Box 348, Commerce Court West
th
199 Bay Street, 30 Floor
Toronto, Ontario, Canada M5L 1G2
www.cba.ca
Deborah Crossman
Director, Financial Affairs
Finance, Risk & Prudential Policy
Tel: (416) 362-6093 Ext. 230
dcrossman@cba.ca
June 30, 2015
Operations Consultation
Financial Markets Department
234 Laurier Avenue West
Ottawa, Ontario
K1A 0G9
Dear Mr. Allenby:
Re: CBA1 Comments on consultative paper:
“Changes to the Bank of Canada’s Framework for Financial Market Operations”
We appreciate the opportunity to review the Bank of Canada’s (“Bank”) consultation paper,
“Changes to the Bank of Canada’s Framework for Financial Market Operations”, which was
issued on May 5, 2015. We recognize that these proposals are designed to improve the policy
objectives of the Bank’s monetary policy in order to promote the stability of Canada’s financial
system. We understand that with this paper the Bank is seeking industry feedback on key
elements of its financial market operations, which include reinforcing the target for the overnight
rate, providing liquidity to financial system participants, acquiring and managing assets on the
Bank’s balance sheet, and making a portion of the Bank’s government securities holdings
available for securities lending when they are in high demand.
Overall, we support the Bank of Canada’s efforts to maintain the smooth and effective
functioning of financial markets; however, we do have some concerns that we would like to
highlight:


1
We do not believe that a fail fee will achieve the objective of increasing liquidity. The
introduction of a fail fee will increase incentives for lenders to restrict availability and will
increase costs to dealers, resulting in a negative impact on liquidity in the repo market, with
significant detrimental effects to liquidity in the cash market.
We welcome the proposed term repo operations, but do not believe a one-month term is
enough to enhance liquidity. We recommend extending to a longer-term tenor (i.e. three to
six months) in order to help foster term liquidity. We also believe that the term repo
operations should be aligned with market practices (e.g. settlement processes, should align
with the biweekly treasury bill tender, repo’d NHA MBS should settle on the 15th of the each
month).
The Canadian Bankers Association works on behalf of 61 domestic banks, foreign bank subsidiaries and foreign
bank branches operating in Canada and their 280,000 employees. The CBA advocates for effective public policies that
contribute to a sound, successful banking system that benefits Canadians and Canada's economy. The Association
also promotes financial literacy to help Canadians make informed financial decisions and works with banks and law
enforcement to help protect customers against financial crime and promote fraud awareness. www.cba.ca.


The introduction of the Contingent Term Repo Facility (CTRF) is a real positive and will be an
important tool in systemic stress. However, consistent with the term repo comments above,
longer term funding (i.e. three to six months) is needed and would have additive benefits to
liquidity metrics.
While we are supportive of the Bank’s proposed secondary market purchases of Government
of Canada Securities, we note that the Bank will need to be tactful in order to not exacerbate
any stress to the collateral markets. As a longer term goal, we also believe they would be
more effective with larger issue sizes and a lower number of total issues in order to help
manage the current pressure on non-benchmark securities.
We have provided our comments on some key issues below, and offer a more detailed response
on the consultative draft and its 15 questions in the attached appendix. In addition to describing
some of our reservations and concerns, we also propose a number of recommendations that we
believe can assist the Bank in achieving the stated objectives of the financial market operations
framework.
Proposals for the Overnight Market
Refinements to Special Purchase and Resale Agreements (SPRAs) and Sale and
Repurchase agreements (SRAs)
We understand that the goal is to distribute liquidity more efficiently by adjusting the SPRA and
SRA operations from a fixed amount at a target rate to a competitive auction at market rates. In
principle, we agree the proposal will help the Bank achieve its long-term inflation target, increase
the efficiency of the mechanism, and provide a better liquidity distribution. However, the Bank
should consider the market liquidity conditions in determining the size of the auction, in order not
to exacerbate the situation in times of stress.
Potential tiered remuneration of Large Value Transfer System (LVTS) settlement balances
To alleviate the late-day downward pressure on the overnight rate, the Bank proposes to
compensate for a portion of excess LVTS settlements, but only on an exceptional basis when
there are unintended, large, system-wide excess balances. However, we question if this
proposal will have a material impact on the market, and we are concerned that it may remove the
incentive for active cash forecasting and LVTS flattening that currently functions smoothly. More
details on the proposed targets and triggers would need to be developed as the timing and size
of the decision to leave the system long, as well as the size and structure of the target
compensation, could introduce late-day uncertainty and volatility into the LVTS flattening
process.
Proposals to Support Market Functioning
Term repos
The Bank proposes to introduce regular term repo operations at longer maturities to help gather
intelligence and analyze changes in liquidity in short-term markets and to hopefully encourage
further development of the longer-term (i.e. three to six months) repo market in Canada. We
suggest that these operations would be more effective if they were aligned with current market
practices, such as the bi-weekly Treasury bill tender. We provide more suggestions in the
attached detailed comments.
Purchase Government of Canada securities in the secondary market
The Bank would shift to the secondary market for some of the purchases of government
securities to enhance liquidity in these benchmark securities, leaving more available to other
buyers seeking high-quality liquid assets (HQLAs). We are generally supportive of the
2
secondary market purchases, but would like to push for larger issue sizes with a lower number of
total issues, and target issues that are not used to price credit and provincial bonds.
Securities lending
The Bank currently lends a portion of its holdings when a specific bond or treasury bill is in high
demand and is otherwise unavailable or trading below a certain threshold in the repo market, and
thus provides a secondary source of liquidity. However, since 2012, a growing number of
Government of Canada bonds have been trading persistently “on special” at repo rates well
below the overnight general collateral rate, which can result in a reduction in market liquidity. We
believe that there are many factors that have contributed to repo tightness (e.g. foreign
purchases, new HQLA requirements, constrained balance sheets, internal credit policies). If
used appropriately, lowering the threshold should generate more repo liquidity at the margin and
allow the market to “clear itself”. However, we are concerned that widening the range at which
participants can access Bank of Canada bonds could lead to an increase in costs for end-user
borrowers and negatively affect liquidity in both repo and cash markets. We would also note
that, at current market rates, we strongly believe that there is no need for a fail fee for
government bonds, and that its introduction will result in less liquid markets.
Contingent term repo facility (CTRF)
We welcome the proposed CTRF to be used for future episodes of intense market-wide stress,
which would only be invoked at the Bank’s discretion as conditions warrant. However, we are
concerned that there might be a stigma attached to institutions that access the facility, so we
recommend that only program aggregate information be available publicly. We also believe that
it would be beneficial to have longer terms (i.e. three to six months) that would have additive
benefits to the liquidity metrics.
Transition Arrangements
Notwithstanding changes to be made following the consultation period, the proposal will certainly
affect business practices and pricing. To avoid unintended market impacts, we recommend a
transition period that would allow market participants to adapt to the new rules. We would
welcome confirmation from the Bank as to its intentions regarding transition arrangements.
We thank you for taking our comments into consideration and look forward to future discussions
on these issues. As appropriate for the development of these proposals, we would be pleased to
facilitate ongoing discussions on the technical design of the framework.
Sincerely,
Attachment
cc:
Toni Gravelle, Chief, Financial Markets Department
Ron Morrow, Chief, Financial Stability Department, Bank of Canada
3
APPENDIX
CBA detailed comments on Bank of Canada consultation paper – Changes to the Bank of Canada’s Framework for Financial Market Operations
CBA detailed comments on Bank of Canada consultation paper:
Changes to the Bank of Canada’s Framework for Financial Market Operations
CBA Members’ Comments and Requests for Clarification
BACKGROUND AND CONTEXT (pages 2 - 3)
REFINEMENTS TO THE OPERATING FRAMEWORK TO REINFORCE THE TARGET FOR THE OVERNIGHT RATE (pages 3 - 6)
Proposed refinements to SPRAs and SRAs (pages 3 – 5)
Question (page 5)
SPRA/SRA Parameters
1. What are the potential effects of changing the pricing format of SPRA/SRA operations to a competitive and discriminatory rate auction
format?
Q1 Answer:

