The Bank of Canada’s Risk-Management Standards for Designated FMIs

Find material related to the Bank’s standards for designated FMIs and the applicability of each standard to securities settlement systems, central counterparties and payments systems.


The Principles for Financial Market Infrastructures (PFMIs) are international standards related to the risk-management, efficiency and transparency of systemically important FMIs. They were introduced and published in April 2012 by:

The Bank of Canada adopted the PFMIs into its risk-management standards for designated systemically important FMIs (systemic FMIs) the same year. The designated systemic FMI have been expected to observe all the principles since December 31, 2016.

The Bank also developed risk-management standards for prominent payment systems that are based on the PFMIs, but are designed to be proportional to a level of risk that is relatively less than in systemic FMIs.

The Bank’s standards for systemic FMIs

In order to satisfy itself that a systemic FMI is adequately controlling its risk, the Bank will consider the FMI’s risk­management practices relative to the Bank’s risk­-management standards, which fully incorporate the Principles and Key Considerations articulated in the PFMIs. The PFMIs also contain explanatory notes that describe how an FMI may implement particular aspects of the standards.

The Bank’s risk­-management standards are summarized below. The associated key considerations and explanatory notes are found in the PFMIs.

The Bank has developed supplementary guidance in coordination with the Canadian Securities Administrators to provide additional context and clarity on certain aspects of these new standards in the Canadian context. This supplementary guidance is intended to support implementation of the PFMI. It does not modify or replace any element of the Principles.

Joint Supplementary Guidance Developed by the Bank of Canada and Canadian Securities Administrators

Joint Supplementary Guidance has been developed by the Bank and the securities regulatory authorities to provide additional clarity on certain aspects of selected PFMI Principles within the Canadian context. It is found on the Bank website and in annexes to the Companion Policy (to the CSA National Instrument 24-102 Clearing Agency Requirements).

The Joint Supplementary Guidance applies in respect of recognized domestic clearing agencies that are designated as systemically-important by the Bank and jointly overseen by the Bank and one or more securities regulatory authorities (referred to in this Joint Supplementary Guidance as an “FMI”).

Beyond observation of the PFMI Principles, an FMI is expected to take into account the “Explanatory Notes” for each applicable PFMI Principle, other reports and explanatory materials published by CPMI and IOSCO that supplement the PFMI Report and that provide guidance to FMIs on the application of the PFMI Principles, as well as this Joint Supplementary Guidance or any future guidance published jointly by the Bank and the securities regulatory authorities.

The Joint Supplementary Guidance below appears under the relevant headings for each applicable PFMI Principle (referred to by the Bank as its “Risk-Management Standards for Designated FMIs”).

PFMI Principle 3: Framework for the comprehensive management of risks

Joint Supplementary Guidance for PFMI Principle 3 has been developed by the Bank and CSA pertaining to FMI recovery planning. This guidance can be found separately on the Bank website and in Annex II to the Companion Policy.


PFMI Principle 5: Collateral

An FMI should not rely solely on external opinions to determine collateral eligibility.

In general, most of the FMI’s collateral pools should be composed of cash and debt securities issued or guaranteed by the Government of Canada, a provincial government or the U.S. Treasury.

Additional asset classes may be acceptable as collateral if they are subject to conservative haircuts and concentration limits. An FMI should limit such assets to a maximum of 40% of the total collateral posted from each participant. It should also limit securities issued by a single issuer to a maximum of 5% of total collateral from each participant. Such assets are:

  • Securities issued by a municipal government;
  • Bankers’ acceptances;
  • Commercial paper;
  • Corporate bonds;
  • Asset-backed securities that meet the following criteria:
  • sponsored by a deposit-taking financial institution that is prudentially-regulated at either the federal of provincial level;
  • part of a securitization program supported by a liquidity facility; and
  • backed by assets of an acceptable credit quality;
  • Equity securities traded on marketplaces regulated by a member of the CSA; and
  • Other securities issued or guaranteed by a government, central bank or supranational institution classified as Level 1 high-quality assets by the Basel Committee on Banking Supervision.

Since it is highly likely that the value of debt and equity securities issued by companies operating in the financial sector would be adversely affected by the default of an FMI participant – introducing wrong-way risk for an FMI that has accepted such securities as collateral – an FMI should:

  • Limit the collateral from financial sector issuers to a maximum of 10% of total collateral pledged from each participant; and
  • Not allow a participant to pledge as collateral securities issued by itself or an affiliate.

PFMI Principle 7: Liquidity risk

Liquidity facilities should include at least three independent liquidity providers to ensure the FMI has access to sufficient liquid resources even in the event one of its liquidity providers defaults.

Uncommitted liquidity facilities are considered qualifying liquid resources for liquidity exposure in Canadian dollars if they meet all of the following additional criteria:

  • The liquidity provider has access to the Bank of Canada’s Standing Liquidity Facility (SLF);
  • The facility is fully-collateralized with SLF-eligible collateral; and
  • The facility is denominated in Canadian dollars.

PFMI Principle 15: General business risk

Liquid net assets funded by equity must be held at the level of the FMI legal entity to ensure they are unencumbered and can be accessed quickly.


PFMI Principle 16: Custody and investment risks

It is paramount that an FMI have prompt access to assets held for risk-management purposes with minimal price impact. For the purposes of PFMI Principle 16, financial instruments can be considered to have minimal credit, market and liquidity risk if they are debt instruments that are:

  • Securities issued or guaranteed by the Government of Canada;
  • Marketable securities issued by the U.S. Treasury;
  • Securities issued or guaranteed by a provincial government;
  • Securities issued by a municipal government;
  • Bankers’ acceptances;
  • Commercial paper;
  • Corporate bonds; and
  • Asset-backed securities that are:
    • sponsored by a deposit-taking financial institution that is prudentially regulated at either the federal or provincial level;
    • part of a securitization program supported by a liquidity facility; and
    • backed by assets of an acceptable credit quality.

Investments should also, at a minimum, observe the following:

  • To reduce concentration risk, no more than 20% of total investments should be invested in any combination of municipal and private sector securities. Investment in a single private sector or municipal issuer should be no more than 5% of total investments.
  • To mitigate specific wrong-way risk, investments should, as much as possible, be inversely related to market events that increase the likelihood of those assets being required. Investment in financial sector securities should be no more than 10% of total investments. An FMI should not invest assets in the securities of its own affiliates.
  • For investments that are subject to counterparty credit risk, an FMI should set clear criteria for choosing investment counterparties and setting exposure limits.

Application of the Bank’s standards to different types of systemic FMIs

Certain standards are applicable only to FMIs that operate particular types of systems, as outlined in the following table.

Securities settlement systems Central counterparties Payment systems
Principle 1

Principle 2

Principle 3

Principle 4

Principle 5

Principle 6

Principle 7

Principle 8

Principle 9

Principle 10

Principle 11

✓*

Principle 12

Principle 13

Principle 14

Principle 15

Principle 16

Principle 17

Principle 18

Principle 19

Principle 20

Principle 21

Principle 22

Principle 23

* Standard 11 related to central securities depositories is only applicable to securities settlement systems that also operate as a central securities depository.

The Bank’s standards for prominent payment systems

The Bank also developed criteria for identifying prominent payment systems for designation and risk-management standards for these systems. The risk-management standards are based on the PFMIs, but are designed to be proportional to a level of risk that is relatively less than in systemic FMIs.