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Bank of Canada settlement account access policy for Lynx and the Automated Clearing Settlement System

This policy establishes the requirements that the applicant must meet for the Bank of Canada to consider granting a settlement account for Lynx or the Automated Clearing Settlement System. Requirements are similar for both systems.

Applicants for a Lynx or Automated Clearing Settlement System (ACSS) settlement account must:

  • qualify for Payments Canada membership in accordance with the Canadian Payments Act or be an existing member of Payments Canada
  • meet Payments Canada’s participation requirements for the applicable system

The Bank reserves the right to request information in addition to what is outlined in this policy to assess applicants against the requirements described below. In all cases, the Bank uses its discretion to determine whether to provide a settlement account.

The Bank will regularly confirm that existing holders of Lynx and ACSS settlement accounts continue to meet certain requirements. The Bank may require account holders to periodically provide information to assist with this confirmation.

The Bank regularly reviews—and may periodically update—these settlement account requirements.

Regulatory requirement

Applicants must be subject to comprehensive and risk-based Canadian prudential regulation. This may be conducted at:

  • the federal level, by the Office of the Superintendent of Financial Institutions (OSFI)
  • the provincial level if regulators have adopted regulatory standards broadly equivalent to those implemented by OSFI1

OSFI authorizes Canadian branches of foreign banks to conduct certain activities in Canada. But the Bank also considers the regime adopted by their home regulator(s) during its assessment.

Applicant information requirement

Applicants must provide basic due diligence information (e.g., applicant name and head office address) as well as information detailing the directors and beneficial ownership of the applicant.

Applicants will also be required to confirm that they have in place financial crimes risk management controls, such as ongoing monitoring of their business relationships. This supports the Bank’s responsibility to perform due diligence on those who will be settling payments using settlement accounts on the books of the Bank.

Business requirement

Applicants must clearly explain their business need for a settlement account for the given system and confirm that the account will be used solely for settlement of payment activity for that system.

Financial requirement

The Bank must deem the credit ratings of applicants to be generally equivalent to investment-grade (BBB- or better). Using its internal credit rating framework, the Bank evaluates whether this requirement is met and continues to be met over time.

This framework establishes a risk profile for each applicant that accounts for:

  • the core business activities and risks of Canadian-owned financial institutions (FIs)—the FI’s degree of regional or business concentration will not be considered in the risk profile
  • the activities and risks of Canadian subsidiaries of foreign-owned FIs as well as the financial health of the parent FI
  • the global activities of foreign-owned FIs, including the broader institutional and regulatory frameworks of the jurisdiction where they are located

The Bank excludes non-public regulatory or supervisory information from its credit assessments. While it may use analysis published by credit rating agencies, the Bank does not derive its credit assessments from these ratings.

Cyber security requirement

Lynx and ACSS settlement account holders access account services through a secure Bank-developed application called the High Availability Banking System (HABS).

To mitigate the risk of providing external access to HABS, the Bank developed a set of cyber security requirements to ensure that holders of settlement accounts follow fundamental security principles. This includes controls around:

  • restricting external access
  • encryption
  • vulnerability management
  • physical security
  • personnel security

Applicants must attest to meeting the Bank’s cyber security requirements.

Operational requirements

The Bank has requirements in place to minimize the operational risks associated with managing settlement accounts.

The Bank expects settlement account holders to be able to pledge eligible collateral to the Bank using the Canadian Depository for Securities’ Clearing and Depository Services Inc. system (CDSX) or have a custodial arrangement in place to do so. The pledging of eligible collateral to the Bank supports the risk models of the given system and other services as applicable.

ACSS settlement account holders meet their net settlement obligations by Lynx payments. Applicants that are not direct participants in Lynx need to arrange for a direct participant in Lynx to perform this settlement on their behalf.

Approved applicants will undergo an onboarding process that includes requirements for:

  • connectivity
  • user management
  • training
  • testing
  • contingency operations
  • collateral management

At the application stage, the Bank may inquire about and review an applicant’s operational capability to ensure that the applicant can meet these requirements on an ongoing basis.

Collateral requirement

Applicants must provide information to demonstrate they will have sufficient collateral to meet their obligations for the given system. For the ACSS, this requirement includes under a stress scenario where additional collateral may be required in a short timeframe to manage a participant default.2 Assets that are eligible as collateral can be found here.

Legal requirement

Successful applicants must enter into the Bank’s Settlement Account Agreement. This agreement sets out the rights and duties of both the Bank and the account holder with respect to maintaining a settlement account.

When payment system activities require the Bank to provide some form of credit, applicants must formalize with the Bank other ancillary legal agreements. Applicants must also formalize with the Bank any other agreements or documents that may be required periodically.

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  1. 1. Due to the different nature of their regulation and supervision, securities dealers, money market mutual funds and insurance companies (including those regulated by OSFI) are excluded from this definition and thus not eligible for settlement accounts for these systems.[]
  2. 2. Direct clearers in the ACSS are exposed to credit risk. This risk materializes through a survivors-pay loss-allocation mechanism when another direct clearer defaults.[]