Securities-Lending Program

September 1, 2021

Standard Terms for Auctions to Primary Dealers Under the Bank of Canada Securities-Lending Program (the “Terms”)

Operation details

• Auction date, amount, minimum bid rate, and other information will be announced by the Bank of Canada ahead of each auction.

Type of auction

• Multiple rate competitive auction for a fixed par amount of securities.

Eligible counterparties

• Canadian Primary Dealers in Government of Canada securities who have signed the Bank of Canada’s Master Securities Loan Agreement and have provided any additional legal documentation or comfort required by the Bank of Canada may participate in the program.

• Primary Dealers may bid on their own behalf subject to auction limits.

• If two or more Primary Dealers are affiliated parties as defined in the Terms of Participation in Auctions for Government Securities Distributors, only one of them will be able to participate in the program, unless they are considered separate bidders for purposes of the Terms.

Term

• The term to maturity of each securities lending operation is 1 business day and the Bank of Canada will make its Government of Canada securities available through a tender process.

Auction trigger

Securities will be made available when in the overnight repo market, the Bank of Canada believes that they are trading at or below the minimum threshold or that they are unavailable.

The threshold for both marketable bonds and treasury bills is as follows:

1. 50 basis points below the Bank of Canada’s target for the overnight rate when the target rate is 1 per cent or lower;
2. 50 per cent of the Bank of Canada’s target for the overnight rate when the target rate is above 1 per cent and below 4 per cent; or
3. 200 basis points below the Bank of Canada’s target for the overnight rate when the target rate is 4 per cent or higher.

Auction size

• The Bank of Canada 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. Auctions of securities with less than two weeks to maturity may be conducted at the discretion of the Bank of Canada. The Bank of Canada will not conduct an auction for an amount of securities less than $25 million. The Bank of Canada will not make available more securities than it holds at the time of the auction. The Bank of Canada reports its holdings of Government of Canada securities on its website.

Tender process

• The deadline for receiving auction bids is 11:45 a.m. (Ottawa time) or could be changed at the Bank’s discretion. The Call for Tenders will be released 15 minutes before the auction deadline.

• Primary Dealers must submit tenders using the Communication, Auction and Reporting System (CARS). Tenders may consist of up to four bids per issue on (each of) the securities being made available. These bids must be stated in multiples of $1 million. Each bid shall be stated in number of basis points with no decimal places. Primary Dealers shall not bid directly or indirectly on behalf of, or in concert with, any other Primary Dealers.

Minimum bid rate

• The minimum bid rate shall be indicated in the Call for Tenders.

• The minimum bid rate for both marketable bonds and treasury bills is calculated as follows:
1. 50 basis points when the Bank of Canada’s target for the overnight rate is 1 per cent or lower;
2. 50 per cent of the Bank of Canada’s target for the overnight rate, rounded up to the nearest basis point if considered necessary by the Bank of Canada, when the target rate is above 1 per cent and below 4 per cent; or
3. 200 basis points when the Bank of Canada’s target for the overnight rate is 4 per cent or higher.

• The minimum bid rate may be adjusted in what the Bank of Canada considers to be extraordinary circumstances. Any such change will be indicated in the Call for Tenders.

Allocation mechanism

• Tenders with the highest bid rate will be accepted and allocated first. Tenders with successively lower bid rates will continue to be accepted until the auction is completely allocated. The lowest accepted bid rate is the cut-off rate. If the sum of tender amounts at the cut-off rate exceeds the amount available to allocate, these tenders will be allocated on a pro-rated basis and rounded to the nearest $1 million.

Maximum allocation

• The maximum amount of a security that any Primary Dealer may bid is the greater of $100 million and 50 per cent of the amount being auctioned. Participants are not eligible to bid for a security if they hold more than 25 per cent of the issue.

Timing of results

• The auction results will be made available on the CARS on the day of the auction.

Eligible securities

The eligible collateral for the Bank of Canada’s Securities-Lending Program and for the Bank of Canada’s Standing Liquidity Facility are the same, except the following assets are not eligible collateral for securities lending operations:

• non-Canadian-dollar assets
• Special Deposit Accounts
• non-mortgage loan portfolios

All other terms and conditions from the Assets Eligible as Collateral under the Bank of Canada’s Standing Liquidity Facility apply to the collateral for the securities-lending program.

All collateral delivered must be submitted free and clear of all liens, charges, claims, encumbrances, hypothecs, security interests or other restrictions of any kind, and a Primary Dealer, in delivering securities as collateral, is deemed to warrant and represent that all securities delivered by it are free and clear.

Notification of securities to be used

• Within 15 minutes of allocating the auction, counterparties must notify the Bank of Canada of the securities that will be used.

Margins

• The margin requirements for the Bank of Canada’s Securities-Lending Program are the same as those for the Bank of Canada’s Standing Liquidity Facility. 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.

