Context

The objective of the Bank of Canada's securities-lending program is to support the liquidity of Government of Canada securities by providing a secondary and temporary source of securities to the market under the conditions listed below.

Transaction Structure
  • The structure of the transactions is securities lending (no cash collateral) pursuant to a securities-lending agreement in the Bank's standard form, which the Bank of Canada will enter into with each eligible counterparty.
Entry by the Bank of Canada
  • The Bank will make its Government of Canada securities available through a tender process.
  • Securities will be made available when there are indications that they are trading, or are unavailable, around the minimum bid rate or higher (in terms of spread below general collateral).
Minimum Bid Rate
  • For bonds, the minimum bid rate is the lower of 150 basis points or 50 per cent of the Bank's target for the overnight rate (i.e., 150 basis points for target rates of 3 per cent or higher).
  • For treasury bills, the minimum bid rate is the lower of 100 basis points or 50 per cent of the target rate (i.e., 100 basis points for target rates of 2 per cent or higher).
  • The minimum bid rates could be adjusted in extraordinary circumstances and will be reviewed periodically.
  • If necessary, the minimum bid rate is rounded to the next lowest 1/4 percentage point (for example, for a target rate of 2.25 per cent, the minimum bid rate would be 100 basis points).
  • The minimum bid rate is indicated in the Communication, Auction and Reporting System.
  • The minimum bid rate is also indicated on the call for tenders.
Bank of Canada Holdings
  • The amounts of each Government of Canada issue held by the Bank will be provided on the Bank's Web site.
Term to Maturity
  • The term to maturity of each securities-lending transaction is one business day.
Amount to Lend
  • The Bank will make up to 50 per cent of its securities available to the market on a given day, provided that the securities meet the entry criteria set out above.
  • The Bank will not make available more securities than it holds at the time of the auction.
Eligible Participants
  • Participants are limited to Primary Dealers for either Government of Canada bonds or treasury bills.
  • If two or more Primary Dealers are related entities, only one of them will be able to participate in the program, unless they certify to the Bank's satisfaction that all policies, decisions, knowledge and information relating to investment and bidding in or for Government of Canada securities are made separately within each of the entities with no exchange or sharing of such policies, decisions, knowledge or information. "Related entities" will be determined in accordance with Appendix A.
  • Participation is voluntary and is not used to evaluate dealer performance with respect to access to primary issuance of Government of Canada securities.
Counterparty Limits
  • By security, the maximum amount available to a participant is the greater of $100 million or 25 per cent of the amount being auctioned (for example, $250 million if the Bank is lending 50 per cent and if $2 billion is held).
  • The maximum amount of a security available to a counterparty will be indicated in the Communication, Auction and Reporting System.
Tender Process
  • When there are indications that market conditions warrant it, an auction will be held at 11 a.m. (Ottawa time).
  • A call for tenders will be provided at 10:30 a.m. (Ottawa time).
  • Participants must submit bids via the Communication, Auction and Reporting System.
  • A multiple price auction is used to allocate securities.
  • Dealers may submit up to four bids per issue on (each of) the securities being made available.
  • Bids must be submitted in increments of $1 million.
  • Bids must be submitted as a number of basis points with no decimal places (for example, 150).
  • Bids must be submitted in a number of basis points greater than or equal to the minimum bid rate for the security.
  • The Bank reserves the right to deny access to the tender process at its own discretion.
Eligible Collateral
Margin Requirements
  • The margin requirements for the Bank's securities-lending program are as set out in Appendix B.
  • The margin requirement is the greater of the margin rate corresponding to the security being lent and the margin rate of the security being provided as collateral.
Settlement
  • The program is managed internally by the Bank. The Bank will conduct securities-lending transactions directly with counterparties, rather than through an agent.
  • The Bank will charge a lending fee on each transaction, which will be calculated by applying a percentage rate to the market value of the security borrowed on an actual over 365 basis.
  • Lending fees will be invoiced at the time of the transaction.
  • All collateral securities and securities lent will be delivered through the Debt Clearing Service (DCS) of the Canadian Depository for Securities Limited.
  • Collateral securities must be delivered to the Bank before the lent securities are delivered to the counterparty.
  • Collateral must be delivered to the Bank by 4 p.m. (Ottawa time), followed by the delivery of lent securities.
  • The Bank will deliver the lent securities by 4 p.m. (Ottawa time) if possible (i.e., if the collateral is delivered by 3:45 p.m.). Otherwise, delivery will be made at 5 p.m., when the trading restrictions in the DCS are lifted.
Return of Securities
  • At maturity, the special securities must be returned to the Bank before the collateral securities are delivered to the counterparty.
  • Securities must be returned to the Bank by 4 p.m. (Ottawa time), followed by a return of the securities held as collateral.
  • The Bank will return collateral by 4 p.m. (Ottawa time) if possible (i.e., if the Bank's securities are returned by 3:45 p.m.). Otherwise, collateral will be returned at 5 p.m., when the trading restrictions in the DCS are lifted.
Fails
  • In the event of a failure to return the Bank's securities on the maturity date, the Bank will, without prejudice to its legal rights under the securities-lending agreement (including the right to realize upon the collateral at any time), have discretion to roll the transaction for an additional business day at a penalty lending fee equal to the target rate.
Net Position Reports
  • The Bank requires participants who borrow securities lent by the Bank to submit a net position report for the security auctioned by the end of the day of the auction.
  • Net position requirements are defined in "Terms of Participation in Auctions for Government Securities Distributors", section 3.2.
  • Net position reports for the security auctioned can be reported through the Communication, Auction and Reporting System or faxed to the Bank of Canada (613) 782-7182 by 5 p.m. (Ottawa time).
  • Should a net position report not be received from a borrowing participant by the deadline, the participant will not be given access to the next auction.
  • Net position reports are not used to determine bidding limits; the information is used to evaluate the situation with respect to particular securities.
Counterparty Obligations
  • No participant should borrow securities from the Bank and use those securities to exercise control over an issue.
  • Participants are not eligible to bid if they hold more than 25 per cent of the issue.
  • Bidders must not bid in concert with any other bidder.
  • Consistent with the Terms of Participation in Auctions for Government Securities Distributors, all eligible participants are expected to comply with the IDA Policy No. 5, The Code of Conduct.
Program Review
  • There will be a review of the securities-lending program within 6 months of its inception to assess the impact on markets and participant behaviour. Subsequent reviews would be conducted annually.
  • The Bank will consult with market participants in this process.