In support of risk mitigation: Payments Canada’s response to OSFI’s consultation

Read Payments Canada’s response to consultation affecting liquidity requirements.

Payments Canada has responded to the Office of the Superintendent of Financial Institutions’ (OSFI) proposed updates to the Liquidity Adequacy Requirements (LAR) Guideline. OFSI’s consultation sought feedback on proposed changes to OSFI’s liquidity monitoring tools and requirements based on lessons learned from recent liquidity events and to align with international practices.

The LAR Guideline outlines measures that allow OSFI to monitor how well financial institutions manage their liquidity, including whether institutions can meet payment and settlement obligations, even in challenging times.

Payments Canada’s response included terminology clarifications, particularly in reference to Lynx and the Automated Clearing Settlement System (ACSS). Payments Canada additionally seeks to ensure that Lynx throughput targets are accurately reflected and cautions against relying on these targets to assess overall intraday liquidity adequacy. The response also highlights the forthcoming Real-Time Rail payment system (RTR), should it need to be reflected in future guidelines.

Payments Canada welcomes and supports OSFI's efforts to mitigate liquidity risk and ensure financial institutions meet their payment settlement obligations.

Submissions to this consultation closed on August 30, 2024. Read the full submission below.

Written comments to the Office of the Superintendent of Financial Institutions’ consultation on updates to the Liquidity Adequacy Requirements Guideline

Payments Canada welcomes the opportunity to comment on the Office of the Superintendent of Financial Institutions’ (OSFI) updates to its Liquidity Adequacy Requirements (LAR) Guideline.

Overview of Payments Canada

Payments Canada underpins the Canadian financial system and economy by owning and operating Canada’s payment clearing and settlement infrastructure, including associated systems, by-laws, rules and standards. In fulfilling its mandate as defined in the Canadian Payments Act (CP Act), Payments Canada has the public policy objectives of promoting the efficiency, safety and soundness of its clearing and settlement systems and taking into account the interests of users. Payments Canada is accountable to the Minister of Finance in carrying out its mandate. Payments Canada's vision is a Canadian payment ecosystem that is resilient, inclusive and enables fair competition as the foundation of a thriving economy.

Subsection 4 of the CP Act defines mandatory and entitled members of Payments Canada. This includes banks, cooperative credit associations, trust and loan companies, securities dealers and life insurance companies. Most members of Payments Canada, as defined in the legislation today, are regulated by OSFI.  

At a date yet to be determined, amendments to the CP Act, contained in Bill C-59, will come into force. The proposed amendments will expand the entitled membership category. New entitled member categories will include payment service providers as defined in section 2 of the Retail Payment Activities Act, provincial credit union locals that are members of a central and clearing houses as defined in section 2 of the Payment Clearing and Settlement Act (PCSA). Payments Canada remains cognizant and is investigating the implications of membership and system participation of entities that are not regulated by OSFI.

Comments on updates to the Liquidity Adequacy Requirements Guideline 

In order to participate directly in the Automated Clearing Settlement System (ACSS) or Lynx, members of Payments Canada must be subject to comprehensive prudential regulation, either by OSFI or a provincial equivalent¹. For federally regulated financial institutions, this includes adherence to the provisions found in the LAR Guideline. 

Payments Canada’s comments on the LAR Guideline are specific to Chapter 7 and are outlined below.

Intraday liquidity

Scope of application
Payments Canada seeks to provide and obtain clarity on some language that is used in the LAR Guideline. The LAR Guideline references Payments Canada’s systems, specifically Lynx and the ACSS. Further, the LAR Guideline uses certain defined terms for these systems in a manner inconsistent with Payments Canada’s by-laws and rules. An institution that directly participates in Lynx, Canada’s high-value payment system, is referred to as a ‘Participant’.² A ‘Non-Participant Member’ can send and receive Lynx payments through a Lynx ‘Participant’.³ An institution that participates directly in the ACSS is referred to as a ‘direct clearer’ or ‘group clearer’.⁴ A member can participate as an ‘indirect clearer’ by clearing and settling payments in the ACSS via a ‘clearing agent’.⁵,⁶ In terms of the LAR Guideline, it can be interpreted that a ‘direct clearer' is an entity that participates directly in a systemically important Financial Market Infrastructures (FMI). This, however, is not explicitly defined. Due to language similarities, Payments Canada recommends providing clarity on the definition of the terms ‘direct clearer’ and ‘indirect clearer’ as used in OSFI’s Guideline.

