Review of Borrowing Framework of Major Federal Government-Backed Entities : 2
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Appendix A
Governance Practices and Borrowing Framework

Leading Governance Practices for Sovereign Issuers

Leading practices are developing most evidently in the USA, where the quality and effectiveness of corporate governance, accountability and securities regulation has become prominent due to significant accounting and securities disclosure incidents that have lead to well publicized corporate failures, addressed by unprecedented levels of litigation and legislative and regulatory reform.

The most visible landmark US legislation has been the Sarbanes-Oxley Act of 2002 (SOX), which places a strong emphasis on corporate governance and accountability, and the quality and effectiveness of internal controls over financial reporting, mainly for Securities and Exchange Commission (SEC) registrants. There are strict penalties for violators. Among other things, SOX requires Boards of Directors to have at least five financially literate members, two of whom must be (or have been) public accountants; and the other three must not be (or not have been) public accountants. Boards are explicitly responsible for establishing and enforcing auditing, quality control and independence standards. In particular, the SOX Section 404 internal control over financial reporting requirement was intended to improve the accuracy and reliability of the basic information on which capital markets rely in making investment decisions. Each audited annual report filed with the SEC for public information must include a signed internal control report stating the establishment, maintenance and adequacy of internal control structure and procedures for financial reporting, and an assessment of its effectiveness.

Increased attention has been placed on the mortgage market government agency participants through the January 2005 introduction of a Bill to address the regulation of secondary mortgage market enterprises, otherwise known as the Federal Housing Enterprise Regulatory Reform Act of 2005. Among other things, the Bill proposes to establish the Federal Housing Enterprise Regulatory Agency, which will be an independent agency of the US federal government, to replace the Office of Federal Housing Enterprise Oversight of the Department of Housing and Urban Development (OFHEO - the regulator for Freddie Mac and Fannie Mae) and the Federal Housing Finance Board (FHFB - the regulator of the Federal Home Loan Bank Finance Corporation and the twelve regional Federal Home Loan Banks). The legislation is aimed at improving the federal oversight and supervision of these large secondary mortgage market institutions' safety, soundness and mission.

This Bill has been tabled to address the concern that the existing special purpose regulators (i.e.; OFHEO and FHFB) are too closely associated with the government agencies they regulate to be truly effective. In response to this increased level of scrutiny, OFHEO and FHFB have become more stringent in their examinations. The government agencies, in most cases, are required to become SEC compliant and SOX Section 302 (CEO and CFO certification) compliant by August 31, 2005; and SOX Section 404 (management assessment of internal controls) compliant by December 31, 2006.

Other sovereign borrowers operate under their own countries' federal government governance frameworks, with a gradual trend to having a central debt office carrying out the borrowing and risk management programs for and on behalf of the state and most if not all of its sub-organizations, and reporting to its Finance departments to segregate the operational activities from the regulatory and supervisory or oversight responsibilities.[1]

The implication for the Government of Canada is that the precedents established in the largest, most liquid government bond market - the US government and its agencies - is setting the agenda for the governance and accountability of capital markets and their institutions in other countries, including - if not especially - Government of Canada and the Borrowers. This is already apparent with the adoption of the Canadian SOX equivalent, Bill 198 or the Budget Measures Act, which made several reforms to the securities laws in Ontario, followed in February 2005 with the Canadian Securities Administrators' proposal for new rules governing the certification of financial disclosure under Multilateral Instrument 52-111: Reporting on Internal Control over Financial Reporting. Overall, more regulation and control rather than the status quo is likely to be required by Canadian, US and international capital markets participants and investors to maintain and improve the liquidity of the Government of Canada debt markets.

Analyze Current Practices - Review and Approval of Borrowing Plans

Minister of Finance

The main formal means by which the Minister of Finance and Finance Canada oversee the Borrowers' borrowing plans and performance is through the legislatively required annual Borrowing Plan. The Borrowing Plan is a section of the annual Corporate Plan submitted by each parent Crown Corporation subject to the Financial Administration Act to Parliament. The Borrowers, except CWB and CHT, are subject to the Financial Administration Act.

