Canada: Contingent Term Repo Facility

The Bank of Canada (BoC) in early April announced that it would initiate its Contingent Term Repo Facility (CTRF) to “counter any severe market-wide liquidity stresses and support the stability of the Canadian financial system” (BoC 2020e; BoC 2021a). The CTRF broadened the list of financial institutions that the BoC engaged with for its normal repurchase agreement (repo) operations, providing access to large asset managers active in repo markets (Gravelle 2021, 3). The BoC typically engages only with primary dealers during its routine repo and reverse repo operations (BoC 2021c).

The power is enumerated in the Powers and Business section of the Bank of Canada Act (Bank of Canada Act 1985).

As part of the central bank’s efforts to learn from the fallout of the Global Financial Crisis (GFC) and shore up its operating framework (BoC 2015b, 2), policymakers created the CTRF in 2015 to deal with “severe market-wide liquidity stress” when activated and stated that the facility would not be used to address “idiosyncratic liquidity shocks at individual institutions” (BoC 2015c; BoC 2015a, 13).

The CTRF is modeled after a similar temporary term repo facility the BoC established during the GFC (Wilkins 2015, 5; Sankar 2022). The BoC updated its Framework for Financial Market Operations to create the CTRF, rather than changing its policy for buying and selling securities (BoC 2015a; BoC 2015d; BoC 2008). This BoC policy, as adopted originally in 2008, provides the central bank flexibility to offer liquidity to institutions beyond primary dealers and their affiliates (BoC 2021c).

The BoC activated the CTRF as part of a broader suite of financial stabilization and liquidity provision measures that the bank implemented in early 2020 in response to the COVID-19 pandemic. Other policies included the following (BoC 2020f, 14):

• Lowering the target for the overnight rate by a cumulative 150 basis points to the effective lower bound of 0.25 percent;
• Launching the Bankers’ Acceptance Purchase Facility;
• Introducing a program to purchase Canada Mortgage Bonds in the secondary market;
• Introducing the Provincial Money Market Purchase Program;
• Introducing the Commercial Paper Purchase Program;
• Introducing the Corporate Bond Purchase Program;
• Introducing the Provincial Bond Purchase Program;
• Launching a program to purchase government of Canada securities in the secondary market (minimum of CAD 5 billion per week, across the yield curve);
• Enhancing term repo operations;
• Coordinating with international policymakers for US-dollar liquidity and announcing that a US dollar term repo facility would be made available on a contingency basis (should the need arise);
• Launching the Standing Term Liquidity Facility.

No other Canadian governmental agencies were involved in the CTRF’s implementation. Counterparties had to deliver collateral to the BoC through security settlement system CDSX (BoC 2020b). The system is owned and operated by CDS Clearing and Depository Services Inc., which is in turn owned indirectly by the for-profit corporation TMX Group (BoC 2020b; BoC 2021b).

The Bank of Canada Act requires that the central bank publish financial information about its assets and liabilities every week on its website. The BoC is also required to release audited financial statements and a report by the BoC’s governor to the Minister of Finance (Bank of Canada Act 1985).

The BoC transacted directly with counterparties (BoC 2020b). Eligible parties could access the facility as needed (BoC 2015a, 14), a design feature intended to restore confidence by “providing backstop repo rates” (Bédard-Pagé et al. 2021, 9). By 3 pm EST on settlement day, counterparties had to deliver securities acting as collateral to the BoC through the security settlement system CDSX (BoC 2020b).

Institutions seeking access to the CTRF had to provide information describing their involvement in Canadian money and bond markets and identify the relevant regulator and the regulations that applied to the firm. The BoC also asked applicants for the following information (BoC 2020a):

• Size of Canadian fixed-income and money market assets under management;
• Number of counterparties transacted with on a regular basis;
• Breakdown of the amount of eligible securities based on the current terms and conditions that was available to be used at the Bank of Canada, including approximate market value;
• Average daily trading volumes of Canadian fixed-income and money market products in 2019 broken down by product type;
• Rationale for accessing the CTRF (e.g., testing, liquidity, loss of market access).

