As part of an ongoing review of the Bank’s collateral policy related to the Standing Liquidity Facility (SLF), the Bank is announcing several changes to the assets accepted as collateral under its SLF.
- Consistent with the recommendations of the Financial Stability Board’s principles announced in October 2010 the Bank is removing from the policy all mechanistic reliance on credit rating agency ratings in determining the acceptable credit quality of eligible assets, however external credit ratings can still be a factor in determining the credit quality of any assets. The following are specific changes to securities that relied on credit rating agency ratings and are effective immediately:
- Private sector securities must meet the criterion of sufficiently high quality as determined by the Bank. With the exception of Term Asset-Backed Securities (ABS), Asset-backed commercial paper (ABCP) and Covered bonds, sufficiently high quality will be broadly equivalent to a rating of A- or above.
- Term ABS, ABCP and Covered bonds must meet the criterion of sufficiently high quality as determined by the Bank. Sufficiently high quality for these securities will be broadly equivalent to a rating of AAA.
- Securities issued or guaranteed by a provincial government must meet the criterion of sufficiently high quality as determined by the Bank. The Bank will not provide specific credit guidance for these securities. As such, to provide eligibility information to the market, the Bank is introducing a list of eligible provincial issuers. This list will also include information on any additional risk mitigants on these securities that the Bank may apply.
Eligibility decisions on securities other than provincial issued or guaranteed securities will be communicated directly to the pledger at the time the assets are presented to the Bank for consideration.
- The Bank is taking further measures to those announced on 13 March 2014 to reduce the Bank’s exposure to wrong-way risk as per the Principles for Financial Market Infrastructures (PFMIs), by removing from eligibility, securities issued or guaranteed by Large Value Transfer System (LVTS) participants, excluding those that are backed by other assets. There will be a 2 month adjustment period for counterparties to adjust to the removal of securities issued or guaranteed by LVTS participants.
- The Bank is updating its haircut methodology for non-mortgage loan portfolios (NMLP) to a more granular and risk-sensitive approach. These new haircuts are the result of a detailed review undertaken by the Bank into non-mortgage loans and their risks, leveraging inputs drawn from academic literature, the practices of other central banks and estimates from the Canadian financial sector. Prior to this update, all NMLPs pledged to the Bank were subject to a 40% haircut.
Under the new approach, to come into effect in mid-August 2018 (when the Bank performs its next monthly update of pledged NMLP values), the Bank will be applying haircuts targeted at different categories of non-mortgage loans. These categories and their corresponding haircuts are listed in the table below. No action is required from LVTS participants that currently pledge non-mortgage loan collateral, as all the required data are already submitted to the Bank on a monthly basis (either bilaterally or through OSFI regulatory returns). The Bank estimates that these updated haircuts will have a minimal impact upon participants that currently pledge NMLPs, due to the 20% concentration limit imposed upon this type of collateral.
|Non-mortgage loan category||Haircut|
|Unsecured consumer loans||85%|
|Secured consumer loans||70%|
|Unsecured business loans||50%|
|Secured business loans||30%|
- To recognize that certain issuers currently classified in the corporate and foreign-issuer bonds category should be differentiated from this classification and to provide some additional pledging flexibility to LVTS participants, the Bank is announcing two new asset categories for Canadian dollar securities; details and implementation to follow pending a separate announcement at a later date, expected in 2019. The two new asset categories to be added are 1) Foreign Official Sector, which will include highly-rated foreign governments, central banks, and Supranational institutions; and 2) Other Public Sector, which will include issuers with clearly-defined links to a federal or provincial government and meet the Bank’s criteria for inclusion in this category, (beyond pension funds, the precise criteria for inclusion will be announced when the changes are implemented). The Foreign Official Sector will not be subject to concentration limits, while for the Other Public Sector any changes to concentration limits will be announced when the changes are implemented. Securities in both these categories will be subject to lower haircuts than they are currently subject to.
- To provide additional flexibility to LVTS participants, the Bank is announcing that it will be making changes to the concentration limits; to be announced and implemented at a future date, expected in 2019. This change allows LVTS participants to hold up to 40% of their pledged collateral in asset-types which are subject to concentration limits. As such, LVTS participants who do not use their NMLP will be able to hold up to 40% in securities that are subject to concentration limits (currently limited to 20%). For participants that do use their NMLP, the 40% of collateral that is subject to concentration limits will include a maximum 20% NMLP (same as current), and 20% in securities that are subject to concentration limits (same as current).
- Changing the right of refusal in the Bank’s collateral policy to a right to: accept, refuse and/or to impose additional risk mitigants.
The updated list of the Assets Eligible as Collateral under the Bank of Canada’s SLF has been posted reflecting the changes to reduce mechanistic reliance on credit rating agency ratings, to reduce the Bank’s exposure to wrong way risk, to update haircuts on the NMLP and reflect certain administrative changes, all of which are effective immediately unless stated otherwise. The new asset categories and concentration limit changes will be effective and reflected in the list at a future date, expected in 2019.
For further information, please contact:
Financial Markets Department
Bank of Canada
Bank of Canada