Interest Rate Risk (I3)

Interest rate risk and maturities matching return

Purpose

To provide information regarding the sensitivity Highlighted textof on and Highlighted textoff balance sheet items to changes in interest rates.

Statutory

Section 628 of the Bank Act and Section 495 of the Trust and Loan Companies Act.

Application

This return applies to all Banks and Trust and Loan Companies. Foreign bank branches are not required to submit this return.

Publication

Information from this return is not published.

Frequency

• Institutions with fiscal year-ends of October - Quarterly - January, April, July and October
• Institutions with fiscal year-ends of December - Quarterly - March, June, September and December

Contact person

Provide the name and phone number of the person to contact regarding any questions about this return.

Reporting dates

The return is to be completed as of the last day of each quarter and submitted within 45 days of the reporting date as follows:

• Institutions with fiscal year-ends of October - January, April, July and October
• Institutions with fiscal year-ends of December - March, June, September and December

Contact agency

OSFI.

General instructions

This return provides the Superintendent's Office, CDIC and the Bank of Canada with information on the sensitivity of Highlighted texton and off-balance sheet exposures to changes in market interest rates. The return includes only those Highlighted textoff-balance sheet transactions that are put into place as hedges of items not included in the trading account, Highlighted textas well as any outstanding loan commitments. All other interest sensitive Highlighted textoff-balance sheet transactions are included in the market risk schedule ("Schedule 42 – Minimum Capital Required for Market Risk") of the BCAR return for the trading business of the consolidated institution.

The repricing/matching information will allow for analysis of potential changes in net interest income and economic value at risk from adverse movements in interest rates. The information will also provide a basis for calculating measures of interest rate risk agreed upon by the Basel Committee of Bank Supervisors.

Highlighted textAmounts should be reported in thousands of equivalent Canadian dollars. Highlighted textInstitutions reporting in millions of dollars should add three zeros to the figures entered in the reporting forms. Complete separate worksheets for:

• Highlighted textConsolidated – mandatory requirement; sum of data reported in the CAD, USD, other foreign currency
• Highlighted textCanadian dollars – mandatory requirement; Canadian dollars only
• Highlighted textUS dollars – to be reported if this represents 5% or more of total banking book assets or liabilities
• Highlighted textOther foreign currencies – to be reported if the aggregate of these represent more than 5% of total banking book assets or liabilities; and then of which any individual foreign currency which represents 1% or more of total banking book assets or liabilities are to be aggregated and included here.

Highlighted textInstitutions must report on-balance sheet and off-balance sheet exposures for the banking book, excluding the trading book; therefore, it is not reconcilable to the General Ledger. However, the scope of the return should be aligned with OSFI Guideline B-12 ("Interest Rate Risk Management") and the institution's definition of banking book. Assets and liabilities related to life insurance subsidiaries, as well as company defined benefit pension plans, are also to be excluded from this return. The detailed instructions for the Consolidated Monthly Balance Sheet (M4) will provide additional information in determining the most appropriate asset or liability line used in this return.

Include in each time band the total amount of assets (gross of provisions), liabilities or Highlighted textoff-balance sheet items that will become subject to repricing or maturity in that particular period (flow approach). Amounts should be slotted into time bands according to the earlier of the next interest rate reset date or final maturity except for floating rate instruments; that is, instruments that reprice immediately upon a change in interest rates (e.g. prime + x%) which are reported in the time band designated as such.

The repricing/maturity date should be determined by referring to the contractual repricing time of every financial instrument, Highlighted textexcluding management or business assumptions except where specified otherwise. Highlighted textThere are separate lines to report modelled assumptions where there are rights for prepayments (loans) or early redemptions (fixed term deposits).

Credit Impaired Assets are to be reported in the Non-Rate Sensitive category gross of the Allowance for Expected Credit Losses. The Allowance for Expected Credit Losses is to be reported in the Non-Rate Sensitive category.

Assets

Highlighted text1. On Balance Sheet Assets

Amounts should be slotted into time bands according to the earliest of the next interest rate reset date, final maturity (flow approach) or floating-rate (immediate repricing) band if applicable.

(a) Cash

Report amounts in the non-rate sensitive column.

(b) Deposits with Regulated Financial Institutions

Report amounts in the appropriate time band.

(c) Securities

(i) Equities

Common shares are reported in the non-rate sensitive column. Preferred shares that pay a fixed or floating rate are reported according to the earliest of repricing date and final maturity. Investments in perpetual preferred shares paying other than a floating rate should be reported in the over Highlighted text10 years column.