Institutions were also required to deliver the relevant securities through CDSX or have a “custodial relationship in place” to do so (BoC 2020a).

The BoC used the CTRF to provide a broader set of financial institutions access to term repos (Gravelle 2021, 3). BoC researchers found that Canada’s largest pension funds play a major role in the country’s repo markets (Bédard-Pagé et al. 2021, 8–9; Garriott and Gray 2016, 11).

The stabilization measures launched by the BoC rapidly expanded the BoC’s balance sheet during the worst part of the pandemic in 2020, from March to June, leaving the central bank’s ledger at historic highs. The CTRF accounted for a very small fraction of this expansion (see Figure 1).

Policy documents that detailed the CTRF’s official establishment in 2015 do not state that the BoC would announce such a limit if it chose to activate the CTRF (BoC 2015a, 13–14).

Exact utilization figures are unavailable after the second quarter of 2020 because the BoC did not continue to break out CTRF data in its subsequent quarterly financial statements. The BoC stated on its CTRF website that it would instead report such transactions at an aggregate level, along with its other repo operations, in its weekly balance sheet (BoC 2020b; BoC 2020i, 23). Two representatives of the BoC stated in a report about the central bank’s interventions that the facility was “little used” (Gravelle, Wilkins, and Ubide 2021, 66).

As of November 2021, the BoC had not formally published the names of institutions that accessed the CTRF. However, BoC researchers’ interviews conducted with Canada’s largest pension funds, the so-called “Big Eight,” revealed that they did tap the facility, albeit in small amounts (Bédard-Pagé et al. 2021, 8–9).^FThe Big Eight include the Canada Pension Plan Investment Board, Caisse de dépôt et placement du Québec, the Ontario Teachers’ Pension Plan, the British Columbia Investment Management Corporation, the Public Sector Pension Investment Board, the Alberta Investment Management Corporation, the Ontario Municipal Employees Retirement System, and the Healthcare of Ontario Pension Plan (Bédard-Pagé et al. 2021, 1).

The BoC’s presence in broader repo markets—through the CTRF and regular term repo facility—increased substantially at the height of the pandemic, peaking at CAD 211 billion in June 2020. This was the most the BoC had ever participated in the repo market, more than quintupling the previous peak at the height of the GFC in 2008 (see Figure 2).

The BoC’s CTRF policy documents do not include language limiting the amount of funds an individual institution could receive as part of repo transactions.

Officials calculated the CTRF’s repo rate, an interest-like charge the counterparty pays on top of the price of the asset it originally agreed to repurchase, in the following manner (BoC 2020b).

The rate was the overnight index swap (OIS) rate of the maturity of the operation plus the higher of (1) 35 basis points, (2) the highest spread over the OIS rate on the most recent term repo with the closest tenor, or (3) as otherwise determined by the BoC at the time of the transaction. The BoC calculated the interest on an actual 365-day basis (BoC 2020b).

During its normal operations, the BoC generally limits the type of financial assets it acquires to public-issued or guaranteed assets to manage risk to its balance sheet, though it does maintain the right to purchase assets associated with a higher degree of risk (BoC 2021d). Policymakers likely used the bank’s typical asset acquisition and management standards to create requirements for the CTRF, though the rationale was not explicitly stated in public CTRF documentation. Eligible securities included the following (BoC 2020b):

• Securities issued by the government of Canada;
• Government of Canada stripped coupons and residuals;
• Securities guaranteed by the government of Canada (including Canada Mortgage Bonds and NHA mortgage-backed securities with a minimum pool size of CAD 25 million);
• Government of Canada-guaranteed stripped coupons and residuals;
• Securities issued or guaranteed by a provincial government that met the criterion of sufficiently high quality as determined by the BoC;
• Stripped coupons and residuals of securities issued or guaranteed by a provincial government that met the criterion of sufficiently high quality as determined by the BoC.

With the BoC’s approval, institutions could substitute a limited number of securities underlying the repo, but the transaction and the substitution date must have been pre-arranged. Unless otherwise arranged, eligible counterparties had one substitution window per operation (BoC 2020b).

