realistic liquidity needs. - Expand testing to a broader range of institutions to improve stress scenario assessments and strengthen crisis response capabilities. - Given the transition to a new operational system, more frequent reviews and testing would help identify challenges, refine protocols, and reinforce market confidence. *International Monetary Fund — EXECUTIVE SUMMARY (content unit: 1canea2025005-source-pdf - EXECUTIVE SUMMARY __________________________________________________________________________ 6)* ### 1. Continue to monitor risks related to foreign funding and to assess ### 1canea2025005-source-pdf - 1. Continue to monitor risks related to foreign funding and to assess ### Recommendations on Systemic Liquidity Management (Concluded) - 1. Continue to monitor risks related to foreign funding and to assess hedging practices, also with a view to maintain a balance between domestic and international funding. - All relevant authorities — I - 2. Support the broad adoption and timely delivery of the CCMS. - BOC, CIMPA — I - 3. Explore benefits and practical challenges of expanding Central Clearing in repo trading. - BOC, CSA, CIRO — MT - 4. Continue to monitor short-term funding post—Bankers’ Acceptance (BA) cessation, support timely adoption of alternatives, and assess ways to strengthen domestic unsecured markets. - CSA, BOC, CIMPA — I - 5. Initiate regular data collection in securities lending markets. - OSFI, CSA — MT - 6. Improve data collection to address gaps on dealer activity, foreign hedge fund leverage, CTA and HFT trading, and repo transactions—especially those with foreign dealers and non-CAD collateral. - OSFI, CSA — ST - 7. Enhance data sharing practices within the foreign exchange and other derivatives markets, notably the non-listed segment. - AMF, OSC, BOC — ST - 8. Enhance transparency in funding markets by collecting and publishing aggregate data on outstanding amounts and trading volumes for key money market instruments (e.g., repo, CP, ABCP, Certificates of Deposits (CDs), also by instrument type, maturity, and currency. Also, publish holdings by major investor types. Consider the benefits of releasing aggregate repo rates by market and maturity segments (e.g., bilateral, centrally cleared, overnight, term). - OSFI, CSA, BOC and provincial authorities — ST - 9. Enhance collaboration and promote standardized reporting by provincial authorities on key indicators (e.g., size, capital, liquidity, depositors) of supervised Deposit Taking Institutions (DTIs) to enhance transparency and cross-jurisdiction comparability. - All relevant provincial authorities — ST - 10. Identify systemically important and regulated NBFIs and consider granting well-regulated and supervised NBFIs access to bilateral liquidity support to address severe idiosyncratic shocks, while enforcing strict conditions to mitigate moral hazard. - Relevant authorities and BOC — ST - 11. Clarify in official communications that liquidity provision tools such as STLF are only available for deposit-taking financial institutions. - BOC — I - 12. Clarify BOC’s ELA policy that liquidity support is not restricted to institutions that are in recovery or resolution. - BOC — I - 13. Strengthen communication to clearly state that solvency remains a critical criterion in decisions to grant or deny ELA outside of resolution. - BOC, OSFI — ST - 14. Recalibrate the minimum ELA pricing to reflect its role as a last-resort liquidity instrument. - BOC — ST - 15. Continue advancing automation in the operationalization processes of liquidity provision. - BOC — ST - 16. Recalibrate haircuts on a more regular (e.g. 2–3 years) basis to enhance responsiveness to changing market conditions while avoiding procyclicality. - BOC — MT - 17. Increase the frequency of tests for BOC’s standing facilities, broadening the scope to all types of eligible institutions. - BOC — ST - Timing legend: I — Immediate (within 1 year), ST—Short term (within 1–2 years), MT—Medium term (within 3–5 years). ### Introduction and Background - The note presents a comprehensive systemic liquidity assessment for Canada and summarizes Financial Sector Assessment Program (FSAP) findings from the mission conducted in February 2025, with meetings held with BOC, OSFI, CIRO, AMF, FSRA, and private-sector stakeholders. - The assessment evaluates structural dynamics of funding markets and authorities' capacity to respond to systemic and idiosyncratic liquidity shocks; central banks have an inherently unlimited capacity to absorb local currency liquidity risk but do not possess special resources to absorb credit risk from the market. - Operationally, central banks extend credit only to financially regulated institutions, subject to strict conditionality and robust risk mitigation measures. - The assessment is divided into four parts: - Part 1: reliance on foreign funding and dynamics/liquidity of secured and unsecured funding markets. - Part 2: overview of the oversight framework for banks and NBFIs. - Part 3: review of effectiveness of BOC’s liquidity backstops and instruments to address systemic and idiosyncratic risks. - Part 4: BOC’s strategies to mitigate risks assumed in standing facility operations and as Lender of Last Resort (LOLR). ### Assessing Market Structure and Liquidity Risks — Reliance on Foreign Funding - Short-term funding provides liquidity for day-to-day operations and includes commercial paper, repurchase agreements (repos), and short-term government paper. - According to the BOC's May 2024 Financial System Survey, respondents ranked liquidity risk as the third major risk, after cyber and geopolitical risks (BOC(b), 2024). - Short-term funding sources of key Canadian institutions are global; foreign funding has grown faster than domestic funding in key funding markets. - Key statistics and structural facts: - Wholesale funding funds about 37 percent of D-SIBs' assets. - Roughly 71 percent of wholesale debt securities are denominated in foreign currencies, up from 58 percent since 2015. - The BOC estimates around 8–10 percent of foreign wholesale funding is used for northbound funding; the share can be much larger for maturities up to 18 months. - Monthly FX turnover in October 2024 of traditional foreign exchange products totaled about US$4.5 trillion, up from US$2.3 trillion in April 2019. - Average daily turnover in October 2024 stood at US$ 204.6 billion. - Canada’s share of global FX turnover increased to 2.3 percent in 2022 from 1.3 percent in 2019 (BOC, 2022a). - Nearly 70 percent of FX swaps have a maturity of less than seven days. - Uses and channels of foreign funding: - D-SIBs issue secured and unsecured borrowings across currencies and jurisdictions (U.S., Europe, Japan, Australia); USD-denominated instruments dominate. - In unsecured markets, banks typically issue CP and CDs in the U.S. for short-term funding; senior unsecured debt is issued for longer term. - In secured markets, bulk of foreign issuance is in EUR denominated covered bonds. - Northbound funding mechanisms include U.S. branches issuing CP and MTNs and transferring proceeds to parent Canadian banks, direct foreign-currency issuance, or FX swaps. - Canadian institutions use U.S. repo market funding for USD asset portfolios and dealer intermediation; collateral providers include hedge funds and large Canadian pension funds. - Pension funds average 70 percent of assets invested in foreign markets, with most bond issuance in USD; domestic debt programs have been growing since the last FSAP. - FX markets and hedging: - FX swaps have risen significantly and are the primary driver of FX turnover growth. - FX swaps and foreign repos are functionally equivalent for hedging exchange rate risk; their interactions can lead to spillovers. - FX derivatives concentrate on the U.S. dollar and have relatively short maturities; banks are key trading counterparties. - Risks and recent observations: - Geopolitical tensions can increase costs and volatility in foreign funding and hedging; correlations that previously provided natural hedges (e.g., USD and U.S. equities) appeared to break down in April 2025. - As of May 2025, more recent data do not suggest an increase in funding stress; the cross-currency basis between CAD and USD has been relatively stable at negative levels. - Authorities are advised to closely monitor funding dynamics and hedging practices given ongoing uncertainty. *Source: 1canea2025005-source-pdf* ### 18. Data sharing can improve blind spots in FX derivatives market for the BOC. The FX ### 18. Data sharing can improve blind spots in FX derivatives market for the BOC. The FX ### Data sharing and FX derivatives reporting - FX derivatives transactions in Canada are reported to the securities commissions (including Ontario Securities Commission (OSC) and AMF) following Canada’s commitments to the G20 in 2009 to promote greater transparency and regulation of the