Lending fee

The Bank of Canada will charge a lending fee on each transaction, which will be calculated by applying the rate of winning bids to the market value of the security borrowed on an actual/365-day basis. The lending fee will be made available on CARS on the day of the auction, and lending fees shall be payable via Lynx by 4:00 p.m. (Ottawa time), on or before the maturity date of the transaction.

Following are the instructions for payment of lending fees. The Bank of Canada’s SWIFT address is BCANCAW2. The payment instruction should be a SWIFT type MT205 or MT103 and should include the following information:

In the event of a failure to return the lent securities in whole or in part on the maturity date, the Bank of Canada may, at its option, extend the maturity date of the transaction for an additional business day. The daily lending fee charged by the Bank of Canada for such an extension is equal to the higher of the Bank of Canada’s target for the overnight rate or 3 per cent.

Net position reporting

Participants must report to the Bank of Canada by 5:30 p.m. (Ottawa time), in the form of the Net Position Report in Schedule A, their closing aggregate net position (as at 5 p.m.) in the auctioned security. The net position must be reported using the CARS, and the more detailed report must be emailed to operations@bank-banque-canada.ca by 5:30 p.m. (Ottawa time) on the day of the auction. 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. The net position report to be submitted is similar to the IIROC net position report and includes the following:

• Trading positions–(i) the par amount of cash holdings of a security with the same International Securities Identification Number (ISIN); (ii) the par amount of when-issued positions; (iii) forward contracts; (iv) holdings of the residual component of a stripped bond of the security being auctioned; and (v) the par amount of any position in the security not covered by the above types of contracts, including positions not covered in the net financing position.

• Financing positions–(i) overnight and open reverse repos; (ii) term reverse repos; (iii) securities borrowed; (iv) collateral received for financial derivatives and other securities transactions; (v) overnight and open repos; (vi) term repos; (vii) securities loaned; and (viii) pledged collateral for financial derivatives and other securities transactions.

• Others–(i) futures contract; (ii) options contract; (iii) failure to receive; and (iv) failure to deliver.

Counterparty settlement instructions

• Collateral for the securities loan must be delivered to the Bank of Canada by 4:00 p.m. (Ottawa time) on the day of the auction. Collateral to be delivered shall be confirmed with and priced by the Bank of Canada after the auction and before delivery. A confirmation of the transaction will be provided by the Bank of Canada.

• The delivery of the collateral securities shall be effected through the pledge function of CDSX (or in any successor service to CDSX), involving the book entry transfer from the CDSX securities account designated by the Primary Dealer to the Bank of Canada’s CDSX securities account. Primary Dealers shall observe all applicable CDS rules, procedures and user guides for CDSX or any successor service to CDSX.

• In delivering the lent securities, the Bank of Canada will, until further notice, use CDSX or any successor service to CDSX. The delivery of securities shall be effected through the pledge function of CDSX.

• On the maturity date, the lent securities must be returned to the Bank of Canada by 4:00 p.m. (Ottawa time) through the pledge function of CDSX.

Legal arrangements

• All tenders submitted by eligible counterparties for the Bank of Canada Securities-Lending Program shall be subject to these Terms.

• Each tender shall be unconditional and shall be received by the Bank of Canada, not later than the time, and on the auction day, specified in the Call for Tenders.

• The Bank of Canada reserves the right to accept or reject any or all tenders, in whole or in part, including without limitation, the right to accept less than the maximum amount specified in the Call for Tenders. The Bank of Canada also reserves the right to deny access to the tender process at its own discretion.

• The Bank of Canada shall not bear any liability whatsoever for any errors in tenders received or for delays in the transmission of tenders.

• The Bank of Canada may, in addition to and without prejudice to any rights it may have under the securities loan agreement, sanction a Primary Dealer if the Bank of Canada is of the view that the Dealer breached any of the terms, including, without limitation, making an incorrect representation or certification; failing to provide any information required under the Terms or providing such information that is incorrect, inaccurate or incomplete; failing to return lent securities on the maturity date; or failing to pay the securities lending fee. The sanctions that the Bank of Canada may impose include, without limitation, suspending the Primary Dealer from participating in one or more future auctions and changing, on a temporary basis, the bidding limit applicable to the Dealer. In the event of behaviour in relation to the Securities-Lending Program or the auction that the Bank of Canada considers to be fundamentally incompatible with the Primary Dealer continuing to act as a Government Securities Distributor, the Dealer’s status as a Government Securities Distributor may be revoked. Any outstanding obligations or liabilities owed as a Primary Dealer to the Bank of Canada as a result of past participation in the program and in auctions shall survive the imposition of any sanction on the Dealer.

• The Bank of Canada reserves the right to change the terms of its Securities Lending Program by posting a revised version of these Terms and Conditions.

General conditions

• Consistent with the Terms of Participation in Auctions for Government Securities Distributors, all eligible participants shall comply with IIROC Rule 2800, the Code of Conduct for IIROC-Regulated Firms Trading in Wholesale Domestic Debt Markets.