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Archived - Exchange Fund Account Annual Report 2001: 1
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Introduction
This report reviews the operations of the Exchange Fund Account ("EFA") for the 2001 calendar year and the changes in Canada's international reserve holdings against the background of developments in the foreign exchange market. The accompanying Financial Statements provide additional information on the operations of the EFA.
The Exchange Fund Account is the principal repository of Canada's official international reserves. The EFA is governed by the provisions of the Currency Act and is held in the name of the Minister of Finance. Foreign currency borrowings by the Government of Canada are the main source of financing of the EFA.
Objectives
The objectives of the EFA are:
- to provide general foreign-currency liquidity for the government; and
- to provide funds to help promote orderly conditions in the Canadian dollar in the foreign exchange market.
Governance
The government approves the general policies related to the management of the EFA and, in particular, establishes the target level of reserves, and provides an annual report to Parliament on the operations of the Account. Responsibility for the management of the EFA is jointly shared by the Department of Finance and the Bank of Canada. The Bank of Canada, acting as fiscal agent for the government, effects transactions for the Account.
The Director, Financial Markets Division (Department of Finance) and the Chief, Financial Markets Department (Bank of Canada) are responsible for the on-going management of the EFA. A Policy Committee, comprised of senior management of the Department of Finance and the Bank of Canada, meets semi-annually to review developments, approve major policy initiatives and provide guidance and accountability on the management of the Account.
The Risk Management Unit (RMU), established by the Bank of Canada to oversee the risk position of the Government of Canada, monitors and advises on the risk position of the EFA, including market, credit and liquidity risks.
Key Principles
In recent years the Government has increased the level of foreign exchange reserves in light of large flows in foreign exchange markets, to provide liquidity for the government's operating needs in foreign currencies, and bring Canada more in line with other comparable sovereigns.[1] The foreign currency reserve assets and the liabilities financing those assets are managed on a portfolio basis, based on many of the same principles used by private sector financial institutions, including prudent risk management principles.
In this regard, interest rate and currency risks are immunized to the extent possible. On the asset side, attention is paid to asset liquidity and quality, diversification and credit limits with counterparties. On the liability side, the same attention is paid to diversified means of raising funds and a diversified investor base, as well as to the cost of different sources of funds and the maturity profile of the liabilities.
Principles governing the management of the EFA include;
- There should be a sufficient amount of high-quality, highly-liquid foreign exchange reserve assets available for general liquidity purposes and possible intervention in the foreign exchange market to promote orderly conditions in the Canadian dollar;
- The difference between the interest paid on the government's foreign currency liabilities used to fund EFA assets and the interest earned on those assets should be minimized (to the extent that the former is higher);
- Foreign reserves should be managed to ensure, as much as possible, that the assets match the liabilities in currency and duration;
- A prudent maturity structure and maturity profile should be maintained to limit refinancing needs within the context of liquidity requirements;
- Best practices with regards to risk management should be applied in the overall management of the EFA;
- Credit risk should be managed prudently through diversification of the EFA asset portfolio, with appropriate use of credit ratings, counterparty limits and collateral support; and
- Foreign currency borrowing activities (e.g. Global bonds and medium term notes) to fund EFA assets should be conducted so as to maintain Canada's reputation as a successful borrower in international capital markets.
Other key management guidelines include;
- The EFA portfolio is structured into a Liquidity Tier and an Investment Tier;
- At least 50% of the EFA's assets are to be denominated in U.S. dollars. The remainder of the portfolio is to be split among euro and yen-denominated assets;
- The EFA holds debt in the designated currencies of highly rated sovereign governments, their agencies and by supranational organizations having a AA-rating or better.
The Gap between Foreign Currency Assets and Liabilities
In recent years foreign currency liabilities came to exceed liquid foreign currency assets in the Exchange Fund Account, largely as a result of foreign exchange intervention and important commitments to the International Monetary Fund in 1998. At its widest point, the excess liability amounted to some US$13 billion. Consistent with the Government's policy of immunizing currency and interest rate risk in Canada's reserve program, the Government is taking steps to bring foreign currency liabilities in line with foreign currency assets.
In December 1998 the Department of Finance, in collaboration with the Bank of Canada, implemented a program of purchases of U.S. dollars in foreign exchange markets. These U.S.-dollar purchases are small in relation to the large daily flows in foreign exchange markets and are undertaken with sensitivity to market conditions. This program has reduced the gap between foreign currency assets and liabilities to some US$4.8 billion, based on the market value of the assets, as of the end of December 2001, and the plan is to eliminate the gap over the next few years.
