Interbank and Major Exposures Return (EB/ET)

Summary of key updates by section

• Deletion:
  • Items (iii) and (iv) under Purpose
  • Memo Items Section

Return files

Book value return - EB (XLSX, 52.79 KB) Change control log (Interbank and Major Exposures Return) Trading value return - ET (XLSX, 52.85 KB) Validation rules - EB (XLSX, 48.68 KB) Validation rules - ET (XLSX, 48.13 KB)

Purpose

The purpose of this return is to provide (on a consolidated basis):

• detailed information on interconnections among the 6 Canadian banks completing this return in terms of counterparty credit exposures.
• total exposures, by category of exposure, to other resident financial institutions, to non-resident financial institutions in the following locations: United States, United Kingdom, Other European Countries and the Rest of the world, and exposures from reverse repurchase agreements and other exposure categories that may be subject to clearing houses.

The required information is to be used by the Office of the Superintendent of Financial Institutions and the Bank of Canada in ongoing current analysis of financial institutions and associated risks to the financial system. The return requires information on both on and off balance-sheet exposures. It requires the separation of the data into different maturity brackets for Canadian dollar, U.S. dollar and other foreign currencies.

Statutory Authority

Sections 628 of the Bank Act.

Application

This return applies to the following banks - Royal Bank of Canada (RBC), Toronto Dominion FinancialGroup (TD), Bank of Nova Scotia (BNS), Bank of Montreal (BMO), Canadian Imperial Bank of Commerce (CIBC) and National Bank of Canada (NBC).

Publication

Information from this return is not published.

Frequency

Monthly (month-end basis)

Contact Person

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

Reporting Dates

The return is to be completed as of the last day of each month and submitted within 30 days of the reporting date.

Contact Agency

Bank of Canada^{Footnote 1}.

Section I - General Instructions

This return should be completed separately for the reporting banks' exposures recorded in the trading book, and those recorded in the banks' banking book.^{Footnote 2} The form of the interbank and major exposures return is identical for all reporting institutions regardless of size and type. Consequently, certain exposure categories may not be applicable to some institutions because of the nature of their operations. Where applicable, the reported amounts are broken down by maturity and by currency.

For each instrument (i.e. category of interbank exposures), reporting institutions are required to report:

• Total amount of exposure to each of the remaining 5 banks. For example, RBC should report its exposures to: Toronto Dominion Financial Group (TD), Bank of Nova Scotia (Scotia Bank), Bank of Montreal (BMO), Canadian Imperial Bank of Commerce (CIBC), and National Bank of Canada (NBC).
• Total amount of exposures to other resident financial institutions (not including the 5 listed banks), excluding clearing houses.
• Total amount of exposures to non-resident institutions in each of the following locations: United States, United Kingdom, other European countries and the Rest of the word, excluding clearing houses.
• The exposure from reverse repurchase agreements and other exposure categories that may be subject to clearing houses, regardless of their residential status.

Where the following instructions indicate that a given instrument includes particular items, the particular items listed do not limit the generality of the heading but indicate the kind of items that are to be reported there. Amounts should be expressed in thousands of Canadian dollar equivalent.

1. Definition of financial institutions

This return makes use of the 1980 Statistics Canada Standard Industrial Classification (SIC) to identify financial institutions as counterparties of the reporting banks. Thesame definition of financial institutions shall apply also to non-resident financial institutions.

• Deposit-taking institutions:
  • Chartered banks that are in Schedule I or II of the Bank Act (see SIC, Division K, Class 7021), and foreign bank branches
  • Credit unions and caisses populaires, trust companies and mortgage loan companies (see SIC, Division K, Classes 7029, 7031, 7041, 7042, 7051, 7052 and 7099).
• Life insurance companies, fraternal benefit societies, property and casualty insurance companies and trustee and other pension plans (see SIC, Division K, Class 7291, 7299 and Groups 731, 732 (non-government) and 733).
• Investment dealers (see SIC, Division K, Group 741) and mutual funds, hedge funds, closed-end funds, mortgage investment companies, real estate investment trusts, sales finance and consumer loan companies and other private financial institutions (such as financial leasing and venture capital companies, see SIC, Division K, Groups 71, 72, (except class 7291 and 7299included above) and Groups 742, 743 and 749).

For banks that use the NAICS classification, financial institutions are those falling into any of the following industry groups:

• Group 522: Credit intermediation and related activities
• Group 523: Securities, commodity contracts, and other financial investment and related activities.
• Group 524: Insurance carriers and related activities.
• Group 526: Funds and other financial vehicles

Exclusions:

Sovereigns (and their central banks), certain public sector entities (PSEs) and multilateral development banks (MDBs) should be excluded as counterparties.