derivatives market. - Securities commissions are responsible for compliance and oversight of derivatives markets in the corresponding provinces; OSFI oversees the derivatives activities of Canadian Federally Regulated Financial Institutions. - The Bank of Canada (BOC) does not have access to trade repository data in FX derivatives currently, but is working closely with securities commissions on data sharing agreements to gain access to the data in the future. ### Monitoring foreign funding risks and coordination (paragraph 19 and recommendations) - Context and risk drivers: - Short-term funding sources of key Canadian institutions are global, reflecting their need for large scale funding and their global operations and investment strategies. - The U.S. funding markets remain particularly vital, given their global depth and liquidity. - Recommendations and monitoring actions: - Authorities should closely monitor the reliance of Canadian financial institutions on global funding sources and hedging practices to ensure institutions maintain stable sources of funding and manage currency risks effectively without exposing themselves to excessive funding or rollover risk. - Authorities should assess evolving vulnerabilities resulting from recent fluctuations in global markets, interest rates, and hedging costs, and their impact on the availability and cost of funding. - Regularly review regulatory frameworks governing foreign funding, including reporting requirements, to prevent excessive exposure to foreign funding risks. - Ensure effective coordination and data sharing among various regulatory agencies to identify vulnerabilities and allow timely interventions to mitigate risks from the interconnectedness of global funding markets and domestic stability. *Source: Excerpt from IMF Canada chapter/section content.* ### 36. With the BA lending model discontinued, a significant gap in funding is left seeking ### With the BA lending model discontinued, a significant gap in funding is left seeking alternatives. ### Impact on unsecured funding markets - Outstanding BAs fell to roughly CAD60 billion at the end of February 2024 (down from over CAD 90 billion a year earlier). - The gap left by BAs has been partially filled by a mix of existing financial products; none of the currently existing money market instruments is seen as a direct alternative, lacking either in maturity (too long) or yield (too low). - New instruments launched include Secured General Collateral (SGC) and Notes and reverse repo under the CCMS; these instruments are expected to gain share but are still being tested. - The private unsecured funding market has shrunk significantly since the cessation of BAs; CP issuance in Canada increased somewhat, while other domestic private instruments remained broadly stable. - The largest part of the gap has been filled by Canadian Government short term T-Bills, notably one-month Bills, raising the percent of T-Bills to almost 60 percent. - Issuance volumes have not fully covered the gap, leaving room for private initiatives to increase volumes; the transition is ongoing and should be monitored closely. - Market feedback suggests previous BA holders, such as large pension funds, likely shifted to repo and foreign CP investments. - Money market funds (MMFs) invested almost 20 percent of their assets in BAs; the impact on MMFs should be examined thoroughly by authorities despite the relatively small size of the sector. - Note: BAs do not count as HQLA under the liquidity coverage ratio. ### Monitoring, policy direction, and recommendations for unsecured market segment - Authorities should monitor market dynamics in the unsecured market segment and analyze: - Shifts in funding patterns of corporates in the absence of BAs. - Shifts in investment patterns of previous holders of BAs (e.g., from domestic to foreign investments). - Authorities should support effective replacements for BAs and assess whether a shrinking domestic unsecured market is a desired outcome. - Steps to promote alternatives: - Support adoption of new instruments that have been launched but remain not operational, such as SGC and repo investments via the CCMS. - Consider merits of boosting domestic unsecured funding markets, including encouraging a vibrant domestic CP market to further diversify funding sources. ### Data gaps and transparency recommendations - Significant data gaps exist: - MTRS reporting provides daily trading volumes of key unsecured money market instruments, but outstanding amounts by market instrument (even monthly) are not readily available. - Authorities should: - Further disaggregate outstanding volume data by instrument, maturity, and currency categories. - Publish volumes of holdings by major holders of these instruments to enhance understanding of vulnerabilities and interconnectedness. ### Government of Canada (GoC) securities and provincial securities — key findings - GoC bonds are key benchmarks for pricing fixed income securities in Canada and are core to secured funding; T-Bills are key money market instruments. - Historically issued nominal bonds: two-year, three-year, five-year, 10-year, 30-year, and 50-year, as well as two categories of T-Bills. The government issues regular T-bills with three different terms to maturity: 3-month, 6-month, and 1-year; it also issues cash management bills (one day to three months). The government cancelled issuance of 50-year bonds in 2022 and ceased issuance of the 3-year bond in the second quarter of fiscal year 2023–24. - In May 2024, the GoC introduced a one-month treasury bill as a temporary new tenor to support the money market’s transition from BAs. - New futures: launch of the new two-year GoC bond futures in late 2020 and re-introduction of the 30-year GoC bond futures in late 2022, complementing pre-existing futures in the five-year, 10-year, and 30-year sectors. - Since the last FSAP, government debt levels have grown but remain modest compared to other countries and on a sustainable trajectory. - Foreign investors now hold around 35 percent of GoC bonds; major domestic holders include pension funds (largest holders of Canadian bonds) and banks (largest holder of T-bills). Since COVID-19, the BOC became a major holder of bonds, although its share has declined substantially with subsequent quantitative tightening. (Last observation in September 2024.) ### Liquidity, market depth, and vulnerabilities in the GoC bond market - The GoC bond market is liquid; increased net issuance since 2020 has boosted outstanding volumes and market depth. - Measures of market resilience point to a very liquid market, though liquidity appears to have deteriorated somewhat compared to the pre-COVID-19 period, partly due to increased market volatility from the sharp rise in interest rates post-COVID-19. - Signs of growing vulnerabilities related to dealer balance sheet capacity constraints: - Government bonds outstanding plateaued in recent years while trading volumes rose faster. - Increased trading activity suggests high demand for GoC bonds and a rise in leveraged investors like hedge funds funding positions via the repo market. - Trades in the dealer-client repo market are largely uncleared; increased repo demand may not be fully netted, increasing demand for dealer balance sheet space. - Negative GoC swap spreads indicate holding large inventories of bonds has become costlier for dealers. ### Policy recommendations to address dealer intermediation constraints and market stability - Enhance understanding of dealer intermediation by collecting and publishing aggregated data on dealer balance sheets, including dealer holdings along lines reported by primary dealers in the Fed for domestic and foreign holdings and dealer total assets. - Safeguard stability of the GoC market: - Relax residence requirements for government securities distributors (GSDs) to expand and internationally diversify the pool of dealers; the March 2025 adjustments to Canada’s debt distribution include this relaxation and further adjustments geared to enhance market functioning and transparency. - Assess benefits of expanded central clearing for GoC bond cash and repo trades (Bank of Canada research suggests more central clearing could free up dealer balance sheet space by providing additional netting across clients). - Consider technical challenges of establishing central clearing, including onboarding non-CCP members; explore sponsored access to U.S. central clearing for U.S. clients via Canadian banks with substantial U.S. dealer presence. - Explore extensions to the Canadian repo market by both private sector and authorities. ### Provincial bonds and monitoring - Provincial government bonds are high-quality investments, offering slightly higher yields than GoC bonds, reflecting differences in credit ratings and liquidity across provinces. - Outstanding provincial debt continues to increase with