The Financial Administration Act (FAA) provides the statutory framework under which the Minister of Finance borrows money for the Government in financial markets. The FAA states that the Minister cannot borrow money without the authority of Parliament. Parliament authorizes the Minister to borrow new funds through borrowing authority acts. The Minister is authorized by the FAA to refinance maturing debt without further parliamentary authority. The Act provides the Minister with the authority to use modern financial and risk management tools and techniques such as interest rate and currency swaps, options, futures and forwards in the conduct of the Government's financial operations and for risk management purposes. In addition, the Act provides the Minister of Finance with legislative authority to establish rules governing the sale of the Government's debt.
In addition to the FAA, the Bank of Canada Act provides statutory authority for the Bank of Canada to act as the Government's fiscal agent. The Currency Act establishes the Exchange Fund Account and provides statutory authority for the Minister of Finance to manage the Account.
The Department of Finance, including Canada Investment and Savings (CI&S), the Government's retail debt agency, manages federal market debt in conjunction with the Bank of Canada. The Financial Markets Division of the Department of Finance provides analysis and develops policies and recommendations for the federal government's borrowing programs, for the investment of the Government's cash and reserve assets, and for the management of financial risks.
The Division works with the Bank of Canada, the Government's fiscal agent, on all aspects of debt management. As fiscal agent, the Bank of Canada is specifically responsible for the operational aspects of debt management, for example, conducting the auctions of government debt, issuing debt instruments, making interest payments and conducting foreign currency borrowing operations. The Bank also has responsibility for monitoring market activities and advising on debt management policy issues, as well as operating the Government's Risk Management Unit.
CI&S is a special operating agency of the Department of Finance, and its primary responsibility is the day-to-day management of the Retail Debt Program. CI&S, working in consultation with the Bank of Canada and the Financial Markets Division, is responsible for developing the Retail Debt Program's strategic direction and managing the front office aspects of the program.
Domestic borrowings are done strategically, i.e. securities are issued on a regular, transparent basis to maximize investor interest and participation. Marketable bonds, real return bonds (RRBs) and Treasury bills are sold via auction, with the Bank of Canada operating as the Government's fiscal agent, to Government of Canada securities distributors and end-investors. Tenders are submitted to the Bank of Canada via the electronic auction system CARS (Communications, Auctions and Reporting System).
Bonds are auctioned on a quarterly basis in the 2-, 5- and 10-year maturities, and on a semi-annual basis in the 30-year maturity. Bonds may be either new maturities or reopenings of previously auctioned bonds. New issues are generally reopened several times in order to increase the size of the issue to the target benchmark bond size.
The bond auction calendar, setting out details of the planned quarterly issuance of marketable bonds, is published by the Bank of Canada prior to the start of each quarter. Final details, including the amounts to be auctioned, the maturity date, and the amount outstanding in the case of bond reopenings, are released one week prior to the auction.
Bond sales take place via multiple-price auctions, with the exception of RRBs, which are sold via single-price auctions. Government securities distributors and investors may submit competitive tenders or non-competitive tenders. For multiple-price auctions, competitive bids are accepted in rising order of yield (declining order of price) until the full amount of the issue being auctioned is allotted, while non-competitive bids are allotted at the average of the accepted competitive bids. For single-price auctions of RRBs, bonds are allotted at the price equivalent of the highest real yield of accepted competitive tenders, plus accrued interest and inflation adjustment.
Buyback operations on a cash basis in the 2-, 5-, 10- and 30-year maturities are held shortly after periodic corresponding bond auctions. The Bank of Canada publishes with the bond auction calendar the target amount of bonds the Government intends to buy back during the quarter. Final details of individual operations, including the target amount to be bought back and the basket of eligible bonds, are released one week prior to the auction with the release of bond auction under announcement.
Buyback operations on a switch basis offer an opportunity for investors to exchange less liquid securities for new more liquid benchmark securities. Switch buybacks are held periodically in the 5-, 10- and 30-year sectors and are announced in the quarterly bond auction schedule. Final details of switch buyback operations, including eligible bonds for buyback and replacement target size, are published one week prior to the operation.
Cash management buyback operations target large bonds with less than 12 months before they mature. They are held on an irregular basis to suit government cash management needs. These operations are held on Tuesday mornings before Treasury bill auctions. Details of individual operations, including the target amount to be bought back and the basket of bond targets, are announced one week in advance with a release of the Treasury bill tender announcement.
