Office of the Superintendent of Financial Institutions
Subsection 485(1) and 949(1) of the Bank Act (BA) and subsection 473(1) of the Trust and Loan Companies Act (TLCA) require banks, bank holding companies and trust and loan companies, respectively, to maintain adequate and appropriate forms of liquidity.
The LAR Guideline is not made pursuant to subsection 485(2) or 949(2) of the BA or subsection 473(2) of the TLCA. However, the liquidity metrics set out in this guideline provide the framework within which the Superintendent assesses whether a bank, a bank holding company or a trust and loan company maintains adequate liquidity pursuant to the Acts. For this purpose, the Superintendent has established two minimum standards: the Liquidity Coverage Ratio (LCR) and the Net Stable Funding Ratio (NSFR). These standards – in conjunction with additional liquidity metrics where OSFI reserves the right to apply supervisory requirements as needed, including the net cumulative cash flow (NCCF), the liquidity monitoring tools and the intraday liquidity monitoring tools – when assessed as a package, provide an overall perspective of the liquidity adequacy of an institution. The LAR Guideline should be read together with the Basel Committee on Banking Supervision's (BCBS) Principles for Sound Liquidity Risk Management and Supervision and OSFI's Guideline B-6: Liquidity Principles. As such, OSFI will conduct detailed supervisory assessments of both the quantitative and qualitative aspects of an institution's liquidity risk, as presented in the LAR Guideline and Guideline B-6, respectively. Notwithstanding that a bank, a bank holding company or a trust and loan company may meet the aforementioned standards, the Superintendent may by order direct a bank or bank holding company to take actions to improve its liquidity under subsection 485(3) or 949(3), respectively, of the BA or a trust and loan company to take actions to improve its liquidity under subsection 473(3) of the TLCA.
OSFI, as a member of the BCBS, participated in the development of the international liquidity framework, including Basel III: The Liquidity Coverage Ratio and liquidity risk monitoring tools (January 2013), Basel III: the Net Stable Funding Ratio (October 2014) and Monitoring tools for intraday liquidity management (April 2013). This domestic guidance is based on the Basel III framework, supplemented to include additional OSFI-designed measures to assess the liquidity adequacy of an institution.
Where relevant, the Basel III paragraph numbers are provided in square brackets at the end of each paragraph referencing material from the Basel III framework. Some chapters include boxed-in text (called OSFI Notes) that set out how certain requirements are to be implemented by Canadian banks, bank holding companies and trust and loan companies, collectively referred to as 'institutions'.
The Liquidity Adequacy Requirements (LAR) for banks, bank holding companies and trust and loan companies are set out in six chapters, each of which has been issued as a separate document. This document, which contains Chapter 6 – Intraday Liquidity Monitoring Tools, should be read together with the other LAR chapters which include:
The scope of application for the intraday liquidity monitoring tools will be limited to OSFI-regulated direct clearers only. At this point in time, this chapter is a placeholder for the intraday liquidity monitoring tools as OSFI will not require such institutions provide such information via regulatory reporting beginning in January 2015. OSFI will continue to review the applicable implementation date for these metrics – which will be, at latest, January 1, 2017 – and will discuss the proposed timing of rollout with affected institutions in advance of taking a final decision.
OSFI, as supervisor of the institutions subject to the Liquidity Adequacy Requirements Guideline, and the Bank of Canada, as overseers of the Canadian payment and settlement system, will, collectively, be responsible for administering the package of intraday liquidity monitoring tools. Per footnote 8, discussions between the agencies will occur, in due course, related to which specific intraday monitoring tools will be collected and utilized by each agency. Until such time as additional clarity is brought forward, all references to the term ‘supervisors’ from this paragraph on in this chapter should be read to mean OSFI and the Bank of Canada.