Recent Developments
The Risk Management Unit monitors credit exposures to each of the government's financial institution (FI) counterparties on a daily basis and reports regularly on counterparties' credit positions to senior management of the Department of Finance and the Bank of Canada. Consistent with best practices in risk management in recent years, the government has been moving to a broad collateral management approach in its fund management operations to better manage its credit risk to FI counterparties. Collateral management systems[2] are increasingly the norm in capital markets as a way of managing credit risk. The effect of collateralization is to substitute the credit risk of the issuer of the collateral for that of the counterparty to the transaction.
Collateral frameworks are being implemented on both the domestic and foreign sides of the government's treasury operations. The government is in the process of implementing a new credit framework for the investment of its domestic (Receiver General) cash balances which will include a move from uncollateralized to partially collateralized investment of the cash. On the foreign side, the government is putting in place a collateral framework for its cross-currency swap program used to raise foreign exchange reserves. The collateral framework for swaps will be operational in the spring of 2002.
The government will also be moving in the next year from uncollateralized short-term US-dollar deposits to collateralized repos to manage credit risk associated with that line of business. Currently, the government invests its US-dollar cash balances in unsecured bank deposits with a number of commercial banks. In line with the evolution of best practices, the government has decided to reduce its credit exposure to FIs through the introduction of a repo program. Under this framework, collateral would be posted to the government when US-dollar cash is invested with the government's FI counterparties.
Coincident with the implementation of collateral management frameworks for the government's cross-currency swap and US-dollar deposit programs, the government will be modifying its credit guidelines to accept a modest amount of A-rated FI US dollar exposure. This change will help the government further diversify its credit risk across FI counterparties and will help improve further the cost of carry of the reserve portfolio. Credit exposure to A-rated FIs will be contained within prudent standards, consistent with best practices of comparable sovereigns and market participants.
Foreign Exchange Market Developments
The Canadian dollar depreciated relative to the U.S. dollar over the year, losing almost four U.S cents (or 6.2 per cent) against the U.S. dollar, finishing the year at US$0.6278. The dollar's high for the year was US$0.6711 recorded on February 2nd while the low for the year was US$0.6230 recorded on November 9th. On a trade weighted basis against the C6[3] currencies the Canadian dollar depreciated by 4.7 per cent, less than it declined against the U.S. dollar alone. This is explained by the fact that the Canadian dollar appreciated by almost 2.1 per cent against the C5 currencies (i.e. the non-U.S. dollar C6 currencies).
International Financial Developments during 2001
The global economic climate slowed in the first half of 2001. The short-term disruptions created by the terrorist attacks on September 11th led to negative growth in the third quarter. Following the attacks, central banks worldwide moved quickly to provide liquidity support to the global financial system.
(1) First Half of 2001 - A Global Slowdown
In Europe, the spillover effects from the U.S. slowdown in investment spending, along with the effects of weaker domestic demand, were already being increasingly felt prior to the attacks in September. European industrial production growth slowed in the first quarter of 2001 and the unemployment rate was at 8.3% in May.
In Japan, the economy deteriorated further from the previous year. Exports continued to decline and industrial output slumped. As for market indicators, stock prices, which had been rising until early May, started falling afterwards. Long-term interest rates started to ease in early August reflecting concerns about the deterioration in the economy.
Economic growth in the United States slowed during the first half of 2001. To an important extent, this deceleration reflected the sharp turnaround in the growth of investment spending (which had been a key element in the U.S. expansion). Investment in the technology sector was hit particularly hard. Industrial production also fell as firms strove to bring stock levels into line with demand. At the same time, consumer spending and housing expenditures continued to advance, albeit at a slower pace. Although some slowing to a more sustainable pace had been desirable, the slowdown was deeper and more prolonged than initially expected.
By midsummer, evidence began to accumulate that the Canadian economic slowdown would be deeper and more protracted than previously anticipated. Core inflation rose above 2 per cent in the spring and hovered around 2.3 per cent through the summer months. In contrast, because of declining energy prices, total CPI inflation had fallen sharply from a peak rate of nearly 4 per cent in the spring and was moving down towards core inflation.
(2) Second Half of 2001 - Continued uncertainty about economic prospects
During the summer, fading hopes for economic recovery had already weakened the major stock markets and problems in emerging markets had resurfaced. There were declines in most categories of international financial flows in the second quarter and at the start of the third, as borrowers moved to trim investment plans and restore balance sheets. The attacks shook consumers and business confidence still further and reinforced prospects for a broad global slowdown.