We are generally supportive of updating the pricing format to a competitive and discriminatory rate auction, and believe it will help the Bank
of Canada (“Bank”) achieve it target rate and its long-term inflation targets.

However, when determining the size of the auction the Bank should be cautious and take into account market conditions to ensure the
activity does not exacerbate the condition or cause the auction to be ineffective. For instance, in a market that has a large amount of
liquidity, a small auction may not be effective in removing the liquidity nor moving the target rate. We see the key as not only related to a
competitive bidding, but more so to the fact that a potentially larger amount of liquidity per participant will be available.

To ensure all primary dealers (big and small) have an opportunity to participate, it may be helpful to have non-competitive component
whereby the stop-out rate would be awarded.

The potential effect is positive in that concentrated cash shorts or longs in the Repo Market can bid for or offer a larger piece of funding, as
required, than currently allowed. This should provide liquidity in a more focused and efficient manner thereby moving the overnight repo rate
closer to the target rate. We believe that these SPRA/SRA operations do not go into Canadian Overnight Repo Rate (CORRA) with the
Date: June 30, 2015
Page 1 of 18
APPENDIX
CBA detailed comments on Bank of Canada consultation paper – Changes to the Bank of Canada’s Framework for Financial Market Operations
CBA Members’ Comments and Requests for Clarification
current rules, so the actual cost of liquidity may be a bit distorted if firms are “paying up” through this facility’s proposed auction, rather than
through the interdealer broker (IDB) screens.

This would likely help to allocate funds directly to participants that need them the most. To encourage broad-based participation, we
recommend that there should not be a floor or cap on the rate.

The Bank may want to consider modifying the current auction in order to create liquidity for smaller participants. The proposed auction
format may not necessarily facilitate the desired distribution of liquidity amongst market participants. In order to better assess the
implications, additional information such as (i) how the Bank will allocate participant’s bids and; (ii) what ranges within the band would be
accepted.

In order to improve the overall liquidity of the proposed framework, modifications to the current SPRA allotments may be considered so that
distribution is better aligned with the funding requirements of the participants. Increasing the securities eligible as collateral within the SLF
would also increase liquidity provided that daily substitution is allowed. The Bank may also consider enabling netting of positions associated
with these operations as a CCP member.
Question (page 5)
SPRA/SRA Parameters
2. What implications, if any, of the proposed structural interventions in the SPRA/SRA overnight markets do you foresee for the behaviour of your
firm or of other firms and for the overnight funding market more generally?
Q2 Answer:

Generally, to the extent there is excess or a moderation of market liquidity, the Bank would need to rely on market participants to be
incentivized solely based on a liquidity need, which may be market driven, or returns of draining market liquidity. However, other constraints
can weigh on decisions to borrow from the Bank or the market (onward to the Bank) like the impact on leverage, capital, and other regulatory
metrics. Market liquidity may not be directly tied to Government of Canada collateral.