(i) Daily maximum intraday liquidity usage
(ii) Available intraday liquidity at the start of the business day
(iii) Total payments
(iv) Time-specific obligations
(i) Value of payments made on behalf of correspondent banking customersFootnote 16
(ii) Intraday credit lines extended to customersFootnote 18
(i) Intraday throughput
(i) Own financial stress: an institution suffers, or is perceived to be suffering from, a stress event
(ii) Counterparty stress: a major counterparty suffers an intraday stress event which prevents it from making payments
(iii) A customer bank’s stress: a customer bank of a correspondent bank suffers a stress event
(iv) Market-wide credit or liquidity stress
(iii) Organisational structure
(iv) Responsibility of home and host supervisors
For a branch operation
For a subsidiary active in a non-domestic LVPS and/or correspondent bank(s)
The following example illustrates how the tools would operate for an institution on a particular business day. Assume that on the given day, the institution’s payment profile and liquidity usage is as follows:
Details of the institution’s payment profile are as followings:
A(i) Daily maximum liquidity usage:
A(ii) Available intraday liquidity at the start of the business day:
A(iii) Total payments:
A(iv) Time-specific obligations:
B(i) Value of payments made on behalf of correspondent banking customers:
B(ii) Intraday credit line extended to customers:
C(i) Intraday throughput
Details of the institution’s payment profile are as followings:
A(i) Daily maximum intraday liquidity usage:
A(iii) Total payments:
A(iv) Time-specific obligations:
[BCBS April 2013, Annex 1]
The following is a non-exhaustive set of examples which illustrate how the tools could be used in different combinations by supervisors to assess an institution’s resilience to intraday liquidity risk:
(1) Time-specific obligations relative to total payments and available intraday liquidity at the start of the business day
If a high proportion of an institution’s payment activity is time critical, the institution has less flexibility to deal with unexpected shocks by managing its payment flows, especially when its amount of available intraday liquidity at the start of the business day is typically low. In such circumstances the supervisor might expect the institution to have adequate risk management arrangements in place or to hold a higher proportion of unencumbered assets to mitigate this risk.
(2) Available intraday liquidity at the start of the business day relative to the impact of intraday stresses on the institution’s daily liquidity usage
If the impact of an intraday liquidity stress on an institution’s daily liquidity usage is large relative to its available intraday liquidity at the start of the business day, it suggests that the institution may struggle to settle payments in a timely manner in conditions of stress.
(3) Relationship between daily maximum liquidity usage, available intraday liquidity at the start of the business day and the time-specific obligations
If an institution misses its time-specific obligations, it could have a significant impact on other institutions. If it were demonstrated that the institution’s daily liquidity usage was high and the lowest amount of available intraday liquidity at the start of the business day were close to zero, it might suggest that the institution is managing its payment flows with an insufficient pool of liquid assets.
(4) Total payments and value of payments made on behalf of correspondent banking customers
If a large proportion of an institution’s total payment activity is made by a correspondent bank on behalf of its customers and, depending on the type of the credit lines extended, the correspondent bank could be more vulnerable to a stress experienced by a customer. The supervisor may wish to understand how this risk is being mitigated by the correspondent bank.
(5) Intraday throughput and daily liquidity usage
If an institution starts to defer its payments and this coincides with a reduction in its liquidity usage (as measured by its largest positive net cumulative position), the supervisor may wish to establish whether the institution has taken a strategic decision to delay payments to reduce its usage of intraday liquidity. This behavioural change might also be of interest to the overseers given the potential knock-on implications to other participants in the LVPS.
[BCBS April 2013, Annex 3]
Following the format: [BCBS April 2013, para x]
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The CPSS serves as a forum for central banks to monitor and analyse developments in payment and settlement arrangements as well as in cross-border and multicurrency settlement schemes. It consists of senior officials responsible for payment and settlement systems in central banks.
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Where reference is made in this paper to payment and settlement systems, the term is understood to encompass payment systems and clearing and settlement systems for securities and derivatives (including central counterparties).
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‘Direct participant’ means a participant in a large-value payment system that can settle transactions without using an intermediary. If not a direct participant, a participant will need to use the services of a direct participant (a correspondent bank) to perform particular settlements on its behalf. Institutions can be a direct participant in a large-value payment system while using a correspondent bank to settle particular payments, for example, payments for an ancillary system.
