Office of the Superintendent of Financial Institutions
This guideline sets out prudential considerations relating to the lending
of securities by federally regulated Canadian-incorporated life insurance
companies ("companies"). Securities under the control of Chief Agents of
Canadian branches of foreign insurance companies can be used in securities
lending programs but securities vested in trust by branches are not
available for securities lending.
Please refer to OSFI’s Corporate Governance Guideline for OSFI’s expectations of companies’ Boards of Directors in regards to operational, business, risk and crisis management policies.
Traditionally, security loans have been short-term transactions designed
to assist the liquidity of securities markets by enabling dealers/brokers
to cover failed deliveries or short sales. However, some security loans
may also have been undertaken for longer terms in which liquidity is a
secondary consideration. Companies should be fully cognizant of the
additional risks stemming from such longer-term transactions and should
ensure that they have the systems and controls in place to identify and
control these risks.
Companies should ensure that securities lending activities are conducted
in a safe and prudent manner and they should seek appropriate professional
advice to ensure that controls and procedures are comprehensive and sound.
Companies should at all times hold adequate collateral to protect
themselves against the risks associated with securities lending.
The amount of collateral taken for securities lending should reflect best
practices in local markets. In Canada, the current market practice is to
obtain collateral of at least 102Footnote 1 per cent of the market value of the securities lent. Management is
expected to ensure that the margin of collateral in excess of market value
of securities lent is appropriate at all times. This margin should provide
adequate protection against volatility and liquidity problems that may
arise for securities lent and for securities held as collateral. Both
loaned and collateral securities should be "marked to market" at least
daily. Shortfalls in the amount of collateral should be rectified
A company's policy on acceptable collateral should be consistent with the company's overall investment policies. Accordingly, companies should only take securities as collateral that are acceptable as a direct investment.
For securities lending within North America, eligible collateral should be
readily marketable and would normally be restricted to the following
assets, denominated in Canadian or U.S. dollars:
widely-traded debt instruments having a rating of single A (or the
equivalent) or higher from a recognized, widely followed North
American credit rating agency;
commercial paper rated A-1 or R-1 or the equivalent by a recognized,
widely followed North American credit rating agency;
acceptances of banks and trust and loan companies whose short-term
deposits are rated A-1 or R-1 or the equivalent by a recognized,
widely followed North American credit rating agency; and
high quality common and preferred shares.
Eligible collateral also includes:
unconditional, irrevocable letters of credit that comply with the
standards of the International Chamber of Commerce and which are
issued by banks and trust and loan companies whose short-term deposits
are rated A-1 or R-1 or the equivalent by a recognized, widely
followed North American credit rating agency; and
unconditional and irrevocable guarantees of banks and trust and loan
companies whose short-term deposits are rated A-1 or R-1 or the
equivalent by a recognized, widely followed North American credit
Convertible preferred shares and convertible debt instruments may be taken
as collateral when they are immediately convertible into the underlying
Securities lending activities in Organization for Economic Co-operation
and Development (OECD) countries other than Canada and the U.S. should be
in accordance with the above criteria, but companies may also accept
collateral denominated in the currency of the country in which the lending
occurs, and debt instruments issued by that country's central government.
Companies should ensure that they have appropriate internal controls,
procedures and records in place. Controls should include a list of
approved borrowers, consistent with the company's lending policies, that
are based on generally accepted credit worthiness standards with specified
lending limits for each borrower. The list should be:
available at all times to the personnel responsible for administering
the securities lending program; and
reviewed regularly by appropriate senior management.
The company's senior management should periodically review and approve:
the general credit worthiness standards used in establishing the list of approved borrowers which should be consistent with the company's overall lending policies; and
overall and individual securities lending limits; these limits should take into account other exposures.
External or internal auditors should verify at appropriate intervals:
that the list of borrowers conforms to established criteria;
that securities accepted as collateral are consistent with the overall investment policies of the company; and
the existence of securities lent and taken as collateral
A designated senior manager of the company should receive regular,
comprehensive and timely reports summarizing the company's securities
lending activities to allow the manager to judge whether the activities
are being properly administered.
A company may employ an agent for the administration of its securities lending program. The agent selected should be an institution that can demonstrate an ability to perform the required duties in a competent and responsible manner. Administrative and reporting arrangements satisfactory to the company should be clearly set out and agreed to in writing.
A company should enter into a legally binding master agreement with each
borrower establishing the basis for all security loans between the two
parties. When an agent is involved, there should be a master agreement
between the company and agent as well as a master agreement between
borrower and agent. The agreement(s) should set out the rights and
obligations of all parties including the right to immediate set-off for
the company (or agent acting for the company) in the event of the
borrower's failure to return the securities as specified in contractual
Companies should ensure that they are in compliance with applicable Protection of Assets Regulations.
Revised in April 2007 from 105%
to reflect current market practice at that time. Since this figure is
subject to local market conditions, it fluctuates over time. As such,
institutions are expected to monitor current market practice and adjust
their policies to at least meet current market practice.
Return to footnote 1 referrer