We could see the market waiting for SPRAs/SRAs to fulfill funding needs, knowing there will be a larger single dose of liquidity under the
proposal. This could cause later or more protracted average daily overnight repo financing of dealers. However, for this to be the case, there
would potentially need to be an automatic trigger point traded on screen (e.g. 5 - 7 bps either side,) as there is with the Bank of Canada
Date: June 30, 2015
Page 2 of 18
APPENDIX
CBA detailed comments on Bank of Canada consultation paper – Changes to the Bank of Canada’s Framework for Financial Market Operations
CBA Members’ Comments and Requests for Clarification
Security Lending Program. Conversely, that automatic trigger point could see dealers on the side of strength transact closer to the target rate
before such intervention takes away their opportunity.

Although we agree with the proposal, we are concerned with the comment that the Bank of Canada may allow “larger deviations” before
intervention, as larger deviations without set trigger points may incent the market the other way. This could possibly greatly reduce liquidity
for front end securities. The overnight index swap (OIS) market has developed as the hedge vehicle of choice for money market traders and
helps to hedge and facilitate most large security trades. If the swap providers have to change their models to accommodate larger swings in
the overnight rate, the result will be wider bid ask spread that will ultimately have an impact on front end securities.

Changing the format to an auction process should allow participants to bid accordingly as a liquidity provider. However, behaviour may not
be drastically altered based on this proposed format, as balance sheet concerns and constraints remain. Expanding the list of eligible
securities to include other types of collateral (such as those eligible for the SLF) for these operations would have a greater impact.

Participants facing challenges in forecasting their funding requirements may rely on this facility for additional funding if cash is not readily
available via other participants. Additional variables in the market such as existence of an afternoon auction, its size, the cash setting, and
uncertainty around LVTS balance compensation may lead to distortions between funding activities outside of the SPRA/SRA auction
process.
Potential tiered remuneration of LVTS settlement balances (pages 5 – 6)
Question (page 6)
Tiered Remuneration of LVTS Settlement Balances
1. Do you have any comments on the possible design and usefulness of tiered remuneration of LVTS settlement balances?
Date: June 30, 2015
Page 3 of 18
APPENDIX
CBA detailed comments on Bank of Canada consultation paper – Changes to the Bank of Canada’s Framework for Financial Market Operations
CBA Members’ Comments and Requests for Clarification
Q1 Answer:

We understand that the objective of the Bank’s proposed Tiered Remuneration of Large Value Transfer System (LVTS) balances is to help
stabilize the settlement process and eliminate the need to pursue a reduction of liquidity late-day in the market. We support full
compensation on extraordinary days, such as if there is a large end-of-day balance due to ELA support or large forecasting error by the
central bank.

On the surface, this initiative appears to be positive, as individual banks will not be penalised as much when there are large end of day
balances. However, our concern is that this initiative may inadvertently compensate bad behavior from members (i.e. hoarding cash and
poor cash forecasting).

To remove uncertainty, we would prefer to have clarity on the dollar threshold at which the tiered remuneration is proposed to take effect.
Additionally, we would need further specifics on the proposed allocation model that the Bank would use to allocate the tiered remuneration.

To illustrate, how would the aggregate and each participant's share of the target compensation amount be determined? For example, if LVTS
is usually left $50 million long and on a given day the Bank decided to leave the system long by $500 million, would the available aggregate
target compensation be $450 million? If the entire long position is with two participants ($300 million and $200 million respectively), how
would the available aggregate target compensation be allocated? By what time will the Bank inform participants that it has decided to leave
the system long and what the target compensation structure will be?

Although economically beneficial to participants with non-zero end of day balances, tiered remuneration of LVTS settlement balances may
reduce the effectiveness of current monetary policy. We would require further details on the tiering calculations and methodology in order to
make a full assessment of the implications. However, we do believe this may create uncertainty around end of day process funding
strategies.
Question (page 6)
Tiered Remuneration of LVTS Settlement Balances
2. Would this change the way your firm or other participants manage their cash balances and, if so, how?
Date: June 30, 2015
Page 4 of 18
APPENDIX
CBA detailed comments on Bank of Canada consultation paper – Changes to the Bank of Canada’s Framework for Financial Market Operations
CBA Members’ Comments and Requests for Clarification
Q2 Answer:

The tiered remuneration may encourage participants to place funds with the central bank and reduce bi-lateral trading with other participants
if there are no penalties associated with placing funds at the Bank. It is not clear at this stage whether this will lead to an increase in Banks’
daily unsecured funding requirements.

We would maintain our objective of processing payment on a timely basis and of closing the day at a zero balance. There should be no
changes to how a participant manages their cash balance if this scheme is executed infrequently by the Bank. However, frequent use of this
scheme by the Bank may lead some participants to manage to a long position in anticipation of the Bank's use. That is, cash managers
would lose the incentive to lend the excess cash balances.

If the “threshold” isn’t big enough for large banks, they will likely charge the deposit rate (target -25bps) anyway to minimize the risk of losing
money. Too large a buffer may introduce complacency in market participants’ cash management practices, potentially intensifying intraday
dislocation.
Question (page 6)
Tiered Remuneration of LVTS Settlement Balances
3. Given that the compensation of balances would depend on whether the system was in a larger-than-intended surplus position at the end of the
day, would uncertainty about the compensation of balances affect your cash-management practices and, if so, how?
Q3 Answer:

LVTS participants’ normal cash operations (settlements) are generally predictable with a minimum amount of same day activity. In normal
course, however less frequently, banks can help clients settle large dollar amounts that need to be prefunded several days in advance,
resulting in a small market disruption impacting clients (rates and liquidity). Remuneration could ease the displacement of cash in the market
(excess liquidity); however, the stigma of leaving excess cash could far outweigh the benefit of a remuneration scheme.