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An LVPS is a funds transfer system that typically handles large-value and high-priority payments. In contrast to retail payment systems, many LVPSs are operated by central banks, using a real-time gross settlement (RTGS) or equivalent mechanism.
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As agreed by national authorities in a particular jurisdiction, the monitoring data may be collected by a relevant domestic oversight authority (e.g. payments system overseer) instead of the banking supervisor.
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See CPSS: A glossary of terms used in payments and settlements systems, March 2003.
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Not all elements will be relevant to all reporting institutions as intraday liquidity profiles will differ between institutions (e.g. whether they access payment and settlement systems directly or indirectly or whether they provide correspondent banking services and intraday credit facilities to other institutions, etc.).
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Ancillary systems include other payment systems such as retail payment systems, CLS, securities settlement systems and central counterparties.
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Although uncommitted credit lines can be withdrawn in times of stress (see stress scenario (i) in Section 6.3), such lines are an available source of intraday liquidity in normal times.
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Some securities settlement systems offer self-collateralisation facilities in co-operation with the central bank. Through these, participants can automatically post incoming securities from the settlement process as collateral at the central bank to obtain liquidity to fund their securities settlement systems’ obligations. In these cases, intraday liquidity usages are only those related to the haircut applied by the central bank.
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For the calculation of the net cumulative position, “payments received” do not include funds obtained through central bank intraday liquidity facilities.
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These obligations include, for example, those for which there is a time-specific intraday deadline, those required to settle positions in other payment and settlement systems, those related to market activities (such as the delivery or return of money market transactions or margin payments), and other payments critical to an institution’s business or reputation (see footnote 10 of the BCBS Sound Principles). Examples include the settlement of obligations in ancillary systems, CLS pay-ins or the return of overnight loans. Payments made to meet the throughput guidelines are not considered time-specific obligations for the purpose of this tool.
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The term ‘customers’ includes all entities for which the correspondent bank provides correspondent banking services.
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Paragraph 79 of the BCBS Sound Principles states that: “[T]he level of a bank’s gross cash inflows and outflows may be uncertain, in part because those flows may reflect the activities of its customers, especially where the bank provides correspondent or custodian services.”
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Not all elements will be relevant to all reporting institutions as intraday liquidity profiles will differ between institutions (e.g. whether they access payment and settlement systems directly or indirectly or whether they provide correspondent banking services and intraday credit facilities to other institutions, etc.)
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The figure to be reported for the three largest intraday credit lines extended to customers should include uncommitted and unsecured lines. This disclosure does not change the legal nature of these credit lines.
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It should be noted that some jurisdictions already have throughput rules or guidelines in place. For example, in the case of Canada’s LVTS, the Canadian Payments Association (CPA) recommends that LVTS participants abide by the following daily throughput guidelines: 25% of daily transaction value and 40% of daily transaction volume should be completed by 10:00 hours Eastern time (ET), 60% of both aggregate volume and value should be completed by 13:00 hours ET, and 80% of both aggregate volume and value should be completed by 16:30 hours ET. Note that, although these throughput guidelines are not mandatory at this time, the CPA reserves the right to make them mandatory if participants do not appear to be abiding by them.
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Institutions are encouraged to consider reverse stress scenarios and other stress testing scenarios as appropriate (for example, the impact of natural disasters, currency crisis, etc.). In addition, institutions should use these stress testing scenarios to inform their intraday liquidity risk tolerance and contingency funding plans.
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A direct intraday liquidity bridge is a technical functionality built into two or more LVPS that allows banks to make transfers directly from one system to the other intraday.
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As an indicative threshold, supervisors may consider that a currency is considered “significant” if the aggregate liabilities denominated in that currency amount to 5% or more of the institution's total liabilities.
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Paragraph 145 of the BCBS Sound Principles states that “the host supervisor needs to understand how the liquidity profile of the group contributes to risks to the entity in its jurisdiction, while the home supervisor requires information on material risks a foreign branch or subsidiary poses to the banking group as a whole.”
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