Canada: Commercial Paper Purchase Program

The BoC established the CPPP to support proper functioning in the market for short-term CP, an important source of funding for a wide range of firms and public authorities. The liquidity backstop for Canadian issuers complemented the suite of monetary and fiscal policy measures taken by the BoC to “create the best possible foundation for the recovery period” (Poloz 2020, 2).

Considering the global volatility, abrupt drop in oil prices, and potential for “permanent damage to the structure of the economy” related to the outbreak of COVID-19 in Canada, the central bank instituted a large package of support measures equal to about 12% of GDP (BoC 2020g, 1; BoC 2020j). Large-scale asset purchases of Canada Mortgage Bonds (issued by the government-owned Canada Mortgage and Housing Corporation), bankers’ acceptances, CP, corporate bonds, and provincial and federal government debt allowed the BoC to support market functioning, while an expansion of term repo facilities supported credit availability for businesses and municipalities. Additionally, on March 27, 2020, the BoC lowered the overnight target rate to its effective lower bound of 25 bps, down from 75 bps just two weeks prior.

Paragraph 18(g) of the Bank of Canada Act gives the BoC broad discretion to buy and sell securities in normal times (18(g)(i))^FPrior to the Global Financial Crisis, the Bank of Canada Act limited the securities that the Bank could buy and sell in normal times to short-term (less than 180-day) credit endorsed, accepted, or issued by a bank (BoC 2004; BoC 2008b). In 2008, Parliament broadened the scope of 18(g)(i) to allow the purchase or sale of any security issued by any person, other than equity interests. The 2008 revision also clarified that the Bank of Canada had this authority either “for the purposes of conducting monetary policy or promoting the stability of the Canadian financial system.” and in crisis times (18(g)(ii)).^FSubparagraph 18(g)(ii) allows the bank to purchase any security in a crisis “if the Governor is of the opinion that there is a severe and unusual stress on a financial market or the financial system” (Bank of Canada Act 1985a). This power has been in the Act since 2001. Since 2008, the Act has allowed the bank to trade in virtually any security except equity interests in normal times; the crisis authority also extends to equities. The Act requires the BoC to establish and publish a policy statement describing how it will administer 18(g)(i) during normal times.

To date, the BoC has never taken action under the crisis authority described in 18(g)(ii). Therefore, the central bank has justified some extraordinary emergency measures during the pandemic crisis by revising its policy statement under 18(g)(i).

The BoC first published that policy in July 2008. At the time, the BoC’s policy allowed it to buy and sell securities only through purchase and resale transactions, or “buybacks.” For purposes of implementing monetary policy, the BoC could buy and sell government of Canada bonds and treasury bills, typically for a duration of just one day. However, the policy allowed the BoC to buy and sell a much broader range of securities for purposes of managing financial system stress—for example, government securities issued by the US and other developed countries, Canadian corporate and municipal bonds, Canadian CP, and Canadian asset-backed securities. The policy originally limited these “exceptional transactions” to terms of 180 days or less. The Bank revised the policy in 2009 to allow terms up to 380 days, among other revisions (BoC 2009).

During the pandemic crisis, the BoC made two small changes in language to the policy statement with broad implications. First, on March 13, it gave itself the ability to “engage in outright purchase or sale transactions” rather than buybacks only (BoC 2020d). Second, on March 18, it removed the 380-day limit on the terms of its transactions (BoC 2020e).

These amendments entered into force a week after their publication in the Canada Gazette.

Section 28 of the Bank of Canada Act 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” (Bank of Canada Act 1985b).

Purchases of CP were conducted by TD Asset Management (TDAM) on behalf of the BoC. Additionally, the BoC retained BlackRock for advisory services and CIBC Mellon as custodian. Although no contract information was available as of March 2022, BoC spokesperson Rebecca Spence told reporters in April 2020 that the information “eventually would be, in keeping with the Bank of Canada’s transparency guidelines” (Carmichael 2020, 1). She further elaborated that the BoC selected the firms “based on their capabilities, prominent role in the Canadian financial system and capacity to respond quickly and establish the CPPP on behalf of the bank” (Carmichael 2020, 1). She also noted that the BoC had instituted “robust” conflict-of-interest measures when asked about TD Asset Management’s “active” role in Canadian credit markets and its potential to profit off its relationship with the CPPP (Carmichael 2020, 2).

Eligible issuers could access the program through their dealers, who in turn filled out a registration form disclosing the issuer’s name, certified issuance limit, and other operational details with TDAM.

The BoC intended to support the “continuous functioning of financial markets” in establishing the program but did not address any specific concerns regarding the strength of the CP market (BoC 2020h, 1). Officials instead cited CP as an essential source of financing for a wide range of firms and public agencies and highlighted the BoC’s commitment to ensuring the flow of credit to the real economy (BoC 2020h).

In announcing its plans to establish numerous programs to support the financial system, the BoC emphasized the importance of returning the economy to a state of normalcy (BoC 2020g). The Governing Council of the BoC also committed to adjusting its measures and taking further action “as required” in response to the evolving situation (BoC 2020g, 1). Furthermore, in his opening statement before the House Commons Standing Committee on Finance, Governor Stephen Poloz emphasized that the BoC “[stood] ready to augment the scale of any of its programs should market conditions warrant it” (Poloz 2020, 1).