Highlighted text(ii) Fixed Income

The appropriate time band for callable bonds is determined with reference to maturity, call price and current price.

For example: a 10 year bond with a market price of 102, a call price of 101 in 3 years and 102 in 6 years would be slotted in the 5 to Texte surligné6 year time band.

Instruments that are convertible, at a stated price, into common shares are included in the time band structure where the instrument trades like a debt security. Where the instrument begins to trade like an equity, it should be reported in the "non-rate sensitive" column.

Highlighted text(iii) Other

Texte surlignéAny security which is not captured in 1(c)(i) or 1(c)(ii).

(d) Non-Mortgage Loans

(i) Governments and Regulated Financial Institutions

Report all loans to governments and regulated financial institutions.

(ii) Lease Receivables

Report all lease receivables (consumer and commercial).

(iii) Individuals for Non-Business Purposes (Consumer)

Report all personal plan loans and credit card balances. Residential mortgages are not included under consumer loans but are reported separately in line Highlighted text1(e)(i). Personal plan loans are to be slotted into the time bands corresponding to scheduled repayments of principal.

Credit card loans are to be allocated between the 1-3 month and the "non-rate sensitive" time bands. Amounts included in the 1-3 month time band represent the percent of the volume of credit card balances that remains outstanding from quarter to quarter. The amount slotted into the non-rate sensitive band is the percentage of credit card balances that are paid when due and therefore represent an interest-free loan to customers. The split of credit card balances is to be a fixed percentage based on historical experience in the portfolio.

(iv) Individuals and Others for Business Purposes (Commercial)

Report all other non-mortgage loans to individuals and others for business purposes.

(v) Other

Report all other non-mortgage loans not included in lines 2(d)(i) and (iv).

(vi) Expected Prepayments

Highlighted textThe Expected Prepayments line is to report how modelling assumptions for loan prepayments, which are independent of changes in interest rates and consistent with the estimates made by the institutions internal systems, will impact the cash flows from loans.

Highlighted textLine 24 is to report the difference (+ or -) between the adjusted non-mortgage loan repayment schedule (including prepayment assumptions), and the contractual repayment schedule, within each time bucket. The scope of line 24 will include the impacts from all non-mortgage loans which are reported in lines 19 to 23.

Highlighted textAs an example shown below, the expected prepayments from all non-mortgage loans with a contractual maturity of 3+ years will reduce Year 3 cash flows by $300 (negative), and increase the cash flows in preceding time buckets by the same amount (positive), allocated to the time bucket by how the institution has modelled these cash flows. The same process is to be taken for each time bucket, where contractual loans are reduced by the expected prepayment, but also offset by any expected prepayments being made in that time bucket from future contractual loan balances. All balances in line 24 will net out to zero.

Highlighted textPlease note that the time buckets in the example below have been condensed for simplification.

Highlighted textWhere accelerated payments are known, for example where a customer has requested an accelerated payment schedule, these should not be considered as modelled assumptions, and included in the time bucket(s) associated with the known payment schedule.

(e) Mortgages

Mortgage loans are to be slotted into the time bands corresponding to the next interest rate reset date and scheduled repayments of principal before the next reset of the contractual interest rate.

(i) Residential

Report all mortgage loans secured by real property consisting of buildings that are used, or are to be used, to the extent of at least one-half of the floor space thereof, as one or more private dwellings.

(ii) Non-Residential

Report all mortgages not included in line 2(e)(i).

Highlighted text(iii) Expected Prepayments

Highlighted textThe Expected Prepayments line is to report how modelling assumptions for loan prepayments, which are independent of changes in interest rates and consistent with the estimates made by the institutions internal systems, will impact the cash flows from loans.

Highlighted textLine 28 is to report the difference (+ or -) between the adjusted mortgage loan repayment schedule (including prepayment assumptions), and the contractual repayment schedule, within each time bucket. The scope of line 28 will include the impacts from all mortgage loans which are reported in lines 26 and 27.

Highlighted textFor additional information, please refer to the example provided in 1(d)(vi) above.

(f) Other Assets

Report all assets not included in lines 1 (a) to (e).

Assets that are non-interest bearing should be reported in the non-rate sensitive column, such as non-interest bearing deposits with the Bank of Canada, acceptances, accrued interest receivable, prepaid expenses, items in transit.

(g) Allowance for Expected Credit Losses

Report the Allowance for Expected Credit Losses related to the assets reported in lines 1(b) to (f) in the Non-Rate Sensitive column.