In the euro area, the spillover effects to domestic demand from geopolitical uncertainties and the U.S. slowdown apparently dampened economic growth by more than anticipated. The unemployment rate was at 8.5% by the end of the year.
In Japan, economic problems continued unabated throughout last year, largely because efforts to revive the economy were constrained by underlying structural difficulties, including ongoing problems in the financial sector, as well as deteriorating business and household confidence.
By year-end, the geopolitical situation in the United States improved and the global economy started to recover. Consumer confidence rebounded from the lows reached after the terrorist attacks. However, business investment remained weak, reflecting low corporate profits and uncertainty about growth prospects.
Canada's economic conditions weakened further as a result of the terrorist attacks in the United States. Growth became negative in the third quarter, reflecting weakening in both domestic and foreign demand. However, a rebound in consumer confidence together with lower taxes and much lower interest rates, led to a rebound in economic activity in the fourth quarter.
Financial Review
1. Foreign Exchange Market Intervention
The objectives of the Exchange Fund Account are to provide general foreign currency liquidity for the government and to provide funds to help promote orderly conditions in the Canadian dollar in the foreign exchange market. In September 1998, the Department of Finance and the Bank of Canada decided to move away from intervening in the foreign exchange market in an automatic fashion (selling foreign exchange / buying Canadian dollars when there was downward pressure on the exchange rate, or buying foreign exchange / selling Canadian dollars when there was upward pressure on the value of the Canadian dollar). Instead, current government policy is for the Bank of Canada to intervene on a discretionary basis.
Since September 1998 the Bank of Canada, acting as agent for the government, has not undertaken any foreign exchange market intervention in the form of either purchases or sales of U.S. dollars versus the Canadian dollar (see Table 1). [4]
| 1997 | 1998 | 1999 | 2000 | 2001 | |
|---|---|---|---|---|---|
| (in millions of U.S. dollars) | |||||
| Purchases | 1,665 | 51 | 0 | 97 | 0 |
| Sales | -5,326 | -9,063 | 0 | 0 | 0 |
| Net | -3,661 | -9,012 | 0 | 97 | 0 |
| 1 The intervention shown represents purchases of euros as part of Canada's participation in the G7 concerted intervention in support of the euro. | |||||
2. Amount and Composition of Canada's Official International Reserves
The Exchange Fund Account is the principal repository of Canada's official international reserves; Canada's foreign assets at the Bank of Canada and the International Monetary Fund are also included in the total of reserves. The composition of Canada's official international reserves and their distribution by holder at year end are shown below:
| Repository | ||||||
|---|---|---|---|---|---|---|
| 2000Total | 2001 Total1 | Exchange Fund Account | Bank of Canada | Minister of Finance | Receiver General for Canada | |
| (in millions of U.S. dollars) | ||||||
| Convertible foreign currencies | ||||||
| Securities | 24,911 | 26,329 | 26,329 | - | - | - |
| Deposits | 4,108 | 4,155 | 4,051 | 100 | - | 4 |
| Gold | 323 | 291 | 291 | - | - | - |
| Reserve position in the IMF |
2,508 | 2,859 | - | - | 2,859 | - |
| Special drawing rights | 574 | 614 | 614 | - | - | - |
| Total | 32,424 | 34,248 | 31,285 | 100 | 2,859 | 4 |
| 1 The classification of assets in the Statement of Official International Reserves differs from that used in the attached financial statements. | ||||||
Canada's official reserves ended the year at US$34.2 billion on a market value basis. The increase in the level of reserves over this period was funded primarily through swapped domestic issues. These financing activities are set out in greater detail in Table 7.
Table 3 below outlines the main factors affecting the level of reserves:
| 2001 Market Value | |
|---|---|
| (millions of U.S. dollars) | |
| Official intervention | 0 |
| Net government operations1 | 1,723 |
| Foreign currency debt | -2,225 |
| Cross-currency swaps | 2,285 |
| Gains and losses on gold sales2 | 1 |
| Return on investments3 | 1,943 |
| Foreign currency debt charges | -1,683 |
| Foreign currency revaluation | -543 |
| Other transactions4 | 323 |
| Total change | 1,824 |
| 1 Net government operations cover net purchases of foreign currency for government foreign exchange require ments and for additions to reserves. 2 Gains and losses on gold sales reflect the degree to which proceeds from the sale of gold exceeds the market value of gold that existed at the end of the previous month. 3 Return on investments comprises interest earned on investments and changes in the market value of securities. 4 Other transactions covers increased support for IMF lending operations. |
|
More detailed information on monthly levels and changes in Canada's reserves is presented in Table 8.