The CWB submits a borrowing plan for Minister of Finance approval of CWB's annual borrowing terms and conditions as required by its enabling legislation, the Canadian Wheat Board Act.

CHT is a special case again as it is covered by CMHC in its Corporate Plan in its role as Guarantor and Financial Services Advisor, but as a housing support program, it is not required by the FAA to be included in the Borrowing Plan component of the Corporate Plan.

Regardless of whether the Borrower is an Agent directly or guaranteed by GOC or one of its Agents, a Borrowing Plan is submitted annually and approved by Minister of Finance who, upon review and approval, issues an approval letter to the Minister responsible for the Borrower.

The approval letter is usually a standing approval of the overall amounts, terms and conditions of a Borrower's planned borrowing activity for the upcoming year, usually by borrowing instrument type (e.g.; commercial paper, medium-term notes, bonds). Borrowers are required to provide this standing approval document to its institutional and retail investors most often as a closing condition to securities placement and underwriting agreements with the broker / dealers and underwriters as evidential proof of the Minister of Finance's approval to borrow within the stated amount, terms and conditions of the instrument being issued.

The Minister of Finance and Finance Canada, together with the Treasury Board Secretariat, are active in the review and approval of the annual Corporate Plans and their component Borrowing Plans (or equivalent, in the case of CWB). Finance Canada and Treasury Board also work together to set and enforce policy and guidelines governing Crown corporations' financial operations and reporting, to conduct performance reviews, and to amend of develop regulatory policies and guidelines to address issues.

There is little formal interaction between Finance Canada and Borrowers other than this annual planning and approval process.

Finance Canada is responsible for Canada's debt management and this responsibility is shared with its fiscal agent, The Bank of Canada. Finance Canada and The Bank of Canada are also jointly responsible for reserves management, but as it does not involve the Borrowers, it is outside of the scope of this review. In the context of debt management, senior officials from Finance Canada and The Bank of Canada participate in the Funds Management Committee, formed in 2003 to formalize their joint strategy development, planning and oversight roles in maintaining effective liquid government bond and money markets. There is a corresponding Risk Management Committee that deals with the more operational debt and market risk issues associated with the federal government's funding and investment activities.[2]

Borrowers

Borrowers' Boards of Directors approve the Corporate Plan and the integral Borrowing Plan, or its equivalent, annually. The Corporate Plan looks forward five years (one year in CWB's case), and once approved by the Board, it is sent to the relevant Minister responsible for the Crown Corporation for ultimate Parliamentary approval. Parliament approves the Corporate Plan and the Minister of Finance approves the Borrowing Plan specifically. The Corporate Plan, or most often, its abridged Summary is made available to the public post-approval. Typically the Borrowing Plans are significantly edited and available only as a Summary for public information purposes because the entire plans are deemed to contain commercially sensitive information, which if made publicly available, may detract from the Borrower's ability to transact in the market on the most favourable terms.

The Borrowers' treasury management report quarterly to a senior management asset / liability committee (ALCO) and in some cases, more frequently to an ALCO subcommittee, per leading practices used in the private financial sector. One of the key roles of the ALCO is to review compliance with market risk policies and performance within the agreed corporate and Finance Canada guidelines, noting deficiencies, if any, and recommending corrective actions, if required.

The Auditor General of Canada (AG) and Treasury Board released separate reports on Crown corporations' corporate governance in February 2005. The reports indicated the existence of prolonged vacancies and other issues at the Board and executive levels of many Crown corporations including some of the Borrowers subject to this review. The reports indicated the need for certain improvements and other actions too numerous to duplicate in this review.

As part of this Review, the résumés of the Borrowers' Boards of Directors were reviewed and it was noted that while all the Borrowers have directors with financial expertise, some Borrowers have directors with stronger treasury and capital markets expertise than others.

The actions for the Borrowers to take, in this regard, are to be considered in the context of the current AG and Treasury Board reviews and recommendations.

Analyze Current Practices - Borrowing Framework

Risk Management and Internal Reporting

Market risk policies and guidelines have been developed by the Borrowers and implemented in the key areas of interest rate risk, foreign exchange risk, counterparty credit risk, liquidity risk and operational risks. The policies and guidelines cover the relevant types of borrowing instruments and derivatives in line with both Finance Canada and commercial financial sector market risk policies.

