Bank of Canada announces changes to its Standing Liquidity facility Collateral Policy
To provide support for the upcoming introduction of the Lynx payment system, the Bank of Canada is announcing changes to the Standing Liquidity Facility (SLF) Collateral Policy that will be effective July 26, 2021. These changes will ensure Lynx participants1 have access to a broad set of collateral that will help them appropriately manage their liquidity requirements under Lynx and facilitate a smooth transition to this new payment system.
The changes to the policy are as follows:
- certain USD-denominated securities are being added to the list of eligible collateral, including securities issued or guaranteed by Canadian and provincial governments, eligible Other Public Sector securities, and covered bonds registered with the Covered Bond Registrar;
- participants are now permitted to request a same-day non-mortgage loan portfolio concentration limit increase to accommodate their liquidity needs for extremely large and/or critical payment flows, and
- as part of the ongoing review of the SLF Collateral Policy, the Bank has revised the margin requirements and some maturity buckets applied to securities accepted as SLF collateral.
In setting its policy for the Assets Eligible as Collateral under the Bank of Canada’s Standing Liquidity Facility, the Bank manages its own risks and considers the implications for market functioning and the broader impacts on the financial system. In determining margin requirements, the Bank takes a “through-the-cycle” approach, looking at historical pricing volatility and liquidity over a full market cycle.
In addition to these changes, to give institutions greater flexibility in managing their collateral, the Bank of Canada will temporarily increase the non-mortgage loan portfolio (NMLP) concentration limit to 40% for a period of three months beginning just prior to the commencement of Lynx. After the three-month period, the concentration limit will be reduced by 5% per month until it reaches 20%.
This temporary increase in the NMLP will allow Lynx participants who use their NMLP to hold up to 60% of their pledged collateral in asset-types that are subject to concentration limits.2 As such, Lynx participants who do not use their NMLP will be temporarily permitted to hold up to 60% of pledged collateral in securities that are subject to concentration limits (currently limited to 40%). After the three-month period, this limit will also be reduced by 5% per month until it reaches 40%.
The updated list of Assets Eligible as Collateral under the Bank of Canada’s Standing Liquidity Facility, including the updated margin requirements, is available on the Bank of Canada website.
Bank of Canada