total size comparable to the GoC market size. - Provincial bonds attract similar holders as GoC bonds, notably domestic mutual funds and foreign investors to a lesser extent. - Authorities should monitor both GoC and provincial developments and assess the impact of potential dealer balance sheet constraints on provincial bond dynamics. ### Assessment of funding markets’ functioning and risks ahead — summary of stress experience - The COVID-19 pandemic caused unprecedented volatility and liquidity shortages globally; Canada fared relatively well due to robust financial infrastructure and swift policy responses, including BOC interventions. - Typical crisis dynamics observed: - Rapid evaporation of liquidity as participants convert assets to cash. - Increased demand for dealer balance sheet space; dealers’ capacity constrained by regulations and internal risk management. - Collective behaviors can exacerbate liquidity shortages and market disruptions. - Specific sector experiences during COVID-19: - Maple Eight pension funds faced large liquidity demands in March 2020, ran down BA stocks, shifted towards longer-term repos at higher cost, and used equities as collateral to raise cash. - Banks experienced funding pressures as businesses drew credit lines and investors withdrew from unsecured funding, but entered the pandemic with strong capital and liquidity. - Life insurers faced limited liquidity pressures; some margin requirements on FX derivatives offset by margin gains on interest rate derivatives; insurers bought long-term corporate and provincial bonds, rebalancing from GoC bonds. - Hedge funds had mixed impacts: provided liquidity outside peak turmoil but contributed to stress during peak by selling GoC positions while unwinding basis trades. - Mutual funds experienced net outflows totaling about 4.5 percent of assets under management; most redemptions occurred before authorities announced support measures. - Short-term funding markets showed elevated stress: - Yields of GoC money market instruments displayed strain; the BA market came under pressure and BA yields increased, putting pressure on CDOR. - Dealers faced constraints in purchasing own-name BAs; bond market volatility made intermediation riskier and bid-ask spreads widened. - Dealers shifted towards trading on agency basis in provincial and corporate bonds. - Dealer banks increased recourse to the BOC’s Extended Term Repo Facility (ETRF) and equivalent Fed facilities amid declining funding volumes from the U.S. repo market. *Source: Excerpt from the provided IMF chapter content.* ### 54. The pandemic highlighted the importance of continuing work to improve the resilience ### 1canea2025005-source-pdf - 54. The pandemic highlighted the importance of continuing work to improve the resilience ### Pandemic and market-resilience takeaways - The pandemic featured acute levels of stress and one-sided trading in some markets, warranting a strong response from the BOC. - The central bank's role as a liquidity backstop was crucial; ongoing efforts to enhance market resilience should remain a key focus. - Swift evaporation of liquidity during stress created significant challenges for major investors in Canada, including pension funds, banks, and mutual funds. - The technical note's recommendations aim to strengthen mechanisms underpinning core funding markets. ### Case II: Evolution of benchmark rate in Canadian funding markets — summary of developments - Money market rates have reacted timely and proportionately to changes in the BOC target rate, albeit with some volatility for the benchmark rate. - CORRA experienced: - Consistent below-target behaviour following Covid; - Hovering closely around the target in 2022; - Moving consistently higher than the target since March 2023; - Averaging about four basis points higher than the BOC’s target in 2024. - CORRA is the benchmark funding rate in Canada after the cessation of CDOR and can influence other interest rates throughout the economy. - BOC launched QE in March 2020; reserves reached approximately $395 billion by 2021. - QE ended in October 2021; QT began in April 2022. Despite QT, reserves remained above the estimated steady state. - The BOC plans to end QT in March 2025. ### Drivers of CORRA movements — identified factors - Large shifts in reserve balances as QT succeeded QE increased sensitivity of money market rates to changes in bank reserves and contributed to upward pressure on CORRA by late 2023. - Increasing involvement of hedge funds in the repo market: - Shifts in market positioning of GoC securities were a primary driver. - End-2023 expectations for global monetary policy easing led foreign hedge funds (and, to a lesser extent, pension funds and dealers) to move from net short to net long positions in GoC securities, including outright long positions and curve steepeners. - Long positions included GoC cash-futures basis trades financed through repos, exerting pressure on CORRA. - Transition to T+1 settlement in May 2024: - Shorter settlement (1 day from prior 2 days) led to a surge in overnight-maturity trading volumes. - CORRA volumes more than doubled from the previous average of CAD 21.6 billion (US$15.4 billion) per day in the first half of the year. - BOC estimated the T+1 switch has added 3 basis points, on average, to the rate. ### Benefits and risks of hedge fund participation in CORRA-eligible markets - Benefits: - Hedge fund volumes contribute to overall market liquidity and efficiency and help ensure pricing reflects a wider range of market information and sentiment. - Additional volumes reduce the risk of too few overnight trades, supporting CORRA as a benchmark. - Risks and vulnerabilities: - Influence of a small number of large (notably foreign) players can raise concerns about market transparency and fairness. - If hedge fund activity drives CORRA above the BOC's target, it can complicate short-term interest rate control. - Hedge funds' leverage can introduce volatility if positions are unwound or reversed, causing repo rate spikes. - High concentration of HFTs in futures (four major U.S.-based HFTs account for almost 40 percent of GoC futures trade) could lead to liquidity withdrawals in stress, degrading futures liquidity and affecting basis trades. - Crowding out of traditional repo clients may occur due to competition for dealer balance sheet space, given the domestic dealer concentration and limited netting ability. ### BOC responses, transparency, and market outcomes - BOC measures implemented: - Targeted liquidity operations to provide additional funding to the overnight market and maintain the spread between CORRA and the target rates at low levels; these operations brought allocation rates closer to the target. - January 2025: deposit rate adjusted downwards to prompt banks to re-allocate additional liquidity into the market. - Overnight Repo operations used only occasionally since the adjustment. - March 2025: published additional CORRA metrics (weighted average mean and mode of the CORRA distribution in addition to the median) to enhance transparency. - Increased monitoring and timely communication on reasons underlying CORRA pressures. - Results and market feedback: - Measures have largely appeased pressure on CORRA and market concerns; market participants noted the impact on funding costs is very small. - Publication of mean and mode metrics with precision up to four decimal digits could stimulate futures market activity. - Authorities should continue monitoring and deepening understanding of factors driving hedge fund strategies and their influence on market dynamics. ### Case III: Growing role of foreign hedge funds — summary of activity and implications - Foreign hedge funds have significantly increased presence in short-term funding markets over the past five years, focusing on relative-value (RV) trades, notably cash-futures basis trades. - Basis trades grew alongside increased GoC cash and futures trading volumes and are typically funded in the repo market at very short tenors. - Hedge funds account for the largest share of client-to-dealer repo transaction volume where GoC bonds are collateral. - Canadian hedge funds have relatively little involvement. - Drivers of misalignments exploited by RV strategies are not well understood; market contacts point to: - Rising activity of CTAs creating mispricing in futures markets. - Strong demand from real money investors for longer-maturity government securities creating cash-segment misalignments. - Leverage and concentration risks: - Hedge funds reportedly employ leverage around 20 times to make basis trades profitable. - High leverage can amplify market stress if rapid deleveraging occurs (e.g., from repo cost increases or margin calls). - Interconnectedness between hedge funds and dealers can amplify shocks across markets. - High concentration of HFTs in futures markets (almost 40 percent