Response to IDA Reconstitution Proposal

The strip bond sub-committee of the Investment Dealers Association (IDA), in a letter dated June 23, 1999, has recommended that “the current ceiling on reconstitution of bonds should be removed to allow reconstitution beyond the quantity stripped by book entry, which at times may be beyond the original issue size”. The Bank of Canada, in conjunction with the Department of Finance, announced today in a letter to the IDA that the government supports the Committee's recommendation, and encourages the IDA to formally request to the Canadian Depository for Securities (CDS) that it proceed with the implementation of the proposal.

Market consultations indicated that market participants were generally in favour of the proposal, and viewed this initiative as an additional tool for enhancing liquidity in the Government of Canada securities market. In this regard, most market participants believed that this initiative would complement the government's bond repurchase operations. The Bank of Canada and the Department of Finance share the market's view on these issues.

The decision to support the proposal to remove the current ceiling on reconstitution should not be taken as an indication of the government's views on the fungibility of interest and principal strips, an issue that was also raised in the IDA's letter of June 23, 1999.

The government encourages efforts to enhance transparency with regards to the implementation of this proposal. These include the IDA's suggestion that CDS publish daily strip bond market information.

For further information, contact:

Bill Mitchell
Department of Finance
613 992-9032

Ron Morrow
Bank of Canada
613 782-8580