Short-term uncertainty of compensation for surplus cash could exacerbate late-day settlements, create undesirable sentiment of the LVTS
system, and ultimately diminish the overall effectiveness of a tiered remuneration scheme. The timing and size of the decision to leave the
system long, as well as the size and structure of the target compensation, could introduce late-day uncertainty and volatility into the LVTS
Date: June 30, 2015
Page 5 of 18
APPENDIX
CBA detailed comments on Bank of Canada consultation paper – Changes to the Bank of Canada’s Framework for Financial Market Operations
CBA Members’ Comments and Requests for Clarification
flattening process.

We expect that Domestic Systemically Important Banks (D-SIBs) would maintain their objective of processing payments on a timely basis
and of closing the day at a zero balance. However, participants with larger non-zero end of day balances may average their return,
depending on the tiering arrangements, when taking all of these factors into consideration. This could also potentially lead to deviations for
overnight cash trading at wider spreads from the mid-point.

It may be difficult to price and pass along to clients. We recommend that the Bank of Canada and the Canadian Payments Association (CPA)
cash managers committee discuss the specific operational aspects of this proposal.
PROPOSED CHANGES IN SUPPORT OF WELL-FUNCTIONING MARKETS (pages 6 – 14)
Term repos (pages 7 - 8)
Question (page 9)
Term Repos
1. Do you have any comments or suggestions on the specific design parameters proposed for the new operations (e.g., size, security eligibility
and substitution, term, frequency, minimum bid rate, or disclosure of results)?
Q1 Answer:

We believe Term Repo operations would be a positive development to enhance liquidity in the term repo markets. The proposed $ 7-10
billion size will be easily absorbed and a larger size program would be welcomed. If the Bank of Canada wants to gauge liquidity of term
markets and foster a recycling of that term liquidity, larger amounts are necessary.

The design could be improved by expanding the list of eligible collateral acceptable and placing no restrictions on NHA MBS pools. In order
to facilitate a reduction in the frequency of specials, a framework that allows for daily collateral substitution should be adapted by the Bank of
Canada.
Date: June 30, 2015
Page 6 of 18
APPENDIX
CBA detailed comments on Bank of Canada consultation paper – Changes to the Bank of Canada’s Framework for Financial Market Operations
CBA Members’ Comments and Requests for Clarification

With regards to tenure, we believe a longer term profile of 3 and 6 months will enable banks to better manage to key regulatory liquidity
metrics including the Liquidity Coverage Ratio (LCR) and Net Cumulative Cash Flow (NCCF).

With respect to pricing, pricing could be tiered by collateral type if the list of eligible collateral was broader.

We are supportive of publishing results to ensure full transparency.

Given the current existence of the minimum floor for Bank of Canada buybacks, aligning the term repo facility with the biweekly treasury bill
tender seems to be the most logical step. This would help supplement the lack of liquidity for these short bonds currently, and also help align
the operations from a timing perspective. The minimum bid rate should match the current minimum bid rate for the receiver general auctions
(bottom of the bank range, or currently 25 bps through target), and eligibility should be to primary dealers only. Security eligibility should
match that of the receiver general auctions (now aligned with SLF). Depending on the length of the term repo, we would suggest a minimum
of 2 substitution dates given the scarcity of collateral, and disclosure should be made available to the public similar to the Term Purchase
and Resale Agreement (Term PRA) results during the crisis. This would add transparency to the marketplace, and we would suggest that the
high/low/average rates be disclosed. The term of the repo should be decided based on the Bank’s own requirements for duration and cash
management, but certain dates such as Bank of Canada meeting dates would be helpful from a liquidity standpoint.

As well, the imposition of a fail charge to the term repo facility would hurt participation, and we believe would be going against what we
believe the Bank of Canada is trying to achieve from a liquidity perspective.

We would favor having more substitution-rights than less. We would further recommend that the substitution process needs to be fluid and
available on a very regular basis, as these are trading assets. A tri-party arrangement may solve for this substitution. We do not want to
introduce optionality into these contracts. We are proposing that participants can substitute their collateral every two weeks.
Question (page 9)
Term Repos
2. What would be the likely impact of the Bank conducting regular longer-term repos on activity in the overnight and longer-term repo markets in
Canada?
Date: June 30, 2015
Page 7 of 18
APPENDIX
CBA detailed comments on Bank of Canada consultation paper – Changes to the Bank of Canada’s Framework for Financial Market Operations
CBA Members’ Comments and Requests for Clarification
Q2 Answer:

We believe this proposal will have a positive impact and enhance liquidity in longer-term repo markets in Canada. To encourage full
participation in the Term Repo operations, we recommend that the Bank of Canada consider becoming a member of a CCP to facilitate
transaction settlements. However, given potential negative implications from a Net Stable Funding Ratio (NSFR) perspective, the ability to
settle with the Bank of Canada on a bi-lateral basis should also be maintained.