by four major U.S. HFTs) may exacerbate liquidity withdrawal risk in stress events. - Crowding out: - Increased demand for dealer balance sheet space by hedge funds may crowd out traditional repo clients, such as pension funds, in a market dominated by few domestic dealers with limited netting ability. ### Policy recommendations and monitoring actions (explicit) - Authorities should continue to monitor and analyze the engagement of foreign hedge funds in Canadian markets, including by enhancing relevant data collection. - Specific policy and data actions recommended: - Further analyze motivations and strategies of foreign hedge funds operating in Canadian funding markets; collect data to closely monitor leverage levels employed by hedge funds in their trading strategies. - Given the concentration of HFTs in GoC futures trades and the prominent role of CTAs, closely monitor their actions and consider enhancing data transparency around their activity. - Increase transparency on dealer holdings of government and provincial bond positions, as well as dealer financing volumes, promote a diverse range of liquidity providers, and foster the ability to net dealer trades with clients through central clearing (see Section D). ### Oversight and liquidity risk absorbers — supervisory framework highlights - Supervision and institutional roles: - OSFI oversees federally regulated financial institutions, including banks, federally incorporated insurance companies, and federally incorporated credit unions, as well as federally regulated private pension plans. - Provincial and territorial regulators oversee securities markets and provincially regulated financial institutions such as credit unions, caisses populaires and insurers. - Canada Deposit Insurance Corporation (CDIC) protects eligible deposits at member institutions at the federal level; provincial institutions have separate safety net arrangements. - BOC oversees systemically important payment systems; CSA coordinates securities regulation across provinces and territories. - OSFI oversight scope and tools: - OSFI supervises all banks operating in Canada, federally regulated trust and loan companies, three federal credit unions (FCUs), and foreign bank subsidiaries and branches. - OSFI may assign a stage rating from Stage 1 (Early Warning) to Stage 4 (Non-Viability/Insolvency Imminent) if concerns arise. - OSFI provides oversight for more than 400 financial institutions across Canada (including insurance companies) and more than 1,200 private pension plans serving employees in federally regulated industries. - Largest banks designated as D-SIBs are subject to capital buffers: the D-SIB Surcharge of 1 percent and the Domestic Stability Buffer of 3.5 percent. - Small and Medium-Sized Deposit-Taking Institutions (SMSBs) operate under a proportionate regulatory framework tailored to their risk profile. *Source: https://www.imf.org/-/media/files/publications/cr/2025/english/1canea2025005-source-pdf.pdf* ### 76. OSFI segments SMSBs into three categories based on their capital and liquidity ### OSFI segments SMSBs into three categories based on their capital and liquidity ### OSFI segmentation of SMSBs - Category I: SMSBs with more than $10 billion in total assets. - Category II: SMSBs with less than US$10 billion in assets but meeting at least one risk-based criterion, such as: - holding over US$100 million in total loans; or - engaging in derivatives transactions; or - having off-balance sheet exposures exceeding 100 percent of total capital. - Category III: SMSBs with less than US$10 billion in assets that do not meet Category II criteria. - Subsidiaries of SMSBs must follow the same capital and liquidity rules as their parent institution, with potential exemptions outlined in OSFI’s Liquidity Requirements Guideline. - Institutions in Category III may request to be classified under Category II if their activities justify stricter requirements. Subsidiaries of D-SIBs are classified as Category I for capital and liquidity purposes. ### Liquidity Adequacy Requirements (LAR) framework and metrics - The LAR Guideline serves as the basis for the Superintendent’s assessment of liquidity adequacy and follows requirements under Sections 485(1) and 949(1) of the Bank Act and Section 473(1) of the Trust and Loan Companies Act. - Two minimum standards form the core of the framework: - Liquidity Coverage Ratio (LCR) — ensures short-term resilience (focuses on a 30-day stress period). - Net Stable Funding Ratio (NSFR) — addresses long-term funding stability (focuses on a one-year period). - Supplementary supervisory liquidity metrics used by OSFI: - Net Cumulative Cash Flow (NCCF): measures liquidity surplus or deficit as eligible cash inflows minus prescribed cash outflows; survival horizon is the last period before the NCCF turns negative (expressed in weeks or months). NCCF assesses resilience over multiple time horizons beyond the LCR’s 30-day window. - Operating Cash Flow Statement (OCFS): used especially for SMSBs under the 2024 proportionality framework. - Additional liquidity monitoring tools included in LAR: - Contractual maturity mismatch. - Concentration of funding. - Available unencumbered assets (HQLA). - LCR by significant currency. - Market-related monitoring tools (credit spreads, funding conditions). - Liquidity Activity Monitor (LAM) for real-time liquidity flows. - Intraday liquidity monitoring tools. ### Observations on LCR, NSFR, and sectoral coverage - On average, banks maintain LCRs and NSFRs well above the 100 percent regulatory requirement, ensuring compliance with Basel III liquidity standards. - Limitations and risks of LCR: - Does not fully address long-term funding risks. - May lead to unintended shifts in banks’ funding structures. - Is not designed to handle extreme liquidity shocks and lacks early warning capabilities. - Assumed run-off rates may not reflect actual deposit behaviors during crises. - Banks may hesitate to use liquidity buffers due to market stigma or supervisory uncertainty. - NSFR reduces reliance on short-term borrowing but shares similar limitations to the LCR. - Figure coverage note: Figure 7 shows both metrics for the six DSIBs, covering 94 percent of the banking sector’s assets. ### SMSBs: variability, LCR adjustments, and proportionality - SMSBs exhibit greater variability and broader LCR values, largely due to differing business models (e.g., trust companies or institutions with limited intermediation resulting in minimal or negative net outflows). - 2019 adjustment: OSFI included non-operational demand deposits from indirect clearers (mostly SMSBs) in the numerator instead of the denominator of the LCR calculation, lowering previously extremely high LCR values. - Despite the 2019 change, LCR distortions persisted for SMSBs with specialized business models. - 2024 proportionality framework: shifted most Category III SMSBs away from LCR reporting and instead required submission of the OCFS to better capture liquidity profiles. - Reporting and graphical references: Figure 8 shows the distribution of LCR values for the six DSIBs and SMSBs. ### Provincial and territorial regulation, credit unions, and data - Each province and territory has its own regulatory authorities; provincially regulated financial entities follow provincial regulations which may vary across Canada. - Major provincial regulators noted include: OSC, AMF (Quebec), BCSC, BCFSA, FSRA, ASC, FCNB (and others listed). - Desjardins: holds CAD 465 billion in assets and is the main non-bank deposit-taking institution group under supervision of AMF in Quebec; Desjardins is excluded from the Figure 9 presentation of credit unions and caisses populaires. - Figure 9: illustrates total assets of credit unions and caisses populaires in each province (Canadian Dollars in billions–2024: Q3), excluding Desjardins. - Provincial authorities supervising DTIs could coordinate publication of key indicators in a structured and standardized manner to improve transparency and comparability across jurisdictions. - Current gaps: information at the agency level is limited, not easily accessible, and lacks harmonization; a joint effort to publish standardized indicators would enhance transparency and early detection of potential risks. ### Liquidity oversight for Non-Bank Financial Institutions (NBFIs) — summary points - Oversight is shared between federal and provincial authorities. - Investment funds: CSA is the umbrella for provincial and territorial securities regulators; AMF and OSC oversee IFMs that manage 90 percent of total net assets held by investment funds in Canada. - Insurance companies: federally regulated insurers overseen by OSFI with capital requirements such as LICAT and stress testing; provincially chartered insurers fall under provincial regulators. - Pension funds: OSFI supervises federally regulated pension plans under the Pension Benefits Standards