Payments Canada is comfortable with references to its systems in determining applicability of these monitoring tools. Payments Canada will be launching a real-time payment system, the Real-Time Rail (RTR).⁷ This system is expected to be designated for oversight by the Bank of Canada as a prominent payment system under the PCSA.⁸ Payments Canada highlights this development for OSFI as it may need to be reflected in the LAR Guideline in the future and is available for questions.

Throughput targets
Payments Canada has the following recommendations and comments with respect to references to throughput in Lynx.

1. Chapter 7, footnote 22 references Lynx throughput targets. These targets are contained in a Technical Specifications and Procedures (TSP) document, as opposed to a guideline. A TSP is a document that sets out additional requirements related to the Lynx rules that Lynx participants are subject to. Payments Canada recommends updating this language from guideline to Technical Standards and Procedures document for accuracy.
   Further, while the targets referenced are correct, there exists the potential for the language to change in the future. Payments Canada recommends referencing or linking the TSP, rather than including specific language. References to Lynx throughput should be consistent with the Lynx Technical Specifications and Procedures (TSP-004). 
2. Payments Canada expresses caution with respect to using throughput in Lynx as a monitoring tool for liquidity adequacy. Throughput provides a measure of payment system efficiency and is impacted by liquidity levels that are discretionary, and payment timing that is customer- and business-driven. Lynx participants may have a liquidity buffer in Lynx that is not used for settlement and unused central bank credit. Throughput as measured and monitored by Payments Canada is not intended to measure liquidity adequacy holistically.⁹
3. Payments Canada expresses caution with respect to using the ‘met / unmet’ approach as detailed in Tab 1 (Direct Participants) of the draft Comprehensive Intraday Liquidity Monitoring Tools form as a singular indication of intraday liquidity risk. As summarized in TSP-004, Payments Canada applies judgment when monitoring throughput and considers factors such as geographic location and business models. In addition, Payments Canada incorporates other statistical measures, such as the participant’s overall liquidity position and queued payments, to holistically understand a participant’s throughput. 

Conclusion

Robust liquidity management and monitoring are paramount to mitigate liquidity risks and promote the functioning of the financial ecosystem. This includes measures to manage intraday liquidity. 

Payments Canada is supportive of measures to ensure that financial institutions can meet their payment and settlement obligations, even in times of stress, and is available should OSFI have any questions on the comments provided.

¹ This requirement is in reference to the Bank of Canada’s settlement account access policy. A settlement account with the Bank of Canada is a requirement to directly participate in the ACSS or Lynx.

² In the Canadian Payments Association By-law No. 9 - Lynx, a Participant is defined as a member who is approved to participate in Lynx in accordance with the By-law.

³ In the Canadian Payments Association Lynx Rule 1 - Interpretation, a Non-Participant Member is defined as a Member of the Association who has instructed a Participant to act on its behalf for the purpose of transferring funds through Lynx.

⁴ In the Canadian Payments Association By-Law No. 3 - Payment Items and Automated Clearing Settlement System, a direct clearer is defined as a member that, on its own behalf, exchanges payment items and makes entries into the ACSS. A group clearer is defined as a member that, on its own behalf or on behalf of the entities belonging to the group in respect of which it is appointed, exchanges payment items and either effects clearing and settlement or makes entries into the ACSS.

⁵ In the Canadian Payments Association By-Law No. 3 - Payment Items and Automated Clearing Settlement System, an indirect clearer is defined as a member on behalf of which a clearing agent exchanges payment items and either effects clearing and settlement or makes entries into the ACSS.

⁶ In the Canadian Payments Association By-Law No. 3 - Payment Items and Automated Clearing Settlement System, a clearing agent is defined as a direct clearer or group clearer that, on behalf of an indirect clearer, exchanges payment items and either effects clearing and settlement or makes entries into the ACSS. A group clearer is defined as a member, on its own behalf or on behalf of the entities belonging to the group in respect of which it is appointed, exchanges payment items and either effects clearing and settlement or makes entries into the ACSS.

⁷ Members will not need to be subject to comprehensive prudential regulation in order to obtain a settlement account to participate in the RTR.

⁸ For more information, see Payment systems the Bank of Canada oversees.

⁹ Additional information can be found in Payments Canada’s discussion paper on Monitoring intraday liquidity risks in a Real Time Gross Settlement System (2020) and the Bank for International Settlements’ working paper Intraday liquidity around the world (2023). Note that this work is still evolving.