3. Term Structure of EFA Investments and Liabilities
| Foreign currency investments | |||||
|---|---|---|---|---|---|
| Term | Cash and term deposits | Government securities in domestic currency | Other securities | Total assets | Foreign currency liabilities2 |
| US Dollar Holdings | |||||
| Under 6 months | 4,066 | 3,200 | 2,330 | 9,596 | 14,829 |
| 6 to 12 months | - | 50 | 578 | 628 | 250 |
| 1 to 5 years | - | - | 6,912 | 6,912 | 7,250 |
| Over 5 years | - | - | 1,848 | 1,848 | 1,550 |
| EURO Holdings3 | |||||
| Under 6 months | 45 | - | - | 45 | - |
| 6 to 12 months | - | - | 214 | 214 | 303 |
| 1 to 5 years | - | - | 2,761 | 2,761 | 2,899 |
| Over 5 years | - | - | 6,515 | 6,515 | 6,270 |
| YEN Holdings | |||||
| Under 6 months | 61 | - | - | 61 | 61 |
| 1 to 5 years | 380 | 380 | 380 | ||
| Over 5 years | - | 380 | - | 380 | 380 |
| Total | 4,172 | 4,010 | 21,158 | 29,340 | 34,172 |
| 1 Data in this table reflect the par value of all investments and liabilities. In the attached Financial Statements, investments are reported at their book value which includes unamortized premiums or discounts where applicable and accrued interest. 2 The December 31, 2001 exchange rate was used for the euro and yen assets and liabilities. 3 The liability data fully reflect the impact of the government's long-term interest rate and currency swaps. For example, $4,049 million of the $9,472 million Euro liabilities consist of swapped domestic issues. |
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As noted earlier, foreign exchange liabilities have grown significantly in recent years, particularly in 1998 due to extensive foreign exchange intervention and important commitments to the International Monetary Fund. As a result, foreign currency liabilities grew to exceed foreign currency assets in the EFA and purchases of U.S. dollars in the foreign exchange markets are being used to reduce the mismatch between foreign currency liabilities and assets. Graph 1 presents the EFA's liquid foreign reserve assets and the foreign currency liabilities since 1986.
4. The Exchange Fund Account's Revenues
The Exchange Fund Account's revenues include income from its investments, net gains on sales of gold, and foreign exchange gains or losses on its assets and liabilities. In 2001, the EFA's income totalled C$2,258 million, compared with C$2,529 million in 2000. Income earned by other reserve holders is added to official reserves, but is reported directly by those other entities.
The main categories of income earned by the EFA are summarized below:
| 1997 | 1998 | 1999 | 2000 | 2001 | |
|---|---|---|---|---|---|
| (in millions of Canadian dollars) | |||||
| Investment Income | |||||
| Marketable securities | 1,030 | 1,364 | 533 | 2,292 | 2,318 |
| Cash and short-term deposits | 260 | 257 | 237 | 407 | 303 |
| Special drawing rights | 64 | 69 | 33 | 36 | 32 |
| Gold | 23 | 26 | 14 | 6 | 7 |
| Total Investment Income | 1,377 | 1,716 | 817 | 2,741 | 2,660 |
| Other Income | |||||
| Gains on gold sales | - | 253 | 247 | 198 | 50 |
| Foreign exchange gains (losses) | (41) | (313) | 871 | (410) | (452) |
| Total Income | 1,336 | 1,656 | 1,935 | 2,529 | 2,258 |
At year end, the EFA's portfolio of marketable securities consisted entirely of discount and fixed-rate securities; there were no floating rate investments held.
The EFA's securities lending programs enhance the yield earned on its securities portfolio by lending out to counterparties securities which are highly sought after in the market. At year end, $2,500 million (par value) in U.S. Government securities were held by financial institutions that act as agents for on-lending these securities in the market. Income from securities lending was US$1.5 million in 2001.
The EFA lends gold in the market on a short term basis, periodically using forward rate agreements in order to benefit from occasional upward fluctuations in rates offered on gold loans and to establish rollover rates on these loans prior to their maturity. Income from this activity is reported as investment income on gold.
