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

The Bank of Canada announced on 29 January 2015 its intention to add certain Canadian-dollar term asset-backed securities (ABS) to its list of assets eligible as collateral under the Bank of Canada’s SLF.   At that time, market participants were invited to provide comments on the proposed conditions under which term ABS would be accepted.

Overall, respondents viewed the proposed addition of certain term ABS as eligible collateral under the SLF as a positive development. However some respondents expressed the view that the Bank of Canada should be more accommodating with respect to the conditions under which it will accept term ABS, in order to provide greater support to the ABS market and help increase the overall liquidity of these securities.   The comments received were taken into consideration, and two modifications are being made relative to the initial conditions proposed:

  • The “clean-up call option”1 that is commonly employed for amortizing term ABS will be permitted so long as it is not readily exercisable while the securities are pledged as collateral.   Commenters noted that this option is included in all amortizing term ABS and therefore not allowing it would effectively render amortizing term ABS ineligible, which was not the intent. While the Bank does not typically accept as collateral securities with embedded optionality, in this case it is satisfied that such options do not pose a material risk to the Bank provided they are not exercisable while the securities are pledged to the Bank.
  • The Bank will consider accepting multiple senior tranches from a single ABS program provided it can be established that those tranches have equal rights and under no circumstances are sub-ordinate to any other tranche. Provided it met the Bank’s other criteria, the Bank would also consider a previously subordinated tranche where, due to the maturity or removal of a previously outstanding senior tranche, that tranche had become the most senior outstanding.

All other eligibility conditions will remain as proposed in the 29 January 2015 notice.

Reflecting these changes, effective today the Bank of Canada’s policy is therefore as follows: Assets Eligible as Collateral under the Bank of Canada’s Standing Liquidity Facility (SLF) .

For further information please contact:

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

Bank of Canada
613 782-8782

Content Type(s): Press, Market notices
  1. 1. Clean-up calls provide the issuer the right to redeem, typically at par, the residual amount of the securities outstanding once the remaining principle balance reaches a low threshold, often 10 per cent of the original amount.[]