All else being equal, term repos should help support liquidity in both the overnight and longer-term repo markets in Canada. This is assuming
that the eligible collateral list would be consistent with the receiver general, and all applicable concentrations, terms, haircuts, etc. Due to
balance sheet and capital management, key reporting periods, such as quarter-ends, will always experience noise given the current
environment. We do expect that a meaningful presence by the Bank of Canada in term repos will help alleviate some of this noise, and this
would be amplified if there was an avenue to finance collateral that is typically outside the standard repo trading market (i.e. Government
bonds, Canada Mortgage bonds, and Provincial bonds).

While this proposal would provide much needed term liquidity for various asset classes in our current market, we are uncertain that this
would improve growth in the secondary term liquidity market, as this liquidity is needed for existing inventories. It may cause a tightening of
spreads in the cash market for some of the lesser liquid asset classes that qualify, but is probably not large enough to create a scenario of
dealers offering liquidity in a secondary term market.

The expected effects on the overnight market and specials market would not be significant. Most activity in the overnight is security specific
so will not be impacted in any material way by term Government of Canada (G/C) transactions. To the extent that the Bank of Canada has a
more dynamic holding of G/C Securities, there should be some relief on bonds that are trading specials in the overnight repo market.

The impact to target rates may be affected given the additional cash put into the market. It is unlikely to be very meaningful for major banks
given their relatively small allocation room and pricing. This is more likely to be an alternative source of term funding for smaller banks with
limited funding channels.

To promote transparency and liquidity, we recommend that the Bank of Canada publish an auction schedule in advance.
Question (page 9)
Term Repos
Date: June 30, 2015
Page 8 of 18
APPENDIX
CBA detailed comments on Bank of Canada consultation paper – Changes to the Bank of Canada’s Framework for Financial Market Operations
CBA Members’ Comments and Requests for Clarification
3. What considerations would be important to your firm if National Housing Act Mortgage-Backed Securities (NHA MBS) were to be treated
differently from other securities eligible for regular repo operations to account for the interest and principal repayment flows (e.g., return interest
and principal repayment flows rather than retain them)?
Q3 Answer:

We believe there should be no restrictions on National Housing Act (NHA) Mortgage-backed Security (MBS) pools in the Term Repo
operations. Repo’ing NHAs for any term past the monthly P & I entitlement date creates an uncertainty in the reinvestment figure. The
convention to trade National Housing Act (NHA) Mortgage-backed Security (MBS) pools in Canada is to roll every 15th of the month. This
helps alleviate the noise of any principle and interest (P&I) prepayments that may occur, as this would be past the factor date (the 5th
business day of the month). This is preferred to re-price trades and enable banks to top up margin requirements.

We would have to set up a separate account to accommodate the different flow type. We would not want to introduce any optionality into the
repo transaction.
Secondary market purchases of Government of Canada securities to reduce primary market purchases (pages 9 – 11)
Question (page 11)
Secondary Market Purchases of Government of Canada Securities
1. What would be the impact on the benchmark and non-benchmark segments of the Government of Canada securities market of the proposed
reduction in the Bank’s participation at nominal bond auctions and proposed secondary market purchases?
Q1 Answer:

Reduction in the Bank’s participation at primary auctions should generally increase the tradable float of benchmark bonds; hence, alleviate
repo tightness and liquidity issues in benchmarks. Liquidity is poor at the moment in many off-the-run bonds especially in the 2-5 year sector.
This should not be a big problem if secondary market purchase starts on current and future benchmark bonds, which will have a bigger float.

We would expect benchmark issues to begin to carry less of a premium, relative to non-benchmark issues, and to remain cheaper on the
Date: June 30, 2015
Page 9 of 18
APPENDIX
CBA detailed comments on Bank of Canada consultation paper – Changes to the Bank of Canada’s Framework for Financial Market Operations
CBA Members’ Comments and Requests for Clarification
curve during the period from initial auction of a new benchmark until the time it gains benchmark status. This would result in very slightly
lower government funding costs all else being equal.

Since many provincial bonds are priced against off-the-run bonds, those bonds might lose some liquidity or the pricing will move from off-therun to benchmark. This change in pricing will offset some of the liquidity gain obtained by the proposed measures.

However, with the proposed changes, there is the risk that a benchmark issue gets tight in repo even with the smaller initial auction purchase
from the Bank. The Bank might not be able to purchase more of that issue once it becomes off-the-run to get to the current 20% holding limit
without further diminishing the liquidity in that bond. At the same time, owning a lesser percentage could dampen the Bank’s ability to
intervene through the securities lending program. We note that illiquidity exists in the current overnight repo market in “off-the-runs”.

We recommend that the Bank of Canada consider having a float of larger issues in order to support liquidity, when at times the decision
might be just to reopen existing issues (at auctions) as much as possible in the shorter end of the curve. In the longer end, we believe that
the buyback program should be reinstated, as a large percentage of on-the-run bonds are held in dealer’s books, with most clients preferring
to remain in benchmark issues. We are seeing this trend with the domestic account community. By doing this, a larger 10-year benchmark
can be created, which over time will slide down to create larger shorter-end issues.

Building liquidity in two, five and ten year benchmarks and phasing out the other points on the curve is potentially a good idea for our smaller
market place, but until such time that the market aligns itself secondary purchasing of off-the-runs may worsen (i.e. spread product,
regardless of actual maturity, needs to trade off the closest major benchmark, or foreign central banks, as an example, need to recognize
that the only liquidity will ultimately be found in those benchmarks).

We had assumed that this was front-end purchases for cash management. In Lynn Patterson's May 14 speech, “Fine-Tuning the Framework
for the Bank’s Market Operations”, she seemed to indicate that the Bank was leaning to purchase across the yield curve in sizes that
replicate their outstanding bond maturities. We have a difficult time seeing this as successful.

