Changes to Conditions for Assets Eligible as Collateral under the Bank of Canada’s Standing Liquidity Facility (SLF)

On September 5 2013, the Bank of Canada announced planned changes to concentration limits for private sector and municipal securities in relation to Assets Eligible as Collateral under the Bank of Canada’s Standing Liquidity Facility (SLF).  Prior to finalizing these planned changes the Bank of Canada consulted with all LVTS participants and invited comments from other market participants.

The Bank of Canada is now announcing that the following changes to its SLF policy will be implemented:

• All eligible securities issued by a municipal government or a private sector issuer (including corporate bonds, covered bonds, bankers’ acceptances, commercial paper, and ABCP) will be subject to a new sectoral concentration limit. No more than 20 per cent of the total collateral value pledged by an institution may be comprised of such municipal and private sector securities.
• Securities issued by LVTS participants or related parties (including covered bonds, but excluding ABCP sponsored by an LVTS participant) will be subject to a sectoral concentration limit of 10 per cent of the total collateral value pledged by an institution, and included as part of the overall municipal and private sector limit above.
• Obligations of a single private sector or municipal issuer or related parties (including covered bonds) will be limited to no more than 5 per cent of the total collateral value pledged by an institution.

There will be an approximate 6 month transition period, ending on September 30 2014, for LVTS participants to make any adjustments to their collateral management practices required to comply with the updated policy.

Consultation Summary

Overall, the planned tightening of concentration limits for private sector and municipal securities was seen as being well founded from a risk management perspective.  Some participants did however state that the planned limits could have been somewhat higher than proposed, in order to provide additional flexibility.  Some respondents highlighted significant ongoing changes to the regulatory and market environment for high quality assets, affecting both the demand for and supply of such assets.  Against this background, it was seen as important that the Bank of Canada continues to monitor these developments and ensure that its collateral policy remains flexible and supportive.  Finally, many of the consultation participants emphasized the importance of the Bank of Canada continuing to provide flexibility in terms of collateral eligibility during any periods of significant market stress.

Following the consultation, the Bank of Canada confirms the implementation of the changes announced in September 2013.  The Bank will monitor closely the impact of the changes on market conditions and will keep its collateral policy under active review, including examining whether additional types of high quality collateral should be eligible at the Bank’s Standing Liquidity Facility.  The Bank remains committed to providing liquidity as required to support the stability of the Canadian financial system and the functioning of financial markets.

Other SLF Policy Updates

In addition to the changes to the concentration limit, a few minor items have been updated, including: clarification of the method to determine the size of the eligible non-mortgage loan portfolio (NMLP), extension until the end of 2014 of the temporary exceptional access to the NMLP for settlement of the same-day cycle for CLS Bank, inclusion of the Bank of Canada on asset-backed commercial paper investment information documentation and clarification of the treatment of issuers under a merger and acquisition.

For further information, please contact:

Assistant Director
Financial Markets Department
Bank of Canada
613 782-8046

Media:

Bank of Canada
613 782-8782