Please refer to the following sections of the "Capital Adequacy Requirements (CAR)" Guideline for the complete exclusion list.

• 3.1.1. Claims on sovereigns
• 3.1.2. Claims on unrated sovereigns
• 3.1.3. Claims on non-central government public sector entities(PSEs), except for (ii) "Claims on the following entities will be treated like claims on corporates"
• 3.1.4. Claims on multilateral development banks (MDBs)

2. Definition of the residential status of counter parties

The treatment of residential status and consolidation level of counterparties for exposures to other reporting banks (RBC, TD, BNS, BMO, CIBC, NBC) is different from the treatment for exposures to all other financial institutions.

Exposures to reporting banks

• For each type of instrument, exposures to each of the other individual reporting banks (RBC, TD, BNS, BMO, CIBC and NBC) are to be reported at the consolidated level of both the lender and the borrower.

Exposures to all other financial institutions

• For each type of instrument, each bank is required to report its consolidated firm-wide exposure to financial institutions other than the individual reporting banks (RBC, TD, BNS, BMO, CIBC and NBC) on the basis of their geographical residence, which is determined by reference to the recorded address (unless the reporting institution knows that the residential status is different from the recorded address). That is to say, reporting banks should report data on these exposures on an immediate borrower basis, i.e. allocated according to the residential status of the immediate counterparty.

Examples of exposure geographical allocation

Example 1

A reporting bank has a deposit with a foreign subsidiary/branch of another reporting bank (BNS) in the United Kingdom.

Treatment: Should be shown as a deposit in the column of the parent bank of the subsidiary/branch (deposit with BNS).

Example 2

A loan is extended from a reporting bank to a subsidiary/branch of a foreign bank (HSBC Canada) operating in Canada.

Treatment: Should be shown as a loan to 'Other resident Financial Institutions' column and not as a loan to the HSBC Canada parent bank (HSBC) which is located in the United Kingdom.

Example 3

A US subsidiary/branch of a reporting bank extends a loan to the US subsidiary of a European bank.

Treatment: Should be shown as a loan to 'Non-Resident Financial Institutions, United States' and not as a loan to other European countries.

Example 4

A branch of a reporting bank that is resident in Ireland has extended a loan to a local Irish bank, which is backed by a guarantee from a bank in the United States.

Treatment: Should be reported as an exposure to a non-resident financial institution in the 'Other European Countries' column, and not as a loan to the United States.

Example 5

There is a $30 million loan by BNS Ireland Limited to a local Ireland Bank, of which $20 million is guaranteed by BNS.

Treatment: The$30 million should be reported as a loan to other European countries.

3. Allowance for expected credit losses

Interbank exposures are to be reported net of specific allowance for expected credit losses or other specific valuation adjustment, if any. All allowances are to be netted from the appropriate exposures in the same currency in which the relevant exposures (related to assets) are denominated, regardless of whether the allowances are booked in Canadian or foreign currency.

4. Definition of instruments' maturity

Maturity refers to the remaining term-to-maturity as specified by the contractual agreement

5. Treatment of collateral

For both Section I and the Memo items, and for the following exposures^{Footnote 3} where applicable, collateral received from counterparties should be subtracted from the exposure amount for the calculation of the "after collateral" or "after CRM".

• Reverse repurchase agreements
• Over-the-Counter (OTC) derivatives

For example, collateral backing an "OTC derivatives" exposure should be deducted directly from the EAD value, instead of adjusting LGD, to generate the corresponding "EAD after CRM" in the memo items.

Section I – Exposures To Big Six Canadian Banks, Other Financial Institutions And Clearing Houses

The reporting institutions are required to provide information on the following seveninter bank exposures categories:

(A) Deposits, less allowance for expected credit losses

This section uses the same definition of deposits as in Section I-Assets of OSFI's Consolidated Balance Sheet (M4) return except for certain items, which should be excluded from (A) (refer to "Excluded" below). In particular, banks are required to report as deposits:

• non-interest-bearing demand deposit balances;
• interest-bearing deposit balances;
• interest-bearing accounts that are correspondent relationships in Canada and elsewhere;
• term deposits for investment purposes;
• certificates of deposit purchased;

Excluded:

• acceptances purchased;
• deposits with the Bank of Canada;
• deposits with foreign central banks and foreign official monetary institutions

Interbank deposits include all non-interest-bearing balances and interest-bearing balances, including correspondent relationships in Canada and elsewhere placed in the normal course of market trading where the only documentation exchanged is a confirmation of contract and the rates applied are the bid and offer of the market.

Where there is no maturity date or contractual arrangement regarding deposits' availability (for example, demand deposits, for which maturity is not applicable), amounts should be slotted into the 'up to 1 year' time bucket.