Regular buyback and cash management buyback operations are settled on a cash basis and take place via multiple-price reverse auctions. Switch buyback operations are settled on a replacement bond and cash basis. In all buyback operations competitive offers are accepted in decreasing order of yield (increasing order of price) until the target amount to buy back is met. The target amounts may not be purchased if the offers do not meet the Government's fair value criteria.
Treasury bills are sold via auction on a discount basis. Those with terms to maturity of approximately 3, 6 and 12 months are currently auctioned on a biweekly basis, generally on a Tuesday for delivery Thursday. Under the biweekly issuance pattern, new 3-month Treasury bills are issued at each biweekly auction; new 6- and 12-month Treasury bills are offered in the same week and then reopened once at the next regular auction two weeks later.
The terms for auctions and buybacks for Government of Canada securities, the terms of participation at auctions and buybacks, the quarterly bond auction schedule, and auction and buyback results are available on the Bank of Canada's Web site at www.bankofcanada.ca.
The participation of distributors and end-investors at Government of Canada debt auctions is governed by a set of auction rules and terms of participation introduced in October 1998.
There are 23 government securities distributors that participate in the primary distribution of bonds and Treasury bills. All must be either members or affiliate members of the Investment Dealers Association of Canada (IDA) and have their core trading and sales operation for Government of Canada securities in Canada.
Under the auction rules and terms for participants, there are specific bidding limits that apply to government securities distributors and end-investors at Treasury bill and bond auctions. The limits vary by distributor based on the firms' relative market activity in the primary and secondary market for the securities. Separate bidding limits apply for Treasury bill and bond auctions. All government securities distributors also have ongoing reporting responsibilities to provide the Bank of Canada with market information involving Government of Canada securities. In addition, all bidders at auctions of Government of Canada securities, including customers, must abide by IDA Policy No. 5 governing standards for trading of debt securities in Canada.
Government securities distributors that maintain a certain threshold of activity in the primary and secondary market for Government of Canada securities become primary dealers, and form part of the core group of distributors of Government of Canada securities. The primary dealer classification can be attained in either Treasury bills or marketable bonds, or both. Primary dealers assume a number of responsibilities with respect to Government of Canada securities - they must comply with minimum bidding requirements for every auction so as to provide coverage at auctions as a group, and consistently make two-sided markets to a broad customer base.
Foreign currency debt is made up of a short-term US-dollar paper program (Canada Bills), two medium-term note programs (Canada Notes and Euro Medium-Term Notes) and large public bond issues. These securities are issued on an opportunistic basis when required and when market conditions are favourable. The Government also obtains foreign-denominated funding through purchases of US dollars in the spot foreign exchange market and through cross-currency swaps of domestic obligations.
The Government sells Canada Savings Bonds (CSBs) and Canada Premium Bonds (CPBs), referred to as non-marketable savings instruments, to individuals, or "retail" investors who are Canadian residents.
Two principal channels are used for sales of CSBs and CPBs: the Payroll Savings Program and financial institutions. The Payroll Savings Program allows employees of employers sponsoring the program to purchase CSBs during the sales campaign through payroll deductions.
During the six-month sales period (October to March) Canadians can also purchase CSBs and CPBs wherever they bank or invest, including banks and trust companies, investment dealers, savings and loan companies and credit unions. Additionally, Canadians, on a pilot basis, can purchase CSBs and CPBs directly from the Government by telephone.
Effective October 1995 Government of Canada marketable bonds are issued in global certificate form only whereby a global certificate for the full amount of the bonds is issued in fully registered form in the name of CDS & Co., a nominee of the Canadian Depository for Securities Limited (CDS). The bonds must be purchased, transferred or sold, directly or indirectly, through a participant of the Debt Clearing Service, which is operated by CDS, and only in integral multiples of $1,000 (face value). Prior to December 1993 Government of Canada bonds were issued in coupon-bearer and fully registered form, and were available in denominations ranging from $1,000 to $1,000,000. Between December 1993 and September 1995 Government of Canada bonds were issued only in fully registered form. All Canadian-dollar marketable bonds are non-callable and pay a fixed rate of interest semi-annually.