Securities eligible for the CTRF were subject to the same haircut and margin requirements as those for the BoC’s Standing Liquidity Facility (SLF). The BoC’s SLF provided overnight advances to financial institutions that were members of the Large Value Transfer System (LVTS), Canada’s main payments network. Members are required to meet certain settlement balance levels each night and may tap the SLF if the financial institution is unable to do so because of temporary liquidity shortages (BoC 2021c). As of April 9, 2020, the SLF, and by extension, the CTRF, utilized the margin schedule shown in Figure 3.^FCentral bank policymakers often deduct so-called haircuts or margins from the market value of pledged collateral. By devaluing an asset relative to its perceived riskiness (larger margins for higher risk), the central bank attempts to protect itself from a drop in the collateral’s price (Chailloux, Gray, and McCaughrin 2008, 22–23).

Repos through the CTRF carried a one-month term. Eligible counterparties accessing the CTRF could also use the facility for repo transactions with a term of less than one month at the participant’s discretion. The BoC reserved the right to allow longer-term transactions but did not publish a market notice announcing such a change (BoC 2020b).

A breakdown of CTRF use based on term length was not available in the BoC’s published documentation and data.

Still, the BoC reserved the right to sanction eligible counterparties for failing to meet general contract terms, such as returning the required cash on the maturity date. Sanctions could include suspension of CTRF access and restricted access to the central bank’s regular Term Repo Operations. The BoC could also change, on a temporary basis, a sanctioned counterparty’s bidding limit for its regular Term Repo Operations (BoC 2020b).

The BoC did not discuss monetary policy transmission issues in its CTRF documentation.

There is no publicly available information on other options considered by the BoC.

The Bank of England (BoE) activated its CTRF in March 2020 as a liquidity “insurance” facility, but there is no evidence to suggest that the BoC designed its CTRF with the BoE’s in mind (BoE 2020; Fulmer 2022).

To address “severe” liquidity issues that affected Canadian markets in March 2020, the BoC injected “significant” amounts of new funding into the financial system by escalating its repo operations (Gravelle 2021, 2; BoC 2020d). This was, and is, the central bank’s primary tool to jumpstart funding markets experiencing liquidity issues (Gravelle 2021, 3; BoC 2021c).

Policymakers positioned the CTRF as an additional tool the BOC could use to broaden access to its key repo operations.^FSee the BoC’s 2020 quarterly reports and its 2020 annual report (BoC 2020d; BoC 2020h; BoC 2020i; BoC 2020j; BoC 2021f; BoC 2021g). For example, Deputy BoC Governor Toni Gravelle stated that the CTRF provided liquidity to large asset managers that were active in repo markets, rather than just primary dealers, the counterparties with which the BoC typically engages in repos (Gravelle 2021, 3).

The Bank of Canada Act requires that the central bank publish financial information about its assets and liabilities every week on its website (Bank of Canada Act 1985). The BoC reported CTRF transactions at an aggregate level with other securities purchased under resale agreements (BoC 2020b). The central bank briefly, in the second quarter of 2020, broke out CTRF figures but ceased doing so after (BoC 2020i, 23). The BoC is also required to release audited financial statements and a report by the BoC’s governor to the Minister of Finance (Bank of Canada Act 1985).

Because of confidentiality considerations, the BoC chose not to publish the names of individual institutions (BoC 2020b). Respondents to the BoC’s 2015 request for comment about the CTRF’s initial establishment worried that institutions accessing the facility might face negative stigma (BoC 2015c). When announcing the establishment of the CTRF, the BoC stated it would mitigate those disclosure concerns if the facility were activated in the future (BoC 2015c).

The BoC activated the CTRF on April 6, 2020, and said the facility would operate for 12 months (BoC 2020e). The central bank shuttered the CTRF, as originally scheduled, on April 6, 2021 (BoC 2021e). The BoC on its balance sheet does not distinguish between securities held under the CTRF from securities held under its other repo operations. Officials have said there was little usage after the second quarter of 2020 (BoC 2020b).