Potential Modifications to the Debt Distribution Framework

This section presents a range of potential modifications to the debt distribution framework for the purpose of raising stable, low-cost funding and maintaining a well-functioning market for Government of Canada securities.

The following list identifies areas where changes could be considered, along with the rationale for such changes; the list also provides a brief summary of key impacts on the government, dealers, and investors.

The purpose of the list is to elicit discussion around the framework's future design and effectiveness for participants. Given the central role played by Government of Canada securities in the domestic fixed-income market, changes to the framework could have significant implications for the domestic fixed-income market environment over the medium term.

Views are requested from all interested parties on the potential adjustments listed in this section and suggestions for any other changes to the framework that may be beneficial.

Goal: Effective Auction Process

i) Bidding Limits

Current Context: Under the current terms of participation, GSDs (including PDs) may bid on their own behalf, and they have a separate limit for the aggregate amount of bids they submit on behalf of customers. Bidding limits are scaled to reflect the size of operation of dealers. Customers must place bids through GSDs (i.e., they cannot place direct bids to the Bank of Canada). GSDs and customers can submit competitive bids and non-competitive bids. Non-competitive bids (up to $3 million for a GSD and another $3 million on behalf of customers) are accepted in full at the average yield of the auction.

Potential Modification: Broader participation could result from an increase in auction bidding limits for participants at government securities auctions. The increase in bidding limits could be designed in a number of ways. The first would be an increase in competitive bidding limits for all PDs, GSDs, and customers.

Likely Impacts:
  • For the government, an increase in bidding limits could encourage wider participation at auctions and broaden the investor base by providing greater flexibility for parties that participate at auctions. More competitive bidding could result in higher prices for auctioned securities and reduce the likelihood of an uncovered auction.
  • For large dealers, larger bidding limits would enable dealers to accept large orders from clients, including international investors who seek substantial amounts of Government of Canada securities at times. Increased bidding limits could also enhance the value of the PD status through greater direct access to securities to support trading businesses. An increase in the bidding limits of large PDs and customers beyond a certain level, on the other hand, could raise the risk of market manipulation through large concentrated holdings of securities (e.g. squeezes), which could affect the integrity of the market.
  • For small dealers, this change could benefit small PDs and other GSDs who currently have insufficient bidding limits to accept large orders from customers and want to grow their business.
  • For customers, an increased bidding limit raises their access to government securities through GSDs. An increase in bidding limits could also reduce the economic incentives for large dealers to attain/maintain PD status if a large proportion of customer orders were to be directed through small PDs and other GSDs. 1

Potential Modification: A second alternative to encourage broader auction participation would be an increase in competitive bidding limits of small GSDs and customers only.

Likely Impacts:
  • For the government, compared to an increase in the bidding limits of all participants, this measure may reduce the possibility of market manipulation by maintaining the current bidding limits of the largest participants.
  • For large dealers, the incentives to maintain PD status could be reduced relative to smaller dealers and relative to customers.
  • For small dealers, this change would raise their access to government securities and ability to accept large orders from customers.
  • For customers, the impact would be similar to the previous alternative.

Potential Modification: A third alternative to encourage broader auction participation would be an increase in the non-competitive bidding limits.

Likely Impacts:
  • For the government, higher non-competitive bidding limits could potentially broaden auction participation and diversify the investor base, particularly with small (retail) investors and very small GSDs. A reduction in the supply of securities available for competitive bidding could encourage market participants to bid more aggressively.
  • For dealers, if non-competitive limits were sufficiently large, more customers orders could be submitted.
  • For customers, higher non-competitive bidding limits could broaden participation for those that would rather not bid competitively. In particular, larger non-competitive bidding limits could facilitate retail investors' access to marketable securities at auctions.
3. What are your views regarding the likely impacts of changes in bidding limits for auction participants?

4. What are your views on an increase in non-competitive bidding limits?

ii) Access to Auctions

Current Context: As stated in the terms of participation, GSDs are permitted to directly bid at auctions. GSDs that have market shares in the primary and secondary markets above a certain threshold are awarded the status of PD and are also awarded higher bidding limits than other GSDs in exchange for assuming certain requirements.

1. Electronic Trading Systems (ETSs)

Potential Modification: The ability of ETSs to access auctions could broaden participation by improving the access of small institutional investors and retail customers to government securities.

Likely Impacts:
  • For the government, ETSs could provide an additional channel to distribute debt, broadening the investor base. In permitting ETSs to access auctions, the government would need to ensure that it does not bear settlement risk if the ETS does not take responsibility for trades, as GSDs do.
  • For dealers, this initiative may reduce the economic incentives to participate actively at auctions if investors decide to use ETSs to submit bids and reduce the flow of orders and information through GSDs.
  • For ETSs, investors and retail investors, the ability to bid at auctions could permit systems to grow and provide their clients with more direct access to securities.