Act 1985, but the majority are provincially regulated. - BOC monitoring since COVID-19: the BOC has been closely monitoring liquidity risk management by NBFIs, given their growing role and vulnerabilities exposed in March 2020. - Differences from banks: NBFIs do not have direct access to central bank liquidity facilities except in extraordinary times; insurers and pension funds do not follow a standardized LCR. - Data and supervisory improvements needed: data gaps, better cooperation between federal and provincial supervisors, and improved systemic risk monitoring. ### Bank of Canada liquidity management framework — overview and key operational points - Since March 2020, the BOC has operated under a floor system due to substantial increases in reserves from QE. - Settlement balances under the floor system ranged from roughly CAD 175 billion to CAD 400 billion—more than 1000 times the average level of settlement balances in the pre-pandemic corridor system. - Under the floor system, the Bank’s deposit rate is set equal to the target rate, initially within a 25-basis-point operating band. - On January 30, 2025, the deposit rate was set at 5 bps below the Bank’s policy rate to improve settlement balance circulation as they stabilize and support short-term funding markets. - The BOC eliminated reserve requirements in 1994. - The Liquidity Management Framework categorizes facilities into three types: - Active liquidity operations to implement monetary policy and maintain market liquidity. - Standard liquidity operations accessible to financial institutions at their initiative for short-term funding needs. - Emergency liquidity facilities for periods of financial distress, including systemic-shock measures (e.g., CTRF, Extended Term Repo Operations) and idiosyncratic support (ELA). CTRF was activated during the COVID-19 pandemic and is suspended for the moment. *Source: IMF staff summary of the cited PDF content.* ### 86. The standard operations at the initiative of the BOC primarily aim to support the ### The standard operations at the initiative of the BOC primarily aim to support the ### Standard operations and market liquidity tools - Purpose: support effective implementation of monetary policy, ensure smooth functioning of financial markets, and manage the BOC’s balance sheet. - Typical instruments: - Overnight Repo (OR) — injects liquidity via competitive auction. - Overnight Reverse Repo (ORR) — withdraws liquidity. - Term repo operations for terms of one and three months. - Securities Lending Program (SLP) — provides temporary government nominal bonds and treasury bills to primary dealers to support liquidity in the securities financing market. - Collateral and auction mechanics (as noted): - Both OR and ORR use directly issued, Canadian-dollar-denominated GoC marketable securities as eligible collateral, subject to limits per eligible counterparty—Canadian Primary Dealers in GoC securities—and an aggregate cap per offering. - Tenders with the highest bid rates are accepted first, followed by lower bids until the total cash offered by the BOC is allocated. The lowest accepted bid rate becomes the allocation rate, applied to all accepted tenders. ### Standing facilities: objectives, scope, and usage - Objectives: - Provide liquidity at the discretion of the BOC to support market stability, facilitate payments settlement, and ensure effective transmission of monetary policy. - Key standing facilities (initiated by eligible counterparties): - Standing Liquidity Facility (SLF) — secured overnight and intra-day advances to financial institutions that are Lynx participants to support orderly settlement in the payments system. - Standing Term Liquidity Facility (STLF) — provides liquidity to eligible financial institutions facing liquidity stress on terms known in advance up to 30 days, provided the BOC has no concerns about the institution’s financial soundness; broader eligibility and collateral scope than SLF, includes certain provincially regulated institutions that are not Lynx participants. - Overnight Standing Repo Facility (OSRF) — access for primary dealers to help reinforce the upper limit (Bank Rate) of the operating band for overnight interest rate. - Usage history: - SLF: seldom used since the transition to a floor system; used sporadically under the corridor system and rarely during/after the pandemic. - STLF: launched on March 30, 2020; used during the pandemic, including a coordinated draw by a number of large- and medium-sized banks when first launched. - OSRF: created in 2009 and never utilized. - Note on floor system effects: In a floor system, settlement balances are sufficiently high to meet Lynx participants' demand, minimizing need for overnight SLF advances. - Operational monitoring: BOC investigates instances where SLF provision exceeds a certain threshold to analyze other aspects of demand for liquidity. ### Pricing framework and incentives - Tiered pricing structure to discourage unnecessary use, reduce moral hazard, and promote market-based funding. - Specific pricing (as stated): - Overnight Standing Repo Facility and SLF: priced at Bank Rate +25 bps (routine liquidity support to primary dealers and Lynx participant financial institutions, respectively). - STLF: - Priced at one-month Overnight Index Swap (OIS) +35 bps when provided against marketable securities collateral. - Priced at one-month OIS +75 bps for non-marketable collateral. - The STLF’s one-month OIS +75 bps is noted as the costliest liquidity tool offered by the BOC, exceeding even the minimum pricing of ELA (discussed in section C). - Liquidity is provided at the discretion of the BOC. ### Transparency and communications recommendation - Recommendation: The BOC should clarify and specify that bilateral liquidity provision instruments such as SLF and STLF are only available for deposit-taking financial institutions in its official communications. - Rationale: Current references on the BOC’s website, related webpages, and the Rules Governing Advances to Financial Institutions broadly mention "financial institutions" rather than specifically referring to deposit-taking financial institutions. Clearer distinctions would enhance transparency and alignment with regulatory definitions. ### Non-Bank Financial Institutions (NBFIs) and liquidity backstops - Recommendation and findings: - Systemic NBFIs should be identified; based on this assessment, the BC should consider granting them access to bilateral liquidity support in severe cases and subject to appropriate conditionalities. - Access should be limited to domestic systemic, well-regulated and supervised NBFIs to ensure responsible use of central bank liquidity under appropriate conditionalities tailored to each institution. - Bilateral support should be limited to cases where stress in a large, interconnected NBFI poses a contagion risk or implications for financial intermediation and stability. - Activating broad facilities (e.g., CTRF) too early when stress is idiosyncratic could exacerbate problems by generating market speculation and increasing the likelihood of systemic crisis. - Box 2 main points (NBFI vulnerabilities and suggested backstops): - Structural vulnerabilities of NBFIs: liquidity mismatches, leverage, interconnectedness, and holdings of relatively illiquid assets (e.g., mutual funds offering daily redemptions). - Typical stress dynamics: sudden redemptions or margin calls forcing fire sales, reliance on short-term funding (repo, credit lines), and susceptibility during market tightening (e.g., March 2020 market turmoil; UK pension fund crisis). - Insurance sector vulnerabilities: greater allocation to illiquid assets and structured credit, reliance on non-traditional liabilities, embedded leverage (e.g., CLOs) amplifying liquidity pressures. - Policy implications: stronger regulatory oversight, enhanced liquidity buffers, and access to backstop funding mechanisms are essential; early targeted bilateral intervention can prevent idiosyncratic shocks from escalating. - Regulatory specifics in Canada (as stated): - Publicly offered mutual funds limited to 10 percent of assets in illiquid securities under NI 81-102. - Publicly offered conventional mutual funds not allowed to borrow other than on a short-term basis to facilitate redemptions; alternative funds can borrow up to 50 percent of net asset value. ### Operational readiness and automation - Progress noted: BOC has made commendable progress improving the operationalization process of liquidity provision for both standing facilities and system-wide support. - Investments and coordination across legal, front office, and other key teams demonstrate commitment to enhancing efficiency and resilience. - Recommendation: Given complexity and manual aspects identified in BOC tests, advancing automation is essential to: - Streamline operations. - Enhance the Bank’s capacity to provide