(B) Lending, less individual allowance for expected credit losses

Information on lending covers all forms of term/revolving credit facilities including letters of credit but excluding short term money placements (such as commercial paper).

Items to be reported:

• Unfunded secured commitments. These are all undrawn and committed facilities, for which the counterparty has pledged collateral.
• Unfunded unsecured commitments. These are all undrawn and committed facilities, for which the counterparty has not pledged any collateral.
• Funded secured. These are all drawn lending facilities, whether apart of a committed facility or not, for which the counterparty has pledgedcollateral.
• Funded unsecured. These are all drawn lending facilities, whether a part of a committed facility or not, for which the counterparty has not pledged collateral

Funded (secured and unsecured) amounts should be broken-down by currency and maturity, while unfunded (secured and unsecured) should be broken-down by currency only.

Debts purchased at a premium or discount are to be reported net of the premium or discount. The net reported amount of such loans will be increased or decreased as the discounts or premiums are taken into income over the term of the loan. Fixed-term loans on which the interest for the term is pre-computed and added to the principal are to be reported net of the pre-computed interest.

Only direct exposures are required. For example, assume that TDissued a letter of credit to Suncor for 10 MM, of which Bank of Montreal owns50%. If Suncor defaults, TD is liable for 5MM and BMO is liable for 5MM.However if BMO subsequently defaults, TD is liable for all 10 MM. In thisexample, TD should not report any exposure to BMO, given that it is conditionalon the default of Suncor.

(C) Reverse Repurchase Agreements

This section uses the same definition of reverse repurchase agreements as in Section I- Assets of OSFI's Consolidated Balance Sheet (M4) return. For example, the amounts reported here include on-balance sheet reversere purchase agreements and on-balance sheet securities borrowing transactions. No distinction between General Collateral (GC) and non-GC agreements.

Reporting requirements:

• In the absence of any counterparty netting agreements, banks are required to report cash paid (i.e. the notional amount of the transaction).
• Where counterparty netting is permitted under a legal agreement, banks are asked to report net cash paid from bilateral and tri-party reverse repurchase agreements. Note that exposures related to tri-party reversere purchase transactions will be shown under the column of the institution that represents the immediate counterparty in the transaction.
• In order to capture potential exposures to clearing houses such as GSCC, banks are asked to report these exposures under the column entitled 'Clearing Houses' regardless of their residential status.
• Open repo transactions should be reported under the 'open repos' maturity bucket.

Amounts that are broken down by currency and maturity should be reported before market value of collateral. For each currency breakdown, reporting institutions should provide total amounts after market value of collateral (which should include any margin call made prior to the reporting date).When the collateral received is greater than the cash leg, the resulting negative value is to be reported.

(D) Bankers' Acceptances

Include acceptances issued by financial institutions and purchased by the reporting institution.

(E) Holdings of Equity

Include:

• Holdings of common equity shares issued by financial institutions (as defined in the general instruction section) and purchased by the report inginstitution.
• Holdings of preferred equity shares issued by financial institutions (as defined in the general instruction section) and purchased by the reporting institution.

Reporting requirements:

• Common and/or preferred equity shares that are held in trading portfolios should be reported on a mark-to-market basis. For both types of exposures, two metrics should be reported. The first metric is the net equity cash position (the sum of long equity positions minus short equity positions). The second is the net equity delta market value. Both the net equity cash positions and net equity delta market value refer only to what is called under Basel III as direct exposure, and exclude what in Basel III is called indirect exposure(basket, index….), as stated in paragraph 80 of Basel III. Net delta market value is the notional amount of equity shares held in trading books that are exposed to market fluctuations adjusted for hedges/derivatives (Including net "out of balance" positions from equity Total Return Swaps).

Example 1:

Bank A holds 1 000 000 shares of Bank B (in terms of net cash position defined as the difference between long and short equity positions), and that Bank A writes1 000 000 calls on Bank B with a delta of -0.3. Then, the net equity delta market value would be: 1 000 000 shares – 300 000 shares = 700 000 shares *market price.

• Common and/or preferred equity shares that are held in the banking book should be reported at their balance sheet values gross of any economic hedge. As such, accounting hedges should not be used. Balance sheet value could be either the market value or the historical cost of the security.
• Net exposures should be reported even when the underlying hedge relates to another financial institution. Cross-currency netting is not permitted.

Example 2:

Canadian Bank A holds a long US dollar position in US Bank B of $1 000 000. Bank A hedges that position by buying 50 000 put options on US Bank C, with a delta of -0.5 and a cash stock price of $25. Then, Bank A would report a net equity delta of 1 000000 – (50 000* 0.5*25) = $375 000 in the non-resident US financial institutions bucket.