Borrowers segregate responsibility for treasury operations from accounting, risk management and portfolio valuation, and settlement, which is industry practice for financial institutions which require, for control and effectiveness purposes, a division of responsibility among front office trading, middle office risk management and valuation, and back office accounting, transaction processing and settlement.

The overall exposure to counterparty credit risk is calculated individually and collectively and provided to Finance Canada. The other market risks are determined on an individual Borrower level and reported to their respective ALCO's and Boards of Directors. Borrowers manage to the Finance Canada policies and guidelines and include in the ALCO and Board reports any policy and guideline compliance issues, including the corrective action required, if any.

Finance Canada has access to the ALCO reports but it is not part of the monthly or quarterly ALCO report review except to the extent that there is a Finance Canada representative on the Borrower's Board of Directors who debriefs Finance Canada staff following Board meetings. As a general practice, Finance Canada neither routinely reviews the quarterly ALCO reports nor analyzes each Borrower individually or as a consolidated group.

Borrowers indicated they would be willing to share further market risk performance results and related data with Finance Canada, if requested, and expressed an interest in receiving information back on the aggregated results, to serve as benchmarking data to compare their performance and standing with their peer group.

Accounting policies generally and specifically those to do with treasury operations (e.g.; derivatives), are adopted and carried out according to the accounting standards that apply to private sector corporations. Borrowers are subject to external audit by public accountants and in some cases by the AG. Borrowers are also subject to periodic Special Examinations by the AG, and other types of reviews and examinations by Treasury Board and other governmental committees organized for various purposes, from time to time.

Ministerial Control and Reporting

The principal reporting and control mechanism is the annual Corporate and Borrowing Plan review and approval process, as discussed above. Finance Canada does not perform formal annual regulatory examinations of each of the Borrowers and provide written assessments of internal control adequacy, risk review results and any findings to the senior management and the Board, as would be the case in the USA, for example. Finance Canada has more of a supervisory role than a strictly regulatory role of the Borrowers' treasury and capital market activities and their market risks. Elements of the Borrowers' treasury and capital market activities are reviewed, assessed and regulated by other examiners, such as the external auditors and the AG for treasury related accounting and financial statement reporting, but the extent of the examinations do not go much further than accounting and reporting compliance, and so do not assess, for example, funding and risk management strategies and performance, the adequacy or excess of liquidity portfolios, or the appropriateness of structured borrowings and their longer-term credit, valuation, and reputation risks.

Overall Comments on Governance

The Borrowers receive direction on their mandated lending, insurance and program activities from their respective responsible Ministers; and direction on their treasury, borrowing, investment and market risk activities from both their respective Ministers responsible and the Minister of Finance. They seem to manage the two environments adeptly.

Accountability to Minister of Finance has, over time, remained strong and unambiguous, but at the same time, the Borrowers have matured into more independent entities operating in global financial markets within approved Finance Canada policies and guidelines, with little more than a high-level annual review and approval process.

Minister of Finance has the ultimate supervisory authority to determine the Borrowers' borrowing activities, and by extension, is able to set minimum risk management protocols and risk management activities, but is not a hands-on regulator. This responsibility rests largely with the Borrowers' management in the context of the regulatory compliance requirements set out by the Minister of Finance.

Overall, the Borrowers appear to operate within the stated borrowing, investment and risk management policy objectives with the formal annual and occasional ad hoc oversight.

Borrowers state that there is sufficient, effective and appropriate Ministerial direction and oversight of their treasury investment, borrowing and market risk operations and no material instances of negative developments or incidents have occurred which have affected the Canada Credit and its quality or perception of quality in capital markets.


Appendix B
Financial Risk Management Practices

 

Foreign Currency Risk Management

Interest Rate Risk Management

Liquidity Risk Management

Counterparty Credit Risk Management

Permitted Derivatives Instruments and Strategies

Responsibility & Procedures for Derivative Management

Other Risk Management

Borrower A - Risk Management Guidelines

No foreign exchange exposure. Foreign currency investments will be fully hedged into CAD at the time of investment unless the proceeds of the foreign investment are supported by like foreign currency borrowing.