liquidity efficiently and effectively across diverse market conditions. ### System-wide liquidity instruments and crisis response - Principles guiding systemic interventions (as listed): - (i) Target interventions to liquidity distortions of system-wide importance the central bank is uniquely positioned to correct. - (ii) Degree of intervention should be proportional to severity of the liquidity disruption. - (iii) Interventions should be well designed, with market-based transactions (often auctions) used to alleviate broad market liquidity shortages and direct loans reserved for institution-specific liquidity issues. - (iv) Interventions must be efficient and non-distortionary, with central bank transactions at market-determined prices. - (v) Interventions should be structured to prevent adverse incentives that weaken financial discipline over time (mitigation of moral hazard). - Adjustability of existing operations: - The BOC can modify scale, terms, or eligibility; increase total liquidity provided; adjust term/frequency; raise settlement balances; broaden eligible securities; expand list of counterparties (subject to BOC criteria). - The BOC does not adjust collateral haircuts during crisis, given its “through the cycle” models. - CTRF (Contingent Term Repo Facility): - Standing bilateral facility to provide liquidity beyond primary dealers and affiliates in severe market-wide stress. - Eligibility: counterparties must demonstrate significant activity in Canadian-dollar money and/or fixed-income markets via size of CTRF eligible assets and/or level of repo activity; scope of review depends on federal/provincial regulation status. - Unregulated counterparties face a more comprehensive risk assessment. - CTRF activation and deactivation are at the sole discretion of the BOC, based on prevailing market conditions. - Historical note: CTRF remained active for 12 months since its announcement in March 2020 but was not utilized by any entity other than for operational testing purposes. *Source: Excerpt from the IMF assessment of Canada’s Bank of Canada liquidity framework and NBFI considerations.* ### 96. The BOC determines whether to activate a liquidity facility by assessing a combination ### The BOC determines whether to activate a liquidity facility by assessing a combination of quantitative and qualitative factors ### Activation criteria and monitoring - The BOC assesses a combination of quantitative and qualitative factors, drawing on market intelligence and a range of key financial indicators. - Indicators include, but are not limited to, repo rates, bid-ask spreads, money market instrument rates and inventories, and trading volumes. - The BOC continuously monitors these metrics to evaluate the severity of liquidity disruptions and whether intervention is warranted, ensuring decisions are informed by real-time market dynamics and qualitative assessments. ### Pandemic-era programs, usage, and lessons - In response to the pandemic, the BOC launched 10 extraordinary programs, including term funding facilities, asset purchase programs (which are all discontinued), and emergency liquidity assistance, to ease market-wide liquidity strains and restore confidence. - Design lessons highlighted: - Targeting systemically important markets. - Ensuring broad access to liquidity. - Designing programs that are flexible enough to scale up or down based on market conditions. - Coordination with other financial authorities to maximize impact. - Limited use of facilities attributed to: - Market conditions improving rapidly after interventions. - Complementary measures by federal and provincial governments and regulatory adjustments. - Spillovers from other central banks (particularly the U.S. Federal Reserve). - Announcements reassuring market participants in some cases, mitigating need for implementation. - Many facilities designed as backstops rather than primary funding sources. - Some programs transitioning roles (e.g., Government of Canada Bond Purchase Program (GBPP) shifted from emergency support to monetary policy stimulus, explaining more extensive use). - Others, like the CTRF and Corporate Bond Purchase Program (CBPP), saw limited uptake as financial institutions found alternative funding sources. - Programs and period of activation (as listed): - (i) Extended Term Repo Facility (ETRF) operated from 12 March 2020–21 May 2021; - (ii) Bankers’ Acceptance Purchase Facility (BAPF) from 23 March to 26 October 2020; - (iii) Canada Mortgage Bond Purchase Program (CMBP) from 17 March to 26 October 2020; - (iv) Contingent Term Repo Facility (CTRF) from 6 April 2020 to 6 April 2021; - (v) Commercial Paper Purchase Program (CPPP) from April 2020 to April 2021; - (vi) Corporate Bond Purchase Program (CBPP) from 26 May 2020 to 25 March 2021; - (vii) Government of Canada Bond Purchase Program (GBPP) from 27 March 2020 to April 2022; - (viii) Provincial Bond Purchase Program (PBPP) from 7 May 2020 to 6 May 2021; - (ix) Provincial Money Market Purchase Program (PMMP) from 24 March to 24 November 2020; and - (x) (IGTP) Incremental GoC treasury bills purchases from 21 April 2020 to 24 November 2020. ### Exit strategy, timing, and operational improvements - A key lesson: need for a structured exit strategy to minimize market distortions and, to a certain extent, moral hazard. - Future liquidity provisions should include: - Clear evaluation metrics. - Well-communicated objectives and terms. - Flexible operational adjustments. - The BOC is already working on enhancing automation and integration of its operations and actively incorporates lessons learned into its policy toolkit. ### Automation and operational capacity (CTRF and other facilities) - Current CTRF operationalization, if activated, would require significant coordination across multiple teams, including legal, front office, risk management, middle office and back office, with some stages still relying on labor intensive processes. - Based on feedback from several tests, the process is now being automated and simplified by the BOC. - Benefits of automation: - Enhance efficiency. - Reduce operational risk. - Improve response times during periods of market stress. - Ensure capacity and scalability for unpredictable liquidity needs. - Recommendation: continue prioritizing efforts to enhance automation and streamlining of the CTRF and other facilities to minimize operational bottlenecks. ### Foreign currency funding, swap lines, and bilateral arrangements - The BOC’s ability to provide foreign currency funding is contingent upon access to foreign reserves and swap arrangements with other central banks. - Swap lines are designed to address market-wide stress rather than idiosyncratic issues. - During the crisis, the BOC established bilateral, standing currency swap agreements with major central banks, including those of the euro area, Japan, Korea, Switzerland, the United Kingdom, and the United States. - Coordinated action example: in March 2020 and March 2023, the BOC, Bank of England, Bank of Japan, European Central Bank, Federal Reserve, and Swiss National Bank announced a joint initiative to strengthen liquidity provision via these swap lines. - These swap lines have not been utilized by Canada to date. ### Emergency Lending Assistance (ELA): purpose, scope, and operational constraints - The BOC may act as a LOLR by providing ELA to eligible FIs and FMI facing serious idiosyncratic liquidity problems. - ELA is not an entitlement; providing guaranteed access can create moral hazard. - The BOC should clarify its ELA policy to explicitly define that liquidity support is not restricted to recovery and resolution cases, as ambiguity exists between the BOC’s 2015 guidelines and 2020 rules. - 2015 policy: ELA can play a role as a temporary source of liquidity in supporting the recovery and resolution of eligible FIs. - 2020 rules: define ELA as “advances made at the Bank’s discretion for the purpose of addressing a serious and persistent withdrawal of liquidity from a financial institution or FMI in the context of the recovery or resolution of the entity.” - A strict interpretation of the 2020 rules could deter institutions from requesting ELA prior to recovery and resolution. - Eligibility criteria summary: - Contingent on regulatory status, systemic importance, and Payments Canada membership. - Federally regulated FIs (banks and FCUs) must be Payments Canada members with a credible recovery and resolution framework. - Since December 2015, a credible recovery and resolution framework requirement was introduced to ensure institutions undergoing resolution could still access ELA promptly. - ELA is disbursed through Lynx; non-Lynx participants must access funds via a Lynx-clearing member. - Provincially regulated DTIs (credit unions and caisses populaires) qualify if they have Payments Canada membership, provincial indemnity, and systemic importance. - Trust