Example 3:

Bank A holds a long US dollar position in US Bank B of $1 000 000. Bank A hedges that position by buying50 000 put options on European Bank C, with a delta of -0.5 and a cash stock price of €25. Then, Bank A would report a net equity delta of $1 000 000 in the non-resident US financial institutions bucket and a -€625 000 net equity delta in the non-resident Other European Countries financial institutions bucket.

• Exposures from common or preferred share positions which are used as hedges of indirect exposures stemming from Exchange Traded Funds (ETF) or other index-based financial products should be excluded.

(F) Holdings of Debt Instruments, less individual allowance for expected credit losses

Include:

• Holdings of secured and unsecured senior debt instruments (including commercial paper if any).
• Holdings of subordinated debt instruments, which include debentures, subordinated notes and innovative capital instruments.

Exclude:

• Exposures associated with securities such as ABCP, ABS, MBS, CMB Sand RMBS (with or without explicit support). This is because we are looking for direct exposures only. For these securities, even if the issuer is liable (although there's no direct legal recourse to the issuer should the principal default), it is only conditional on the default of principal.

Definitions

• Senior debt instruments:

  Debt instruments recognized by reporting banks as senior, in that they get priority repayment should the counterparty default. Among others, the list of senior debt instruments includes secured covered bonds, and other unsecured senior debt instruments such as convertibles.

• Subordinated debt instruments:

  Debt instruments explicitly qualified as subordinated in the instrument's prospectus, in that they have lower priority than that of other debt claims on the assets of the defaulting counterparty. Among others, the list of subordinated debt instruments includes innovative capital securities (such as trust capital securities).

Reporting requirements:

• For each instrument type, reporting institutions are required to provide the outstanding amounts, which should be broken down by maturity and currency.
• Only total exposures related to the two debt instruments are to be reported net of credit hedge amounts. Credit hedges should be netted whether or not the credit hedge was provided by another financial institution. Where the hedge was given by another financial institution, the amount of the hedge should not be considered as an exposure of the hedge purchaser to the hedge provider.
• Single named CDS can be considered as credit risk hedges, while basket CDS are not.

(G) Over-the-Counter (OTC) Derivatives

Subsection G collects information on the Exposure-at-Default of OTC derivatives transactions. All amounts, including those transactions that qualify for hedge accounting, should be reported in Section II-Trading Book. These are two subsections under (G) Over-the-Counter Derivatives, G(i) Over-the-Counter Derivatives – Standardized Approach for Counterparty Credit Risk (SA-CCR) and G(ii) Over-the-Counter Derivatives – Internal Model Method (IMM). Banks should report their OTC derivative exposures under either (i) or (ii) consistent with their treatment under OSFI's Basel Capital Adequacy Reporting (BCAR) return^{Footnote 4}. Definitions and valuation methods should follow those described in the Schedule 40 of the BCAR, Section B(i) for CEM and the Section B(ii) for IMM.

For item G(i), the following are to be reported:

• Replacement cost of contracts subject to permissible netting
  • Margined contracts
  • Unmargined contracts
• Replacement cost of contracts not subject to permissible netting
  • Margined contracts
  • Unmargined contracts
• Potential future credit exposure of contracts subject to permissible netting
• Potential future credit exposure of contracts not subject to permissible netting

Under the SA-CCR, the EAD of a derivative is generally calculated as alpha multiplied by the sum of its replacement cost (RC), if positive, plus an amount for potential future credit exposure (PFE). The alpha is currently 1.4. Replacement cost is determined according to BCBS, April 2014 (SA-CCR), par 129-145. The potential future credit exposure is calculated for a derivative regardless of whether its replacement cost is positive or negative. The potential future credit exposure is generally calculated according to BCBS, April 2014 (SA-CCR), par 146-184 and BCBS, August 2015 Questions 2, 5, 6, 7 and 12.

To calculate the EAD of a number of derivative contracts, negative replacement costs can offset positive replacement costs if the conditions for netting are met. These conditions are outlined in BCBS, April 2014 (SA-CCR), par 133 of the guideline.

Counterparty credit exposures related to FX OTC derivatives (including cross-currency swaps) should be reported in Canadian dollars only. All other exposures should be backed by currency.

For item G(ii), the following are to be reported:

• Derivatives for which model takes collateral into account
• • Exposure at Default (Effective EPE * Alpha)
  • Reduction in EAD for Incurred Credit Valuation Adjustment (Losses)
  • Outstanding Exposure at Default
• Derivatives for which model does not take collateral into account
• • Exposure at Default (Effective EPE * Alpha)
  • Reduction in EAD for Incurred Credit Valuation Adjustment (Losses)
  • Outstanding Exposure at Default

Counterparty credit exposures related to FX OTC derivatives (including cross-currency swaps) should be reported in Canadian dollars only. All other exposures should be backed by currency.