Total Assets

Sum of lines Highlighted text1(a) to (g).

Liabilities and equity

Highlighted text2. On Balance Sheet Liabilities and Equity

(a) Deposits

(i) Personal Demand/Notice

Highlighted textA) Interest Bearing - Report the interest bearing deposits according to their interest rate sensitivity, where the rate sensitive portion is reported in the floating/overnight bucket, and the remainder (non-rate sensitive) according to the assumed maturity profile for hedge purposes. For clarity, interest rate sensitivity pertains to how responsive the depositors are to deposit repricing or competitive offering in determining whether to maintain their deposit balances with the institution.

Highlighted textB) Non-Interest Bearing - Report the non-interest bearing deposits which are considered core in the time bucket according to the assumed maturity profile for hedge purposes. All remaining balances are to be reported in the floating rate column.

Highlighted textInstitutions which do not have the designation of domestic systemically important banks (D-SIBs) may take a conservative approach when applying non-maturity duration, by including these into an overnight profile. However, OSFI reserves the right to require any institution to report non-maturity deposit duration based on (A) and (B) above, depending on the size, complexity, and business model of the institution.

(ii) Personal Fixed Term

Report all personal fixed-term deposits Highlighted textin the time bucket corresponding to the earlier of repricing or maturity dates.

(iii) Non-Personal Demand/Notice

Report all non-personal demand and notice deposits, such as groups, associations, banks, etc., Highlighted textusing the same reporting methodology as 2(a)(i) above.

(iv) Non-Personal Fixed Term

Report all non-personal fixed-term deposits Highlighted textin the time bucket corresponding to the earlier of re-pricing or maturity dates.

Highlighted text(v) Expected Early Redemptions

Highlighted textThe Expected Early Redemptions line is to report how modelling assumptions for early redemptions, which are independent of changes in interest rates and consistent with the estimates made by the institutions internal systems, will impact the cash flows from fixed term deposits.

Highlighted textLine 43 is to report the difference (+ or -) between the adjusted maturity schedule (including early redemption assumptions), and the contractual maturity of fixed term deposits, within each time bucket. The scope of line 43 will include the impacts from fixed term deposits which are reported in lines 38 and 42.

Highlighted textPlease refer to the example in 1(d)(vi) above, replacing expected prepayments with expected early redemptions.

(b) Other Liabilities

Report all other liabilities other than subordinated debentures not reported in line Highlighted text2(b).

(c) Debentures and Subordinated Debt

Report subordinated debentures and subordinated debt issued by the institution and its consolidated subsidiaries.

(d) Equity

Report only fixed and floating rate preferred shares in the time bands from the floating rate to over Highlighted text10 years. Common shares and retained earnings are reported in the non-rate sensitive column. Common equity is to be reported in Canadian dollars only and is not to be notionally allocated to foreign currency repricing ladders. Perpetual preferred shares issued by the reporting institution and paying other than a floating rate should be classified in the earlier of the time band corresponding to the call date (if applicable) and non-rate sensitive.

Total Liabilities and Equity

Sum of lines Highlighted text2(a) to 2(d)

3. Excess (Deficit) of Assets Over Liabilities and Equity

Subtract Total Liabilities and Equity from Total Assets.

Highlighted textOff-balance sheet

4. Hedges of Investment Account

Long positions represent all positions where the institution stands to benefit from either an increase in the price of the asset or a wider margin of interest income if interest rates fall. Conversely, short positions represent all positions where the institution stands to benefit from either a fall in the price of an asset or a wider margin of interest income if interest rates rise.

Short positions should be filled in with a negative (-) sign and long positions with no sign (i.e. left blank).

This section includes all Highlighted textoff-balance sheet instruments hedging the non-trading account balance sheet items and thereby affecting the interest rate risk structure of the institution.

Institutions' involvement in Highlighted textoff-balance sheet contracts should be presented in the time bands based on the nominal value of the underlying principal of the contract.

(a) FRAs/Futures

The repricing profile of positions in Forward Rate Agreements and Futures should reflect the time-period over which interest rates are fixed by the contract. Futures and FRAs will be treated as a combination of two positions, one long and one short. The positions will be taken to be (i) the period starting with delivery or exercise of the contract, plus the life of the underlying security and (ii) the date of delivery or exercise of the contract. Amounts should be placed into the maturity/repricing ladder based on the face value of the underlying instrument.