Effective November 1995 all new issues of Treasury bills are issued in global certificate form only whereby a global certificate for the full amount of the Treasury bill is issued in fully registered form in the name of CDS & Co., a nominee of the CDS. Treasury bills must be purchased, transferred or sold, directly or indirectly, through a participant of the Debt Clearing Service, which is operated by CDS, and only in integral multiples of $1,000 (face value). Prior to November 1995 Treasury bills were issued in bearer form and were available in denominations ranging from $1,000 to $1,000,000.
The Government of Canada also periodically issues cash management bills (CMBs). CMBs are Treasury bills with maturities of less than three months (they can be as short as one day) used as a source of short-term financing for the Government. CMB auctions can take place on any business day, typically for next-day delivery, but on some occasions for same-day delivery.
Government of Canada real return bonds (RRBs) pay semi-annual interest based upon a real interest rate. Unlike standard fixed-coupon marketable bonds, interest payments on RRBs are adjusted for changes in the consumer price index (CPI). The CPI, for the purposes of RRBs, is the all-items CPI for Canada, not seasonally adjusted, published monthly by Statistics Canada. The semi-annual nominal coupon payments are calculated as follows:
= real coupon rate/2 x (principal + inflation compensationi) where inflation compensationi
= ((principal x reference CPIi/reference CPIbase) - principal).
Reference CPI for the first day of any calendar month is the CPI for the third preceding calendar month. The reference CPI for any other day in a month is calculated by linear interpolation between the reference CPI applicable to the first day of the month in which such day falls and the reference CPI applicable to the first day of the month immediately following. The reference CPIbase for a series of bonds is the reference CPIi applicable to the original issue date for the series.
At maturity bondholders will receive, in addition to a coupon interest payment, a final payment equal to the sum of the principal amount and the inflation compensation accrued from the original issue date, i.e. final payment = principal + ((principal x reference CPImaturity/reference CPIbase) - principal).
These bonds must be purchased, transferred or sold, directly or indirectly, through a participant of the Debt Clearing Service and only in integral multiples of $1,000 (face value).
Canada Savings Bonds (CSBs) are offered for sale by most financial institutions in Canada. In addition, a significant number of organizations sponsor the Payroll Savings Program, thus allowing many Canadians to purchase CSBs through payroll deductions.
Except in certain specific circumstances, CSBs can be registered only in the name of residents of Canada. They are available in both regular interest and compound interest forms. For those CSBs which are certificated, denominations range from $100 ($300 for a regular interest bond) to $10,000. All CSBs are non-callable and, except in certain limited circumstances, non-transferable.
CSBs provide minimum guaranteed annual interest rates. The minimum guaranteed annual interest rate will be increased if market conditions warrant, but the bondholder will not earn less than the rate announced for that series for the posted period. CSBs are cashable at any time and, after the first three months, pay interest up to the end of the month prior to encashment. Principal and interest are fully backed by the Government of Canada.
The Canada Premium Bond (CPB) was introduced by the Government of Canada in 1998. Like CSBs, CPBs are offered for sale at most financial institutions in Canada.
CPBs offer a higher rate of interest at the time of issue compared to the CSB on sale at the same time, and are redeemable once a year on the anniversary date of the issue and during the 30 days thereafter without penalty. Once an issue date has passed, the announced interest rates for the posted period will not be changed. CPBs are available in both regular interest and compound interest forms. The compound interest bond is available for as little as $100 while the regular interest bond is available starting from $300. Principal and interest are fully backed by the Government of Canada and this bond is non-callable.
Canada Bills are promissory notes denominated in US dollars and issued only in book-entry form. They mature not more than 270 days from their date of issue, and are discount obligations with a minimum order size of US$1,000,000 and a minimum denomination of US$1,000. Delivery and payment for Canada Bills occur in same-day funds through Chase Manhattan Bank in New York City.
Primary distribution of Canada Bills occurs through five dealers: CIBC Wood Gundy Inc., Credit Suisse First Boston Corporation, Goldman, Sachs & Co., Lehman Brothers Inc. and RBC Dominion Securities Inc. Rates on Canada Bills are posted daily for terms of one to six months.
Canada Bills are issued for foreign exchange reserve funding purposes only.
Canada Notes are promissory notes usually denominated in US dollars and available in book-entry form. They are issued in denominations of US$1,000 and integral multiples thereof. At present the aggregate principal amount outstanding issued under the program is limited to US$10.0 billion. Notes can be issued for terms of nine months or longer, and can be issued at a fixed or a floating rate.