It is also notable that the bulk of the special issues we have encountered in the last several years have been off-the-run securities. If the
Bank were to purchase non-benchmark securities in the secondary market, it would most likely cause more distortions in the yield curve and
further hamper liquidity in the sectors that are already significantly constrained. The Bank will need to be tactful in how it allocates its balance
sheet in this regard. The elimination of 3 year issuance will already have the impact of increasing benchmark size in the front end.
Date: June 30, 2015
Page 10 of 18
APPENDIX
CBA detailed comments on Bank of Canada consultation paper – Changes to the Bank of Canada’s Framework for Financial Market Operations
CBA Members’ Comments and Requests for Clarification

In conclusion, we are generally supportive of the secondary market purchases, but would like to push for larger issue sizes with a lower
number of total issues as a longer term goal.
Question (page 11)
Secondary Market Purchases of Government of Canada Securities
2. What measures or parameters should be included to minimize any potential negative effects of the secondary market purchases on market
functioning?
Q2 Answer:

We would suggest a floor on the ratio between the outstanding issue size of non-benchmark issues being purchased in the secondary
market to the nearest maturity benchmark’s issue size in order to maintain an acceptable level of liquidity in the non-benchmark issues.

We recommend that secondary market purchases should focus on bigger size issues to start and have a relatively high threshold: minimum
outstanding, repo tightness. We would like the Bank to adopt a more flexible view on the program to take into account frictions in the market,
and be mindful of liquidity in specific issues.

The prevailing repo rates should be taken into account when deciding which securities to purchase. There are very few off-the-run bonds
trading at the G/C level; therefore, the issuer should not buy bonds that are trading tight in repo. As well, under the current environment there
is not enough long bonds supply to support buybacks in that sector. Shrinking off-the-runs or long bonds could create market distortions.

In addition to the already mentioned market sensitivities, the Bank should also consider how many credit bonds (e.g. Provincials, CMB’s and
Corp’s/Muni’s) are hedged against these off-the-run G/C bonds. The Bank should strive to not buy back these off-the-run bonds in large size
as liquidity, and hence credit spreads, could be adversely affected. Alternatively, pricing credit bonds can move to benchmark issue.
Securities-lending program (pages 11 – 13)
Question (page 13)
Securities-Lending Program
Date: June 30, 2015
Page 11 of 18
APPENDIX
CBA detailed comments on Bank of Canada consultation paper – Changes to the Bank of Canada’s Framework for Financial Market Operations
CBA Members’ Comments and Requests for Clarification
1. What would be the impact of the proposed change to the intervention threshold for the securities-lending program?
Q1 Answer:

We have some general concerns with this proposal. Lowering of the Bank’s intervention threshold to lend bonds will allow special issues to
fetch lower repo rates and may entice more holders to lend out securities. However, the lowering of the intervention threshold will in itself
make it more expensive to borrow bonds for the street overall. The repo rate will gravitate to the new threshold intervention level; however,
holders of securities trading on special may still not be motivated to lend out their portfolio. A large proportion of the holders of these
securities are not actively participating in the Repo market despite the trading levels.

We believe the intent is to generate an incentive for foreign central banks, which have historically been administratively reluctant, to lend
bonds if the spread to overnight is wide enough. What is being overlooked is the fact that the access to specials bonds has also been
affected by constrained balance sheets, as well as internal credit policies around trading repo with some of these foreign entities. In simple
terms, even if they are incented, the banks and dealers do not have the capital to deal with them directly, or through the securities lenders.
Given Canadian bonds are widely held by foreign investors (~28%), market liquidity can be constrained by the collateral held by these
investors. This in turn can increase repo trading, but it is not evident that it will achieve the desired effect of increased liquidity due to bank
constraints like capital and balance sheet (leverage).

Obviously, at current rates, the cost of being short a bond without liquidity would go higher (50 as opposed to 37 basis points), but the
general assumption is that rates will ultimately rise, reinstating the current ratio. When the overnight rate was at 25 bps, there was little
incentive to lend at a pickup of 12 bps.

Widening the range at which participants can access Bank of Canada bonds could lead to an increase in costs for end user borrowers and
negatively affect liquidity in both repo and cash markets. Setting a minimum bid level at the Bank discourages security holders to lend out
their securities until a certain target is achieved.

The specials market for illiquid securities would adjust to that intervention level. Scarce securities would be more expensive for the banks,
broker/dealers as lenders would equate additional spread in the market. Whether the revised threshold would result in additional supply and
less intervention by the Bank of Canada would need to be seen. If target rates go to 0.50 and there is no concurrent fails charge, the market
participants are likely going to let securities fail rather than borrowing from the Bank of Canada.
Date: June 30, 2015
Page 12 of 18
APPENDIX
CBA detailed comments on Bank of Canada consultation paper – Changes to the Bank of Canada’s Framework for Financial Market Operations
CBA Members’ Comments and Requests for Clarification

Introduction of a fail charge will open the door to negative repo rates and an even wider trading range for repo specials. If implemented, the
costly economics of fail charges will help reduce settlement fails similar to the experience in the US treasury market.
Question (page 13)
Securities-Lending Program
2. What additional changes to specific terms of the securities-lending program would help the program achieve its objective?
Q2 Answer:
We are generally supportive of the proposed changes, but we believe they could impact the market. We believe the following additional changes
to the securities-lending program would help achieve the objective:

Increase the term of the securities lending facility: Adding the possibility of a term longer than overnight, and changing settlement time to
align with regular market practice, would help the program achieve its objective. This would help alleviate the liquidity risk that dealers face
by providing liquidity to participants in the Canadian market place from a repo and cash perspective, and help reduce the magnitude of price
shocks. Extending term would reduce the daily lack of liquidity for specific issues because of added supply in the market. The market
understands the implications for borrower’s requirements to return securities, thereby reducing the effectiveness of the program, when
overnight.