companies can receive ELA only through loans secured by company-owned assets or asset purchases with a repurchase agreement. - ATB Financial is eligible for ELA as long as the BOC’s ELA criteria are met. - For domestic systemically important FMIs, ELA is available only to those designated under the Payment Clearing and Settlement Act (PCSA) and under BOC oversight. - ELA is not available for non-deposit-taking institutions including insurance companies, pension and mutual funds and investment dealers. - Foreign branches are not eligible for ELA. - Term and practice: - The BOC Act provides for a maximum term of six months, with the possibility of renewal at BOC’s discretion. - In practice, ELA loans are typically structured as one-day loans and rolled over daily. - Operational foreign-currency constraints: - The BOC currently lacks the operational capacity to provide ELA in foreign currency and cannot lend against U.S. dollar loan collateral. - The BOC does not hold a significant pool of foreign-currency assets on its own balance sheet; Canada’s foreign exchange reserves are owned by the Government of Canada. - The only available source for foreign currency liquidity support to address idiosyncratic stress is through direct support from foreign central banks. - Work is ongoing between the GoC and BOC to establish a mechanism that could provide foreign currency liquidity from the GoC to the BOC to lend out in the form of foreign currency ELA. - Recommendation: Canadian authorities should advance on operational preparedness for liquidity provision in foreign currency. ### Decision-making, coordination, and communication around ELA - Activation of ELA involves a dynamic and iterative exchange between the BOC and supervisors and regulators, who provide critical information on financial condition, liquidity needs, and recovery and resolution strategies. - The BOC assesses all available information and determines if liquidity provision should occur and under what terms; the process is organic and involves ongoing discussions with regulators to weigh financial stability implications and institutional viability. - The BOC should enhance public communication to clarify that, while the formal solvency requirement for ELA has been replaced by a credible recovery and resolution framework, FIs’ viability remains a key factor in decisions on granting ELA outside resolution. - Rationale: The solvency requirement for ELA was removed to ensure emergency liquidity can be provided promptly during resolution, facilitating orderly and timely resolution processes. - OSFI continues to routinely assess the solvency of financial institutions when considering potential provision of ELA. - Clear communication would reinforce confidence and mitigate misperceptions regarding safeguards. ### Pricing of ELA and market discipline - Current pricing issue: - While the BOC can charge a higher rate, the minimum price that can be charged for ELA is the same as SLF and OSRF, not reflecting the tiering pricing structure principle applied to the other facilities. - Historically, ELA has been provided at the Bank rate. - ELA has not been provided since 1986. - Policy recommendation: - Adopt a more risk-sensitive pricing structure for ELA so that its cost appropriately reflects its function as a final liquidity backstop while remaining consistent with the broader liquidity framework. - The rate should be sufficient to discourage use but not so high as to accentuate the strains ELA seeks to alleviate. - Note: Figure III.A in Appendix III contains a detailed table comparing prices charged and counterparty eligibility across BOC liquidity provision facilities and ELA; collateral framework is assessed in section IV. ### Balance sheet resilience and risk mitigation - Maintaining a robust and resilient balance sheet is essential for central banks to implement monetary policy, manage liquidity, and respond to crises. - Policies implemented to protect the BOC’s balance sheet include: - Requiring high-quality collateral for liquidity provisions. - Applying conservative haircuts to mitigate market fluctuations. - Conducting regular stress testing. - Maintaining a diversified asset portfolio. - Imposing limits on the duration and amount of liquidity assistance to ensure support remains temporary and targeted. *Source: Excerpt from the IMF staff report on Canada (pages 52–57).* ### 111. The collateral policy establishes the conditions under which assets can be pledged, with ### 1canea2025005-source-pdf - 111. The collateral policy establishes the conditions under which assets can be pledged, with ### Collateral eligibility and concentration limits - SLF has the most restrictive set of eligible securities and serves as the foundation for other facilities. - Canadian dollar-denominated securities are eligible for all asset types; U.S. dollar-denominated securities are restricted to specific government and high-quality public sector securities, including U.S. Treasury bonds. - Securities used as collateral must be pledged through the Canadian Depository for Securities Exchange (CDSX) or delivered physically. - Concentration limits: - No more than 5 percent of the pledged collateral may be from a single private sector issuer. - Specific limits apply for covered bonds, corporate and municipal securities. - SLF: no more than 20 percent of pledged collateral can come from the non-mortgage loan portfolio (NMLP). - During COVID-19, NMLP limit temporarily increased from 20 percent to 40 percent and later to 100 percent; later scaled back to pre-crisis levels. - Institutions cannot pledge their own securities or those of related entities, including covered bonds, term Asset-Backed Securities (ABS), ABCP, and SGC Notes. - Eligible securities must not mature the next business day. - Only the most senior tranches of term ABS and ABCP are accepted. - Government of Canada, provincial and territorial issuers are exempt from credit rating requirements in the SLF collateral policy; BOC reserves the right to add risk mitigants but none have been applied to provincial or territorial issuers to date. ### Minimums, documentation, and prohibited products - Minimum principal amount per security: CAD 1 million. - Legal documentation is necessary to secure the Bank’s interest in pledged assets. - ABCP and term ABS programs must meet strict eligibility and transparency criteria, including clear disclosure of sponsors, liquidity providers, and underlying asset structure. - Highly structured products such as Collateralized Debt Obligations (CDOs) and synthetic assets are prohibited. - Continuous disclosure of relevant investment information is required. - Additional requirements: ensure pledgors are not exposed to excessive leverage, credit derivatives, or complex financial structures. - BOC reserves the right to monitor, limit, or reject pledges based on risk tolerance and market conditions. ### Risk management, valuation, and margining - BOC values securities daily on a counterparty-by-counterparty basis and compares them to the contract valuation. - Margin calls: - Triggered when the shortfall is the lesser of CAD 500,000 or 0.1 percent of the total outstanding transactions with that counterparty. - For shortfalls covered under the 0.1 percent criterion, a minimum transfer amount of CAD 50,000 applies. - No margin call is issued for shortfalls below the CAD 50,000 threshold. - Margin requirements for residential mortgage collateral are determined using a stress scenario: - Insured residential mortgages: 10 percent margin requirement. - Uninsured residential mortgage loans: margin requirements range from 10 percent to 67 percent, based on cLTV and geographic location; cLTV compares outstanding loan balance to the updated property appraisal value stressed under a worst-case scenario for Canadian housing prices, factoring in foreclosure costs. ### Facility-specific eligibility and haircuts - Framework expands from SLF (most restricted) → STLF (broader) → ELA (broadest). - Haircuts reflect riskiness of the asset and are consistent across facilities for the same collateral type, but BOC may apply higher haircuts at its discretion, including on collateral in outstanding transactions. - SLF accepts marketable securities issued by the Government of Canada, provincial governments, and select public and private sector entities subject to rating requirements. - CTRF accepts GoC and provincial securities, Canada Mortgage Bonds and NHA MBS (with specific eligibility), stripped coupons and residuals meeting high-quality standards; eligibility, concentration limits, and exceptions at BOC discretion. - STLF accepts all SLF-eligible marketable securities plus: - Canadian-dollar non-mortgage loans without a concentration limit, - Insured residential mortgages, - Uninsured residential mortgages with loan-to-value (LTV) ratio of 80 percent or lower. - ELA accepts the broadest collateral