For example, for a reporting date in April, a purchase of one (1) June three-month bankers acceptance futures (BAX) will be reported as:

• a long position five months from now; and
• a short position two months from now.

(b) and (c) Swaps

Interest rate swaps should be segregated into assets and liabilities, reflecting the long and short position based on the next interest rate adjustment date, or for the fixed rate leg of the swap, its maturity. Therefore, both sides of the swap should be reported on the time-band ladder.

For example, an interest rate swap (liability) based on a notional principal of $1,000,000 under which a reporting institution receives a floating rate (e.g. the 30 day BA rate) and pays a 2 year fixed rate of interest will be treated as:

• a long position in a floating rate instrument of maturity equivalent to the period until the next interest rate fixing (report in the "receive floating" category);
• a short position in a fixed rate instrument of maturity equivalent to the maturity of the swap (report in the "pay fixed" category).

SWAP ASSETS:

• Receive Fixed (Long)
• Pay Floating (Short)

SWAP LIABILITIES:

• Pay Fixed (Short)
• Receive Floating (Long)

(d) Other

Include forward foreign exchange contracts hedging internal swapped deposits using two entries according to the maturity of individual contracts and the two currencies involved, Highlighted textalthough taking consideration currency-specific materiality thresholds as defined in the General Instructions.

For example, a $1,250,000 one year fixed rate Canadian dollar loan funded by a swapped 6 month 1,000,000 U.S. dollar deposit hedged by a contract to sell Canadian dollars 6 months forward would be slotted as a short 3-6 month position in Canadian dollars and a long 3-6 month position in U.S. dollars.

5. Excess (Deficit) of Assets over Liabilities and Equity Adjusted for the Net Effect of Highlighted textOff-Balance Sheet Hedges

Sum of lines 3 and 4(a) to (d).

Memo Items

Highlighted text6. Loan Commitments

Highlighted textReport the notional amount of fixed-rate loan commitments (mortgage and non-mortgage) issued by the bank and currently outstanding. These should be reported in the time bucket which represents the contractual expiry of the commitment.

Highlighted text7. Explicit Interest Rate Options in the Banking Book

Highlighted textThis section is to include only traded (explicit) interest rate options. Notional of the option refers to the sum of the notional amounts of the underlying, by interest rate option types (purchased or written) for the appropriate currency. Option value refers to the current value at which the interest rate option is included in the official consolidated financial statements (balance sheet) in Canadian dollar equivalent.

(1) Purchased Options

Explicit purchased interest rate options to be included are:

• bought floors
• bought caps
• bought swaptions (receiver and payer).

(2) Written Options

Explicit written interest rate options to be included are:

• sold floors
• sold caps
• sold swaptions (receiver and payer).

8. Internal Management Stress Testing

Institutions are to simulate the impact on Net Highlighted textInterest Income (NII) and Economic Value of Net Assets (EVE) before tax arising from Highlighted texton-balance sheet and off-balance sheet items given Highlighted texta 1% (100 basis points interest rate shock. The amounts reported on lines 8(a) to (d) are to be based on the institutions' own-estimate interest rate sensitivity positions as at the reporting date. Own-estimate sensitivities are to assume an immediate and sustained parallel change in interest rates across all maturities over the next twelve months, that no additional hedging is undertaken, and that all Highlighted texton-balance sheet and off-balance sheet items reprice by the interest rate shocks.

Highlighted textInstitutions are to report the amount for both a 1% increase and decrease in interest rates.

Highlighted textThis section does not apply to the foreign currency worksheet.

Highlighted text9. Guideline B-12 – Annex 1 Scenarios

Highlighted textInstitutions are to apply OSFI Guideline B-12's six prescribed interest rate shock scenarios to capture parallel and non-parallel gap risks for EVE and two prescribed interest rate shock scenarios for NII, for the consolidated, CAD, and US worksheet (if materiality thresholds are met). Institutions are not required to report the scenario results on the foreign currency worksheet.

Highlighted textThe EVE amounts reported on lines 9(c) to (h) are to be expressed in present value terms. In order to accommodate heterogeneous economic environments across jurisdictions, the shock scenarios reflect currency-specific absolute shocks as specified in Table 1 in OSFI Guideline B-12.^{Footnote 1}

• Highlighted textParallel shock up;
• Highlighted textParallel shock down;
• Highlighted textSteepener shock (short rates down and long rates up);
• Highlighted textFlattener shock (short rates up and long rates down);
• Highlighted textShort rates shock up; and
• Highlighted textShort rates shock down

Institutions are to simulate the shocks independent of each other.