Remove the 300 bps fail fee: The 300 bps fail fee that exists currently substantially reduces the effectiveness of the lending facility, and in
some cases, forces participants to pay well through the threshold rate in order to not be exposed to the asymmetric risk exposure. This also
reduces the market-making capability of the dealers in Canada if the risk to the funding desk does not justify the liquidity being shown. One
option would be to reduce the fail fee significantly to a more acceptable range of 50-75bps.

Align with current market practices: We welcome the Bank’s efforts to extend the settlement time to 4 pm instead of 3 pm to align with
regular market operating practices.

Consider increasing the amount being lent: At the margin, this would help increase liquidity as those who are long would be more likely to
lend their inventory out if the Bank’s operation has enough capacity to fill the short base. Lending a larger percentage of existing balances
would also add supply into the market. We recognize that this would not necessarily be possible under the new benchmark strategy;
Date: June 30, 2015
Page 13 of 18
APPENDIX
CBA detailed comments on Bank of Canada consultation paper – Changes to the Bank of Canada’s Framework for Financial Market Operations
CBA Members’ Comments and Requests for Clarification
however, it could apply to legacy positions.

Exercise Bank’s discretion carefully: Liquidity could be improved by shifting the Sec Lending Program trigger from a "minimum" repo level to
a dynamic response based on supply and demand based on market intelligence gathered from market participants. Similar to the buyback
program currently in place, it should be at the Bank's discretion whether they offer the securities lending facility or not. If upon canvasing the
street it is deemed that there are enough bonds to satisfy the bid, the market should be allowed to clear itself out on its own. In order to
encourage lenders to put out their bonds, the Bank should reserve the right to offer the bonds either via auction or as G/C up to a predetermined number. While remaining as a lender of last resort, the risk of the Bank stepping in should prevent lenders from hoarding
securities until a certain level is reached.
Question (page 13)
Securities-Lending Program
3. What are the main factors behind tightness in the repo market for Government of Canada securities?
Q3 Answer:

Foreign Purchases: We would argue that foreign purchases of Canadian debt are the single largest factor contributing to collateral and
liquidity pressures in Canada. Since Canada became a reserve currency, foreign purchases have increased. Non-residents hold about 28
per cent (2014) of Government of Canada marketable debt securities. Many of these foreign counterparties do not lend out their securities
holdings back into the marketplace, regardless of rate as they are administratively phobic. Not all foreign jurisdictions can interact with
Canadian banks and broker/dealers due to tax and/or legal restrictions. Different settlement hubs (Euroclear) can create dislocations
between delivery and short cover. They may be sensitive to fails and/or the operational footprint of running a repo program. The prevalence
of domestic hedge funds using long credit and short Government of Canada debt strategies compound the short base of the Canadian
marketplace as it pertains to collateral, with the prime brokerage market facing this exposure.

Government of Canada fiscal policy: As the government fiscal balances come back in balance, issuance is diminishing, which may result in
a dramatic decline in the global pool of government bonds in the AAA rated category.

Regulation: The move to Basel III compliance has meant dealers have had to hold larger quantities of government collateral in inventory over
the past couple of years in order to meet upcoming regulatory liquidity requirements. High Quality Liquid Asset (HQLA) demand has
Date: June 30, 2015
Page 14 of 18
APPENDIX
CBA detailed comments on Bank of Canada consultation paper – Changes to the Bank of Canada’s Framework for Financial Market Operations
CBA Members’ Comments and Requests for Clarification
increased across all the banks, reducing the amount available to lend.

Agency Lending in Canada: The large securities lenders in Canada have moved from a principal-based agreement, to that of an agencybased model. This has reduced overall supply as capital measures, both regulatory and economic, are more punitive using an agency
agreement versus a principal-based arrangement. As well, depending on differing credit policies, certain jurisdictions and types of
counterparts may not be eligible for some banks and dealers. This can result in a loss of liquidity that was previously available.
Market Structure: The growth of the credit hedge fund sector contributes to repo tightness, which has significantly increased the demand for
Government of Canada bonds. In addition, the 3 pm settlement deadline when returning bonds taken on previous auctions reduces the
participants' willingness to take bonds and potentially incur in fail fees. The requirement for greater margin required to participate in
settlement systems (particularly the Central counterparty platform in Canada). Ironically, the Bank of Canada and the changes in regulatory
landscape requiring CCP participation for market continuity are hindering such to a certain extent because of the onerous margin
requirements of operating in the CCP itself (including more strenuous haircuts than what the Bank of Canada applies on eligible securities).
Question (page 13)
Securities-Lending Program
4. Would a market-wide settlement fail fee for Government of Canada securities be effective in providing greater incentives to lend scarce
securities and avoid settlement fails?
Q4 Answer:

We do not believe that we have a fail issue in Canada that needs to be addressed. Although specials are frequent, they do not persist and
the market does find a price to meet financing requirements. The introduction of a settlement fail fee will negatively impact liquidity and
create more specials. In addition, the fail fee would drive the repo rate down to the fail cost level only benefiting large owners as their offer
rate will move to align with the fail cost. Increased specials will have knock-on effects on the cash market and banks will be challenged to
provide liquidity to core investors short the issues trading on special. We strongly believe that fail fees will have a significant negative impact
on liquidity in Canada in both the repo and cash markets.

