Bank of Canada mixes up concentration limits
14 March 2014 Toronto
Image: Shutterstock
After a six month waiting period, the Bank of Canada has detailed the specific changes to conditions for assets eligible as collateral.
On 5 September 2013, the bank announced planned changes to concentration limits for private sector and municipal securities in relation to assets eligible as collateral under the Bank of Canada’s standing liquidity facility (SLF). Prior to finalising these planned changes, the bank invited comments from other market participants.
The Bank of Canada is now announcing that the following changes to its SLF policy will be implemented:
All eligible securities issued by a municipal government or a private sector issuer (including corporate bonds, covered bonds, bankers’ acceptances, commercial paper, and asset-backed commercial paper) will be subject to a new sectoral concentration limit.
No more than 20 per cent of the total collateral value pledged by an institution may be comprised of such municipal and private sector securities.
Securities issued by LVTS participants or related parties (including covered bonds, but excluding ABCP sponsored by an LVTS participant) will be subject to a sectoral concentration limit of 10 per cent of the total collateral value pledged by an institution, and included as part of the overall municipal and private sector limit above.
Obligations of a single private sector or municipal issuer or related parties (including covered bonds) will be limited to no more than 5 per cent of the total collateral value pledged by an institution.
There will be an approximate 6 month transition period, ending on September 30 2014, for LVTS participants to make any adjustments to their collateral management practices required to comply with the updated policy.
Overall, the planned tightening of concentration limits for private sector and municipal securities was seen as being well founded from a risk management perspective, said a statement from the bank.
It added the caveat that some participants did state that the planned limits could have been somewhat higher than proposed, in order to provide additional flexibility.
Some respondents highlighted significant ongoing changes to the regulatory and market environment for high quality assets, affecting both the demand for and supply of such assets.
“Against this background, it was seen as important that the Bank of Canada continues to monitor these developments and ensure that its collateral policy remains flexible and supportive,” said the bank.
“Finally, many of the consultation participants emphasized the importance of the Bank of Canada continuing to provide flexibility in terms of collateral eligibility during any periods of significant market stress.”
On 5 September 2013, the bank announced planned changes to concentration limits for private sector and municipal securities in relation to assets eligible as collateral under the Bank of Canada’s standing liquidity facility (SLF). Prior to finalising these planned changes, the bank invited comments from other market participants.
The Bank of Canada is now announcing that the following changes to its SLF policy will be implemented:
All eligible securities issued by a municipal government or a private sector issuer (including corporate bonds, covered bonds, bankers’ acceptances, commercial paper, and asset-backed commercial paper) will be subject to a new sectoral concentration limit.
No more than 20 per cent of the total collateral value pledged by an institution may be comprised of such municipal and private sector securities.
Securities issued by LVTS participants or related parties (including covered bonds, but excluding ABCP sponsored by an LVTS participant) will be subject to a sectoral concentration limit of 10 per cent of the total collateral value pledged by an institution, and included as part of the overall municipal and private sector limit above.
Obligations of a single private sector or municipal issuer or related parties (including covered bonds) will be limited to no more than 5 per cent of the total collateral value pledged by an institution.
There will be an approximate 6 month transition period, ending on September 30 2014, for LVTS participants to make any adjustments to their collateral management practices required to comply with the updated policy.
Overall, the planned tightening of concentration limits for private sector and municipal securities was seen as being well founded from a risk management perspective, said a statement from the bank.
It added the caveat that some participants did state that the planned limits could have been somewhat higher than proposed, in order to provide additional flexibility.
Some respondents highlighted significant ongoing changes to the regulatory and market environment for high quality assets, affecting both the demand for and supply of such assets.
“Against this background, it was seen as important that the Bank of Canada continues to monitor these developments and ensure that its collateral policy remains flexible and supportive,” said the bank.
“Finally, many of the consultation participants emphasized the importance of the Bank of Canada continuing to provide flexibility in terms of collateral eligibility during any periods of significant market stress.”
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