The interest rate or interest rate formula, issue price, stated maturity, redemption or repayment provisions, and any other terms are established by the Government of Canada at the time of issuance of the notes and will be indicated in the Pricing Supplement. Delivery and payment for Canada Notes occur through the Bank of New York.
The notes are offered by the Government through five dealers: Credit Suisse First Boston Corporation, Goldman, Sachs & Co., Lehman Brothers Inc., Nesbitt Burns Securities Inc. and Scotia Capital Markets (USA) Inc. The Government may also sell notes to other dealers or directly to investors.
Canada Notes are issued for foreign exchange reserve funding purposes only.
Euro Medium-Term Notes (EMTNs) are medium-term notes issued outside the United States and Canada. Government of Canada EMTNs are sold either by dealers in the dealer group, or by dealers who are not in the dealer group but who are acting as the Government's agent for the particular transaction (called reverse inquiry). EMTNs are sold on a bought-deal basis (i.e. the dealer purchasing EMTNs is responsible for the sale of the notes) and on an intermittent basis.
The Arranger for the EMTN program is Morgan Stanley Dean Witter. The London-based dealer group includes CIBC World Markets plc, Goldman Sachs International, J.P. Morgan Securities Ltd., Nomura International, TD Securities, Deutsche Bank, Merrill Lynch International, Morgan Stanley Dean Witter, RBC Dominion Securities and Warburg Dillon Read.
The EMTN program further diversifies the sources of cost-effective funding for the foreign exchange reserves. Notes issued under this program can be denominated in a range of currencies and structured to meet investor demand.
EMTNs are issued for foreign exchange reserve funding purposes only.
A cross-currency swap is an agreement that exchanges one type of return for another (e.g. a fixed for a floating rate of interest) and the principal amount for the term of the swap. Cross-currency swaps of domestic obligations are a cost-effective alternative to foreign-currency-denominated bond issues as a means of meeting the Government's targets for longer-term foreign currency funding.
Specific issue outstanding within each class of maturities. It is considered by the market to be the standard against which all other bonds issued in that class are evaluated.
Price a buyer is willing to pay.
The difference between bid and offer prices. It is typically measured in basis points (hundredths of a per cent).
Occurs when government annual revenues exceed annual budgetary expenditures. A deficit is the shortfall between government revenues and budgetary spending.
Exchange Fund Account:
A fund maintained by the Government of Canada for the purpose of promoting order and stability of the Canadian dollar in the foreign exchange market. This function is fulfilled by purchasing foreign exchange (selling Canadian dollars) when there is upward pressure on the value of the Canadian dollar and selling foreign exchange (buying Canadian dollars) when there is downward pressure on the currency.
Measures the difference between the cash coming in to the Government and the cash going out. In the case of a financial requirement, it is the amount of new borrowing required from outside lenders to meet the Government's financing needs in any given year.
foreign exchange reserves:
Stocks of foreign exchange assets (e.g. interest-earning bonds) held by sovereign states to support the value of the domestic currency. Canada's foreign exchange reserves are held in a special account called the Exchange Fund Account.
gross public debt:
Total amount the Government owes. It consists of both market debt in the form of outstanding securities, such as Treasury bills and Canada Savings Bonds, and internal debt owed mainly to the superannuation fund for government employees and other current liabilities.
Consists of unmatured debt, or market debt, and the Government's liabilities to internally held accounts such as federal employees' pension plans.
For debt management purposes, market debt is defined as the portion of debt that is funded in the public markets, and consists of marketable bonds, Treasury bills, retail debt (primarily Canada Savings Bonds), foreign-currency-denominated bonds and bills, as well as bonds issued to the Canada Pension Plan.
Market debt that is issued by the Government of Canada and sold via public tender or syndication. These issues can be traded between investors while outstanding.
net public debt:
Consists of gross public debt net of financial assets.
Consists of the Government's internal debt, which is, for the most part, federal public sector pension liabilities and the Government's current liabilities (such as accounts payable, accrued liabilities, interest and payment of matured debt).
Market debt that is not tradable and that is issued to retail investors (Canada Savings Bonds and Canada Premium Bonds).
Price at which a seller is willing to sell.
term structure of interest rates:
The levels of interest rates from short- to long-term maturities.
Volume of securities traded as a percentage of securities outstanding.