A 300 bps fail fee is high relative to the risk being managed and could contribute to less liquidity in the market (through discouraging repo
lending, which increases bonds on special). There seems to be a huge push to impose a fail charge, which the street has, on several
Date: June 30, 2015
Page 15 of 18
APPENDIX
CBA detailed comments on Bank of Canada consultation paper – Changes to the Bank of Canada’s Framework for Financial Market Operations
CBA Members’ Comments and Requests for Clarification
occasions, argued strongly against. Specifically, we strongly believe the fail charge will force a wider repo trading range into a very low-rate
environment, which will have significant downstream effects on volatility, cash bond pricing and liquidity. There may be incentive to not lend
bonds out above 0%, in order to generate a higher return in a constraining balance sheet environment.

A punitive fail fee may compound the lack of liquidity for some bonds as it may result in hoarding and/ or other protective behavior. Fail fees
are designed to combat protracted fail situations, something Canada does not suffer from. The Canadian market is both small and unique
compared to that of the United States, and attempting to incent participation through a greater potential return (i.e. encouraging negative
rates), as in the U.S. repo market, would, in fact, have the opposite effect in Canada. We believe that the U.S market has a fails (settlement
gridlock) issue, whereas Canada has a specials speciality/volatility issue. The introduction of a fail fee in the US market has clearly effected
trading and settlement patterns, as more treasuries trade special, and at richer levels. We believe that there would be an amplified effect in a
less liquid Canadian market.

A market-wide fail fee will require a more active ability to dynamically matched-up positions on an intra-day basis (within the custodian
environment). The extension of fail fees to the entire market may limit ongoing participation by pension funds and the involvement of offshore
participants. These new players would require spending to enhance/improve the existing/new settlement infrastructure, making it
unattractive to join.

The main drawbacks of the implementation of the fail fee are that it will likely discourage lenders from offering their bonds until the securities
are fully settled, and given the current low rate environment, a fee could potentially encourage hoarding of issues as holders look to benefit
from fail charge. As an additional point, cash market makers will be less willing to provide liquidity on specific issues given the uncertainty
regarding the level where those positions will be financed. It is also likely that fail fee measures would immediately push valuations on special
issues richer, causing further distortions in the yield curve.

In summary, a fail fee is not necessary. Incentives would be for a lender to restrict availability and either earn a fail fee or pick-up additional
spread. Reliance on the Bank of Canada Securities Lending facility would increase. Cost to the banks/dealers would increase. Administration
of a fail fee would require significant infrastructure build. Determining who is subject to fails is also required. There is a good probability that
repo rates would start to trade negative.
Date: June 30, 2015
Page 16 of 18
APPENDIX
CBA detailed comments on Bank of Canada consultation paper – Changes to the Bank of Canada’s Framework for Financial Market Operations
CBA Members’ Comments and Requests for Clarification
Contingent Term Repo Facility (pages 13 – 14)
We are supportive of the Bank of Canada’s proposal for a bi-lateral CTRF, but have a few questions:

The one-month term proposed for the Contingent Term Repo Facility (CFRF) is short. Has the Bank given any consideration for a long-term
facility, similar to the Insured Mortgage Purchase Program (IMPP)?

Can the Bank elaborate how it will activate the CTRF in relation to other tools, such as the Term Purchase and Resale Agreement (Term
PRA), Term loan facility?

Why has the Bank set a one month term as opposed to longer terms that would have additive benefits to the liquidity metrics?
Question (page 14)
Contingent Term Repo Facility
1. How useful would the proposed Contingent Term Repo Facility (CTRF) be as an additional tool for the Bank to have available to deal with
severe market-wide liquidity stress?
Q1 Answer:

We expect that in times of stress, having such a facility would ensure that liquidity is maintained in the Canadian marketplace, similar to what
was provided during the Global Financial Crisis through the Term PRA program. As an emergency liquidity backstop measure, it would be
helpful at the margin.

In order to improve the effectiveness of the facility, we recommend that the list of eligible collateral that is acceptable should be expanded
with substitutions allowed daily. It is encouraging that NHA MBS would be considered as eligible collateral for this facility.

We request clarification on how the CTRF could be accessed, and we believe that the ability to access the facility should be established in
advance of the need to actually access it so that there are no operational challenges if access is actually required.

Further considerations should be made with respect to the degree of disclosure and transparency on use of the facility as we foresee that a
stigma would be attached to the institutions that access the facility. Therefore, we recommend that the Bank not publish which institution
Date: June 30, 2015
Page 17 of 18
APPENDIX
CBA detailed comments on Bank of Canada consultation paper – Changes to the Bank of Canada’s Framework for Financial Market Operations
CBA Members’ Comments and Requests for Clarification
accessed the facility but only the aggregate amount borrowed. This would limit any run on a bank or institution scenarios.

For clarification, does the Bank of Canada include the Currency Swap arrangement within the liquidity contingency framework?
APPENDIX: Simplified illustration of the Bank of Canada’s Framework for Financial Market Operations and Proposed Refinements
(page 15)

We request some clarity around the proposed rates, tier balances, limits, and fees.
Date: June 30, 2015
Page 18 of 18