Financial System
Payments and other clearing and settlement systems
Services provided by the Bank of Canada
Settlement assets, liquidity, and collateral and settlement-agent services
The Bank of Canada provides the following services to certain clearing and settlement systems and their participants:
- Settlement assets
- Standing liquidity facility
- Collateral services
- Settlement-agent services
Participants in the Large Value Transfer System (LVTS) use claims on the Bank of Canada to settle net payment obligations among direct participants. (That is, payments are made from account balances held by the participants at the Bank.) Because Bank of Canada deposits are risk free, this mechanism provides greater safety to participants. Since the Bank of Canada can supply virtually unlimited amounts of these deposits, sufficient balances will always be available for settlement purposes under all circumstances.
The Bank of Canada provides collateralized advances to direct participants in the LVTS through its Standard Liquidity Facility. These virtually automatic advances provide participants with access to a reliable backup source of liquidity should they need to fund their end-of-day payment obligations, thus helping them to transfer value efficiently among themselves during the day.
An LVTS advance is a secured loan provided by the Bank of Canada to cover a net amount owed by the institution in its end-of-day LVTS position. The interest rate on the one-business-day loan is set at the upper limit of the Bank of Canada's operating band for the overnight interest rate: the Bank Rate.
See also the Bank of Canada's policies governing its activities as lender of last resort.
The Bank of Canada performs several functions concerning collateral in the LVTS. The LVTS participants pledge their collateral security to the Bank. The Bank establishes the list of asset types acceptable for pledging. The Bank provides the LVTS system operator with valuations of securities when they are pledged as collateral. The Bank has built a specialized computer system (the Collateral Valuation and Tracking System) to monitor and value quickly and accurately the collateral pledged by the participants in the LVTS.
The Bank of Canada acts as settlement agent, or "banker," for CDSX. CDSX clears and settles trades in Canadian-dollar-denominated debt securities. Each day, the Bank receives payments from participants that owe money to CDS, then makes payments to participants entitled to receive money from the CDS.
With the Bank acting as settlement agent, so-called "banker risk" is eliminated for CDSX and its participants. Banker risk refers to the possible failure of a private sector institution acting as settlement agent for a clearing and settlement system, which would then expose the system participants and the operator to credit risk. The Bank of Canada incurs no liquidity or credit risk from carrying out this function because the LVTS is used to make end-of-day CDSX payments, and the Bank will make an LVTS payment on behalf of CDS only if there is a sufficient balance in CDS's account to cover the amount of the payment.
The Bank of Canada also acts as banker for the CLS Bank, by providing it with a settlement account which it uses to make and receive Canadian-dollar-payments arising from the continuous linked settlement service. In addition, since the CLS Bank is not a member of the Canadian Payments Association, the Bank of Canada makes and receives payments through the LVTS on its behalf. The Bank of Canada has extended its overnight operations to provide these services during the CLS Bank's processing period.