5. The Exchange Fund Account's Carry
The Exchange Fund Account's carry is estimated by subtracting the interest paid on Canada's foreign currency liabilities from interest earned on the EFA's assets (i.e. the net interest earned or paid). In 2001, the net interest earned totalled US$21.7 million. Table 6 provides an estimate of the carry for the EFA portfolio as a whole and for the euro, yen, and U.S. dollar segments of the portfolio. The carry of the total EFA portfolio in 2001 is estimated at 6 basis points. On an individual portfolio basis, the carry for the euro portfolio is higher than that of the US dollar and yen portfolios, reflecting the comparative funding and investment opportunities in the euro market.
| Interest Earned on Assets | Interest Paid on Liabilities | Net Interest Earned on Assets | Carry in basis points | |
|---|---|---|---|---|
| (in millions of U.S. dollars) | ||||
| Euro Portfolio | 389.2 | 371.6 | 17.6 | +22 |
| Yen Portfolio | 9.7 | 9.7 | - | - |
| US$ Portfolio | ||||
| Matched | 1,113.3 | 1,105.7 | 7.6 | +4 |
| Unmatched1 | 192.2 | 195.7 | (3.5) | -7 |
| Total | 1,704.4 | 1,682.7 | 21.7 | +6 |
| 1 As the EFA is currently in a net foreign currency liability position, a portion of liabilities cannot be matched to any foreign currency assets. To estimate the interest income earned on the unmatched portion of the portfolio, note that sales of foreign currency assets in intervention produce Canadian dollar cash which substitute for Canadian dollar borrowings. The interest paid on short-term Canadian-dollar liabilities over the same period are used to estimate the interest earned on the unmatched portion of the US-dollar portfolio. | ||||
The main strategies used to enhance the carry of the EFA have been, on the liability side, to achieve cost-effective funding of the reserves and, on the asset side, to modify the composition of the Account by shifting a portion of the government's investments in sovereign issues to other higher- yielding but still liquid high-quality, fixed-income securities. These securities bear returns near the rate of interest Canada pays on its foreign liabilities. To further enhance carry, a more aggressive use of the government's euro-currency portfolio has been undertaken, when a comparative funding and investment advantage relative to the US-dollar assets exists. Finally, the EFA's carry has been further enhanced by proceeds derived from the government's active securities lending program.
6. Financing of EFA Assets
EFA foreign currency reserves are financed by foreign currency borrowings by the government (see Table 7). Currently, all foreign currency marketable assets are matched by foreign currency borrowings. In addition, as noted before, because of heavy intervention in support of the Canadian dollar in 1998, there are currently more foreign currency liabilities than foreign currency assets (i.e. a portion of foreign currency liabilities is not matched by foreign currency assets).
| 1999 | 2000 | 2001 | |
|---|---|---|---|
| (in millions of U.S. dollars) | |||
| Bonds | 15,038 | 13,522 | 12,555 |
| Canada Bills | 3,293 | 3,776 | 2,686 |
| Swapped domestic issues | 12,807 | 14,325 | 16,608 |
| Floating Rate Note | - | - | - |
| Canada Notes | 661 | 638 | 928 |
| Euro Medium Term Notes | 3,054 | 2,988 | 2,571 |
| TOTAL | 34,853 | 35,249 | 35,348 |
| 1 Liabilities are stated at historical FX rates. | |||
7. Risk Management
The government has in place a comprehensive risk management framework for identifying and managing treasury risk, including market, credit, operational and legal risks, related to the financing and investment of the foreign exchange reserves.[6] The government's risk management policies call for prudent management of treasury risks based on best practices. Standards for risk tolerance are very prudent, with market risks generally immunized and high credit quality and diversification standards followed.
The governance framework separates risk management from treasury operations. The Risk Management Unit (RMU) established by the Department of Finance and the Bank of Canada monitors and advises on the risk position of the EFA. The RMU measures the EFA's major treasury risks on a daily basis and reports regularly to both treasury and senior management at the Department of Finance and the Bank of Canada.
The Risk Management Committee (RMC) meets regularly to review risk reports and to provide guidance and accountability on the government's treasury risk policies. The Committee is comprised of senior treasury management from the Department of Finance and the Bank of Canada and also includes members from the Department of Finance and the Bank of Canada outside treasury operations.