2. Retail investor access to auctions

Potential Modifications: Retail customers could be provided direct access to government securities via a non-competitive bidding tranche reserved for dealers that provide retail sales for their clients, or through a direct-access system from the government.

Likely Impacts:
  • For the government, retail investors' participation at auctions could broaden the investor base, promote auction participation, and provide marketable securities for the saving and investment plans of Canadians. Settlement and processing procedures would require significant investment.
  • For GSDs, direct access to auctioned securities for retail investors may negatively affect their brokerage revenues.
  • For retail investors, direct access to auctioned securities would provide risk-free, marketable securities for their needs.
5. What are your views on the participation of electronic trading systems at Government of Canada securities auctions?

6. What are your views on greater access for retail investors?

iii) Auction Format

Context: The Government of Canada uses multiple-price auctions to issue domestic treasury bills and regular marketable bonds. In a multiple-price auction, successful competitive bids are allotted in rising order of yield until the full amount of the issue is allotted. RRBs are issued with the single-price auction format. In a single-price auction, successful competitive bids are allotted at the highest yield of accepted competitive bids.

Over the past few years, a number of smaller or less frequent participants in the Government of Canada securities market have advocated the use of single-price auctions for bonds. The rationale is that single-price auctions could reduce the risks that less-informed bidders, who do not have the benefit of seeing large customer orders and flows, overpay for the securities auctioned. 2

Potential Modification: The government could adopt the single-price auction format for nominal bond issuance.

Likely Impacts:
  • For the government, the single-price auction format could support broader and more regular participation at auctions, given the premise that single-price auctions reduce the risks for less-informed bidders. On the other hand, multiple-price auctions permit the government to issue its securities at the maximum prices bid. Other impacts could include the potential for increased variability of funding costs.
  • For large dealers, the single-price auction format could reduce the benefit of being informed bidders and reduce the value of PD status.
  • For small dealers and investors, the risk of overpaying for securities at a single-price auction is lowered.
7. What are your views with respect to the impact over time of a single-price auction format for Government of Canada nominal bonds?
Goal: Effective Intermediation

i) Regular Bidding Requirements

Context: Under the terms of participation, each PD must bid at every auction for a minimum of 50 per cent of its auction limit at a reasonable price for the government. 3

Potential Modification: The bidding obligations of PDs could be reduced to encourage participation at auctions. Potential changes could be to decrease minimum bidding requirements from 50 per cent of the firm's auction limit, or to expand the range of bids that would be classified as being at "reasonable prices".

Likely Impacts:
  • For the government, lower bidding requirements could result in an increase in the potential for an uncovered auction, placing the financing of the government at risk, with the associated potential negative impact on its cost of funding.
  • For PDs, lower bidding requirements could make the status of PD more attractive.
  • For GSDs, lower bidding requirements for PDs could encourage GSDs to become PDs.
Questions 8 to 10 are primarily addressed to dealers, but others are welcome to provide feedback.

8. How do the current obligations affect participation at auctions? How do you view the balance between the value of being a PD and the bidding obligations that must be assumed?

9. What are your views on the impact of lower minimum bidding requirements?

10. Would reducing bidding obligations be more likely to support GSDs in becoming a PD?

ii) Transparency of Prices and Trading on Government of Canada securities

Context: The yields of government securities that trade in the secondary market are used as pricing benchmarks in the broader fixed-income market.

Potential Modification: The publication of pricing information of Government of Canada benchmarks on exchanges or Web sites could enhance the availability of the information at minimum cost for the public.

Likely Impacts:
  • For the government, improved secondary-market price transparency could encourage greater participation at the government's auctions and subsequently lower the government's costs of borrowing.
  • For PDs, a higher level of transparency could affect their ability to make markets.
  • For retail and small investors, posted prices could encourage greater participation in fixed-income markets and provide assurance that prices are fair.
11. What are your views with respect to broader dissemination of real-time price information on Government of Canada securities to the general public?
  1. 1. Potential changes in bidding requirements are addressed in Section b) i) of the Potential Modifications to the Debt Distribution Framework section.[]
  2. 2. This is referred to as the winner's curse.[]
  3. 3. More specifically, the lesser of 50 per cent of its auction limit or 50 per cent of its formula calculation (bidding limit less the PDs' inventory of that security) at reasonable yields that do not exceed the highest yield accepted at the auction plus a spread of 5 basis points. A basis point is one-hundredth of one percentage point. See Section 10.1 of the Terms of Participation in Auction for Government Securities Distributors.[]