Canada: Provincial Bond Purchase Program

The BoC announced the Provincial Bond Purchase Program (PBPP) through a notice published April 15, 2020 (BoC 2020g). The BoC stated in the first press release that the PBPP would supplement the newly created Provincial Money Market Purchase Program (PMMPP), which had been announced on March 24, 2020 (BoC 2020f).

The first press release stated the aim of both the PBPP and the PMMPP: “to maintain well-functioning provincial funding markets in the face of significant demands for funding as governments implement their emergency measures, and businesses and households seek to bridge this difficult period” (BoC 2020g).

The PBPP was one of a number of liquidity programs announced in response to market stress caused by the COVID-19 pandemic (BoC, n.d.c). The BoC stated in the first press release that the PBPP would supplement the newly created Provincial Money Market Purchase Program (PMMPP), which had been announced on March 24, 2020 (BoC 2020f). The PMMPP supported liquidity in short-term provincial money markets through the primary market (BoC 2020a).

Section 18(c) of the Bank of Canada Act established the BoC’s right to buy and sell securities issued or guaranteed by Canada or any province (Bank of Canada Act 1985).

Section 28 of the Bank of Canada Act (1985) enables the Minister of Finance to appoint auditors of the BoC and to require that those auditors report on bank affairs to the Minister “from time to time.”

On April 23, 2020, the BoC announced that BMO Global Asset Management (BMO GAM) would serve as asset manager for the PBPP, which was “selected following a competitive procurement process” (BoC 2020h). BMO Global Asset Management was selected for “their capacity to quickly and effectively establish and manage this program, and their robust conflict of interest policies and processes” (BoC 2020h). The BoC retained BlackRock Financial Markets Advisory to advise the BoC and CIBC Mellon to serve as custodian (BoC 2020g).

Eligible participants—primary dealers for Government marketable bonds—could access the program by contacting BMO GAM (BoC 2020b).

When it first announced the program on April 15, 2020, the BoC framed the PBPP as critical “to maintain[ing] well-functioning provincial funding markets in the face of significant demands for funding as governments implement their emergency measures, and businesses and households seek to bridge this difficult period” (BoC 2020g). A day later, on April 16, the governor of the BoC, Stephen Poloz, addressed the House of Commons Standing Committee on Finance and explained that the PBPP would help to “ensure proper functioning of provincial debt markets” (Poloz 2020).

Section 29 requires that the BoC report weekly, on Fridays, its assets and liabilities (Bank of Canada Act 1985). Pursuant to Section 29, the BoC reported on its aggregate holdings of provincial bonds every Friday (BoC 2020b). However, it did not report individual transactions while the program was operating. While not required by law, the BoC published transaction-level data on June 29, 2021 (BoC 2021c).

A March 23, 2021, press release which announced that the PBPP would be discontinued on May 7, 2021, further stated that the BoC would publish transaction-level data for its asset purchase programs (BoC 2021b).

This Key Design Decision does not apply to the BoC's PBPP.

The PBPP was authorized to hold up to CAD 50 billion par value of eligible assets (BoC 2020b). The BoC instituted individual participating limits: the BoC would not purchase more than 20% of an eligible issuer’s outstanding eligible assets (BoC, n.d.a).^FSection 18(j) of the Bank of Canada Act states that the BoC may extend loans to provincial governments but that outstanding loans must not exceed: 1) one-third of the Government of Canada’s annual revenue and 2) one-fourth of the borrowing provincial government’s revenue. All loans must be repaid by the first quarter of the following year (BoC 2020d, sec. 18[j]).

An explanatory note from Deputy Governor Paul Beaudry explained that the BoC funded its acquisition of provincial bonds through settlement balances—by crediting primary dealers upon purchase “with a deposit of settlement balances in” BoC accounts paying the policy interest rate of 25bps (Beaudry 2020).

The Government of Canada entered into indemnity agreements with the Bank of Canada covering the PBPP, as well as other COVID-19 asset purchase programs. Under these agreements, realized losses would be indemnified by the Government of Canada, and realized gains would be remitted (BoC 2021a, 21).

Eligible participants were primary dealers for Government of Canada marketable bonds (BoC 2020e). See Figure 5 for a complete list of eligible primary dealers.

The BoC purchased provincial bonds through reverse auction. Prior to February 22, 2021, auctions were to be held twice a week, though published operations data indicates that auctions were occasionally held three times a week. After February 22, 2021, the BoC held weekly auctions (BoC, n.d.b). A BoC spokesperson said that the change was “consistent with the gradual reduction approach” that the BoC favored with other programs (Gordon 2021).

The BoC purchased provincial bonds through primary dealers from provinces and territories (BoC 2020b).

Eligible assets were CAD-denominated bonds with maturation dates on or before April 15, 2031, issued or guaranteed by a provincial or territorial government and sold in the secondary market. Non-guaranteed agency bonds, municipal bonds, real return bonds, FRNs, strip/residuals, T-Bills, and promissory notes were not eligible for the program (BoC 2020b). A full list is presented in Figure 5.

 Source: BoC 2020c.

The BoC instituted individual participating limits: the BoC would not purchase more than 20% of an eligible issuer’s outstanding eligible assets. The facility did not impose a minimum rating requirement (BoC, n.d.a).

The BoC aimed to create a portfolio of assets “based in equal weight on each province or territory’s share of eligible bonds outstanding and their share of Canadian GDP” (BoC, n.d.a, 2). This weighting was recalculated on a monthly basis. Figure 6 contains the portfolio by issuer as of May 10, 2021.

Source: BoC, n.d.a.

The BoC determined pricing through a tender offer process, informed by market conditions. The BoC “reserved the right to adjust its pricing and portfolio requirements and objectives to meet policy objectives” (BoC 2020b).

Research did not reveal other restrictions on participants.

This Key Design Decision does not apply to the BoC's PBPP.

This Key Design Decision does not apply to the BoC's PBPP.

This Key Design Decision does not apply to the BoC's PBPP.

This Key Design Decision does not apply to the BoC's PBPP.

This Key Design Decision does not apply to the BoC's PBPP.

This Key Design Decision does not apply to the BoC's PBPP.

The BoC announced on March 23, 2021, that it would discontinue the PBPP on May 7, 2021, consistent with the BoC’s intentions to operate the program for one year (BoC 2021b).