| Month End | Securities | Deposits | Gold1 | Special Drawing Rights2 | Reserve Position in the IMF2,3 | Total | Total Monthly Change |
|---|---|---|---|---|---|---|---|
| 2000 | |||||||
| December | 24,911 | 4,108 | 323 | 574 | 2,508 | 32,424 | 1,347 |
| 2001 | |||||||
| January | 24,291 | 5,081 | 313 | 572 | 2,581 | 32,838 | 414 |
| February | 24,548 | 5,002 | 310 | 587 | 2,464 | 32,911 | 73 |
| March | 25,314 | 4,923 | 300 | 573 | 2,403 | 33,513 | 602 |
| April | 25,096 | 4,862 | 306 | 575 | 2,368 | 33,207 | -306 |
| May | 24,834 | 5,122 | 311 | 586 | 2,408 | 33,261 | 54 |
| June | 25,166 | 4,700 | 315 | 582 | 2,252 | 33,015 | -246 |
| July | 25,591 | 5,040 | 309 | 588 | 2,276 | 33,804 | 789 |
| August | 26,289 | 5,243 | 312 | 615 | 2,571 | 35,030 | 1,226 |
| September | 25,575 | 4,629 | 335 | 616 | 3,064 | 34,219 | -811 |
| October | 26,423 | 4,576 | 308 | 610 | 3,038 | 34,955 | 736 |
| November | 26,116 | 4,621 | 305 | 619 | 2,924 | 34,585 | -370 |
| December | 26,329 | 4,155 | 291 | 614 | 2,859 | 34,248 | -337 |
| 1 Gold valuation is based on the London p.m. fix on the last business day of the reporting month. 2 SDR-denominated assets are valued in U.S. dollars at the SDR rate established by the IMF. A rise in the SDR in terms of the U.S. dollar generates an increase in the U.S. dollar value of Canada's holdings of SDR-denominated assets. 3 The reserve position in the IMF represents the amount of foreign exchange which Canada is entitled to draw from the IMF on demand for balance of payments purposes. It equals the Canadian quota, less IMF holdings of Canadian dollars, plus loans to the IMF. |
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| Month End | Foreign Currency Debt | Gains and Losses on Gold Sales | Return on Investments4 | Foreign Currency Debt Charges | Revaluation Effects | Net Government Operations5 | Official Intervention | Other transactions6 |
|---|---|---|---|---|---|---|---|---|
| 2000 | ||||||||
| December | 655 | 0 | 412 | -186 | 478 | -12 | 0 | 0 |
| 2001 | ||||||||
| January | 226 | 0 | 251 | -140 | -49 | 126 | 0 | 0 |
| February | -28 | 1 | 151 | -121 | -111 | 181 | 0 | 0 |
| March | 1,082 | 0 | 227 | -177 | -469 | -61 | 0 | 0 |
| April | -149 | 0 | -81 | -92 | 109 | -93 | 0 | 0 |
| May | 216 | 0 | 181 | -188 | -297 | 142 | 0 | 0 |
| June | -472 | 0 | 123 | -199 | -23 | 325 | 0 | 0 |
| July | 100 | 0 | 356 | -175 | 240 | 268 | 0 | 0 |
| August | 247 | 0 | 236 | -95 | 448 | 390 | 0 | 0 |
| September | -1,464 | 0 | 362 | -127 | 10 | -1 | 0 | 409 |
| October | 551 | 0 | 385 | -91 | -168 | 59 | 0 | 0 |
| November | -34 | 0 | -86 | -158 | -91 | 85 | 0 | -86 |
| December | -215 | 0 | -162 | -120 | -142 | 302 | 0 | 0 |
| 4 Return on investments is comprised of interest earned on investments and changes in the market value of securities resulting from changes in interest rates. 5 Net government operations are the net purchases of foreign currency for government foreign exchange requirements and for additions to reserves. 6 Other transactions covers increased support for IMF lending operations. |
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NOTES
1 See the 1996 and 1998 Budgets for statements on the government's policy to increase the level of reserves.
2 Collateral management systems involve the pledging of collateral (e.g. securities, cash) by a counterparty to another, in order to reduce the credit risk faced by the latter, should the former default.
3 The C6 index includes the United States, the Euro-11, Japan, the United Kingdom, Switzerland and Sweden.
4 Official intervention is separate from net purchases of foreign currency for government foreign exchange requirements and for additions to reserves.
5 Interest earned on the euro, yen, and U.S. dollar matched portfolios includes actual and accrued interest and amortization of premium/discount. Interest earned on the unmatched U.S. dollar portfolio is the U.S. dollar equivalent of the Canadian dollar advance to the CRF multiplied by a weighted average of Government of Canada treasury bill rates prevailing in 2001. Interest paid on liabilities includes actual and accrued interest but does not include a relatively small amount of amortization.
6 For more information on the government's risk management framework, see article published in the winter 2001-02 edition of the Bank of Canada Review.
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