The BoC reported aggregate holdings of CP acquired through the CPPP every Friday on the bank’s weekly balance sheet; the first results were published on April 10, 2020.

This reporting appears to go beyond what was required in Section 29 of the Bank of Canada Act. Subsection 29(1) required the BoC to post aggregate information about its assets and liabilities on its website each Friday. Subsection 29(2) required the BoC to report monthly on investments and securities issued or guaranteed by the government of Canada.

Furthermore, the Governor of the Bank or Minister of Finance could compel the BoC to submit a summary or report along with these financial statements for publication in the Canada Gazette. The Minister of Finance would then present such documents to Parliament within three weeks (Bank of Canada Act 1985a, c. B-2:22).

The BoC upheld its stated commitment to transparency in releasing transaction-level data for its discontinued asset purchase programs introduced during the COVID-19 pandemic. While not required explicitly by law, the BoC announced upon termination of the programs that it would disclose the names of individual issuers and amounts of CP purchased over the course of the program. On June 29, 2021, the BoC published on its website transaction-level data for its emergency asset purchase programs, including the CPPP.

The BoC purchased CP directly from eligible issuers.

The maximum amount of a single issuer’s CP that the CPPP could hold at any given time equaled 1.25 times the greatest amount of CAD-denominated CP that the issuer had outstanding on any day in the 12 months prior to April 2, 2020. The CPPP also would not purchase additional CP from an issuer whose total CP outstanding to all investors (including the CPPP itself) exceeded this limit.

In an explanatory note on the BoC’s use of reserves for emergency purposes, Deputy Governor Paul Beaudry analogized settlement balances—deposits to the facility’s account with the central bank—with loans from institutions to the central bank. The BoC credited issuers upon purchase with a deposit of settlement balances, paying interest at the policy rate of 25 bps (Beaudry 2020, 3). This policy derived from the BoC’s existing “Statement of Policy Governing the Acquisition and Management of Financial Assets for the Bank of Canada’s Balance Sheet.”

The BoC also entered into independent financial guarantee contracts with the government of Canada that indemnified the central bank in the case that it incurred credit losses on assets purchased under the CPPP. In accordance with International Accounting Standard 37, these agreements stipulated that assets would be recognized only if an issuer were in default and the BoC had filed a claim of reimbursement with the government (BoC 2021c).

Compared with other programs enacted in response to COVID-19, the CPPP did not contribute to the significant increase in the BoC’s balance sheet. Figure 2 illustrates the relatively small impact of CP (approximately CAD 3.0 billion) on the BoC’s total asset holdings, which more than quadrupled over the first six months of 2020 to CAD 528.2 billion as of June 30, 2020 (BoC 2020m).

Source: BoC 2020m, 5.

The BoC could purchase CP on the primary market through eligible issuers’ dealers or after issuance from eligible counterparties on the secondary market. Eligible firms and public authorities were required to have had an existing CP program prior to the establishment of the CPPP. Relatedly, issuers had to be rated R-1 high/mid/low by DBRS Morningstar as of April 2, 2020. If an issuer did not possess a short-term credit rating from DBRS Morningstar, it could substitute ratings from Fitch, Moody’s, or S&P at the BoC’s discretion. If the issuer were to have been downgraded after April 2, 2020, it would remain eligible for participation in the CPPP, subject to BoC approval (BoC 2020c).

According to the CPPP term sheet, draws could be rolled throughout the duration of the program.

The program allowed eligible Canadian entities to issue highly rated CP through designated dealers.

The BoC required assets to be of “sufficiently high quality,” generally equivalent to a minimum short-term credit rating of R-1 High (highest), R-1 Mid (superior), or R-1 Low (good) (BoC 2020a, 2).

The CPPP made purchases on a fixed-rate basis set daily, based on a spread above the current three-month Canadian OIS rate. When the CPPP first became operational on April 2, 2020, the BoC charged 130 bps to institutions rated R-1 high or R-1 mid; those rated R-1 low were required to pay 160 bps (BoC 2020a).

The BoC “[reserved] the right to adjust its pricing to meet policy objectives” (BoC 2020a, 2).

Haircuts apply only to programs that involve lending to counterparties.

Interest rates apply only to programs that involve lending to counterparties.

The BoC announced that it expected issuers to be able to access the program without any charges from the dealer. Instead, assets purchased under the CPPP were managed by collecting contractual cash flows derived from interest payments. As of July 2020, the BoC reported that the amortized cost of its CP purchases amounted to approximately CAD 1.6 billion (BoC 2020m).

This refers to the loan maturity and applies only to programs that involve lending to counterparties.

Sources consulted do not indicate the imposition of restrictions on CPPP participants.

Sources consulted do not indicate the existence of regulatory concessions.

Sources consulted do not indicate that the BoC consulted with international parties.

In its initial press release, the BoC announced that the program would become operational on April 2, 2020 and would last for 12 months.

On March 23, 2021, the BoC announced that the CPPP would be discontinued, as scheduled, on April 2, 2021. Deputy Governor Toni Gravelle, in his remarks to the CFA Society of Toronto that same day, noted that it was “clear that [the BoC’s] extraordinary facilities [were] no longer required,” as firms and public authorities had “unfettered access to fully functional debt markets” and credit spreads had normalized to pre-pandemic levels for most borrowers (Gravelle 2021, 6).