set, including: - All SLF and STLF-eligible securities and loans, - Less liquid securities, - Collateralized own-name securities, - Insured and uninsured residential mortgages (without LTV restrictions), - Non-residential mortgages. - Details of ELA-eligible collateral remain confidential. ### Pricing and recommended adjustments for ELA - Minimum ELA pricing currently equals the SLF minimum price, although ELA accepts riskier and less liquid collateral and serves as last-resort lending. - IMF recommendation: recalibrate minimum ELA pricing to account for higher residual risk inherent in extraordinary circumstances when ELA is provided. - ELA pricing considerations: - Should be sufficient to discourage use but not so high as to accentuate the strains ELA seeks to alleviate. - If STLF is priced significantly higher than ELA, institutions may be disincentivized from using STLF for preemptive liquidity management, causing distorted pricing incentives. - Provinces must provide indemnities when accessing ELA; no such requirement exists for federal institutions. ### Haircut policy and recommended review frequency - BOC uses a "through-the-cycle" approach to set haircuts; haircuts are not adjusted during financial stress. - Haircut review process includes at least one crisis period in quantitative analysis. - BOC actively manages liquidity risks through tools other than haircut changes (e.g., adjusting concentration policies). - IMF recommendation: shorten formal haircut review cycle from five years to between two and three years to improve responsiveness while avoiding procyclicality. ### Prepositioning and collateral stocks - BOC does not require prepositioning for individual facilities; institutions preposition their entire non-mortgage loan collateral portfolio. - A significant portion of pledged assets: consumer loans (secured and unsecured) and business loans (excluding mortgages). - After applying haircuts, the total value of prepositioned collateral exceeds CAD 300 billion. - Given complexities of accepting non-residential mortgages, BOC encourages institutions to prioritize pledging securities, residential mortgages, and non-mortgage loans first. - To increase borrowing capacity beyond post-haircut limits, BOC may accept alternative collateral and seek to increase concentration limit. ### Operational testing and stress tests - STLF testing since 2020: - BOC has conducted 55 tests across large, medium, and small federally regulated institutions and a range of provincially regulated institutions. - STLF designated tests have been more frequent and upon request. - ELA testing: - Typically one ELA test is conducted annually for FMIs and occasionally for other institutions. - BOC conducts annual internal stress test scenarios, including an annual BOC balance sheet stress test in 2024 that evaluated resilience under four independent stress scenarios: - Asset Purchase for Market Functioning, - BIS Share Revaluation, - ELA scenario, - Financial Market Infrastructure (FMI) Resolution scenario. - Central bank currency swap lines are tested on a two-year cycle; schedule is not currently risk-based. - IMF recommendation: increase frequency of tests for standing facilities and expand the scope to include a broader range of eligible institutions; ensure test values reflect potential real liquidity needs and support the transition to a new operational system. ### Market structure: tri-party repo, CCMS, and alternatives to Bankers’ Acceptances (BAs) - Repo market segments: interdealer market and dealer-to-client market; roughly similar sizes. - CCMS (launched May 2023) aims to provide a tri-party repo service in Canada, modernize collateral management, reduce operational risk, and allow trading baskets of general collateral. - Canadian dealer banks significantly use the U.S. tri-party repo market; U.S. MMFs provide substantial liquidity to Canadian dealers. - CCMS adoption could attract foreign liquidity providers and reduce reliance on a concentrated set of liquidity providers. - Alternatives to BAs discussed: - Bearer Deposit Notes (BDNs): closer substitute to BAs in yield but typically longer maturities (range from three months to one year); floating rate BDNs with shorter duration could appeal to some investors; operational issues remain for large-scale issuance. - Commercial Paper (CP): in Canada CP issuance lacks frequency and consistency of BA issuance; much CP is issued in foreign markets, notably the U.S. - Floating rate notes linked to a term version of CORRA: constrained because term CORRA is not a tradeable security per CARR guidance and depends on futures liquidity in one-month contracts which has yet to develop. - CCMS Repo service: aspires to be viable BA alternative but repo’s secured nature would offer lower yields. - SGC Notes: higher-yielding repo-like securitized financing expected to emerge; SGC Notes launched in June 2024 but notes have not yet been issued. - Government of Canada one-month Treasury bill: introduced May 2024 as a temporary measure to support BA transition; decision on continued issuance depends on market need and efficiency; T-bills would offer lower yields compared to BAs. *Source: IMF staff summary of the Bank of Canada collateral, facilities, and testing framework as presented in the provided content.* ### 6. Canada is the first major central bank to announce an end to its QT program. Back in ### Canada is the first major central bank to announce an end to its QT program. Back in ### QT background and cross-country approaches - In 2022, as monetary policy turned contractionary against a backdrop of higher inflation, central banks in several AEs (including those in the U.S., EA, U.K., Canada, Australia, New Zealand and Sweden) began shrinking their balance sheets. - Initial stage: net asset purchases ceased. - Bank of Canada (BOC) approach: adopted a natural run-off of maturing securities—maturing securities are not re-invested. - Alternative approaches by other central banks: - Active sales of securities in addition to natural run-off (CBNZ, BoE, Riksbank) to accelerate asset reductions. - More gradual reductions compared to natural run-off by capping reinvestments of maturing assets at specified amounts per month (U.S. Fed and ECB). - Context for Canada’s natural run-off: - Compared to other major countries, the BOC had not done QE before the pandemic so its balance sheet to GDP is relatively small. - The BOC ended QE before its peers and a shorter maturity profile allowed for a relatively fast runoff. ### BOC announcement, transition plan, and steady-state composition - In February 2025, the BOC announced that QT would end in the first half of 2025. - Transition operations upon program end: - The bank will start replacing assets via term repo operations. - The bank will start Treasury bill purchases in the fourth quarter of this year. - Steady-state objectives: - Aim to match floating-rate liabilities (deposits) with short-term assets (mostly T-bills and term repo). - Beginning in late 2026 (at the earliest), the central bank will purchase GoC bonds in the secondary market and announce these operations well in advance. - This deviates from the BOC’s pre-pandemic practice of buying bonds in the primary market. - In the long run, the central bank plans to roughly match currency in circulation with GoC bond holdings. - The BOC may not reach its steady state composition until 2030. ### Reserves (settlement balances) and liquidity management - BOC’s evolving view of optimal reserve levels: - Latest announcement foresees a higher steady state of reserve balances than earlier: between CAD 50 billion and CAD 70 billion (from the earlier CAD20 billion to CAD 60 billion range). - The BOC acknowledges that only CAD 20–30 billion is needed to support the payments system and the rest is due to precautionary demand, a buffer for unexpected liquidity shocks. - Challenges and implications: - Because liquidity management practices and regulatory requirements have changed over time, estimating precautionary demand and pinning down the levels at which reserves become scarce is challenging in practice. - This uncertainty could create uncertainty over the stability of funding rates. - Policy and operational imperatives: - It is crucial to have liquidity providing facilities in place, which can be drawn in a timely and appropriate fashion to balance reserve demand and supply in the economy. - The BOC has a very robust liquidity framework and capacity to provide such facilities (see Section III). ### Key statistics and dates (verbatim) - 2022 - February 2025 - first half of 2025 - fourth quarter of this year - late 2026 (at the earliest) - 2030 - CAD 50 billion and CAD 70 billion - CAD20 billion to CAD 60 billion - CAD 20–30 billion *Source: International Monetary Fund* --- _Source: https://www.imf.org/-/media/files/publications/cr/2025/english/1canea2025005-source-pdf.pdf_