Measure potential impact on Net Interest Income under different interest rate scenarios; develop effective interest rate risk management reports and monitoring procedures to facilitate the control of interest rate risk; establish and implement prudent action plans for funding and hedging operations within the constraints of Treasury policy. Stress tests.

Borrower A maintains liquidity through: liquid investment portfolio (minimum credit ratings for ST & LT securities); access to CP markets; bank lines and standby credit facility.

Compliance with Minister of Finance guidelines. Dollars-at-Risk individual counterparty limit.

Borrower A uses derivatives to reduce financial exposure (foreign currency risk hedged back into CAD and Canadian interest rates), to manage asset/liability positions, to synthetically create or hedge borrowings. List of authorized derivatives includes: Forward Rate Agreements, interest rate futures, interest rate options and interest rate swaps, options on interest rates swaps, bonds forwards, foreign currency swaps, forwards and options, index linked swaps, stock index futures, index options.

Approval from ALCO and the Board, authorization by the treasurer and Front Officer Manager. Control of trade execution.

N/A

 

 

Foreign Currency Risk Management

Interest Rate Risk Management

Liquidity Risk Management

Counterparty Credit Risk Management

Permitted Derivatives Instruments and Strategies

Responsibility & Procedures for Derivative Management

Other Risk Management

Borrower B - Financial Risk Management Policies

Concurrent hedging of any non-USD or CAD currency risk arising from funding operations. Hedging currency risk linked to Asset Liability mismatches. Independent benchmarks are used to measure performance on foreign exchange risk management activities. Borrower B receives an annual borrowing authority from the Minister of Finance, which requires all monies borrowed by Borrower B to be in USD or CAD or to be swapped to floating USD or CAD.

ALM Tolerance limit. The requirement for floating rate debt reduces Borrower B's interest rate risk. Concurrent hedging of interest rate risk arising from funding operations. Long term funding transactions are swapped from a fixed rate of interest to a floating rate (typically 6 months).

Managed through the use of exchange-traded futures and options. No hedging strategy will be undertaken that, by nature of its design, is illiquid.

Compliance with Minister of Finance guidelines. Borrower B only deals with highly-rated counterparties (that meet or exceed the Minister of Finance credit guidelines) and who have signed an ISDA Master Agreement prior to entering into transactions. Maintain an appropriate number of approved counterparties for investment and Over the Counter derivatives to manage credit risk. Maintain appropriate credit administration, measurement, monitoring and reporting of credit risk on a regular basis.

See column "Counterparty credit risk management".

Detailed approval from Minister of Finance to issue debt, the terms, derivative activities, and delegation rights of authority.

Borrower B is a floating rate borrower financing floating rate assets and has natural CAD and USD funding requirements. Current funding programs include: Employee Savings Plan; Credit & Operating Line arrangements with financial institutions; note program; US CP program; Euro CP program; Euro MTN program; Domestic MTN program. Investments are managed to meet the following objectives: safety of principal, counterparty credit exposure, risk/return nature of the investment, liquidity of the investment.

 

 

Foreign Currency Risk Management

Interest Rate Risk Management

Liquidity Risk Management

Counterparty Credit Risk Management

Permitted Derivatives Instruments and Strategies

Responsibility & Procedures for Derivative Management

Other Risk Management

Borrower C - Treasury Risk Policy

Minimize adverse impact to Gross Interest Income and Economic Value, prudent allocation of Equity. Perform stress test of 200 basis points for impact on Gross Interest Income for next 12 months; long-term risk-sensitivity of Economic Value of Equity using duration.

Explains liquidity risk and that Treasury will ensure cash is invested in highly liquid instruments and maintain stability in its funding activities as unexpected material and sudden fundraising may result. Treasury will aim to protect Gross Interest Income through an adequate range of liquidity levels. Limits for minimum and max liquidity based on net cash outflows, for liquidity as percentage of liability profile and maturity profile of investments. Lists authorized investment securities (bonds, repurchase agreements, CP, asset-backed securities).

Compliance with Minister of Finance guidelines. Distinction between issuer and derivative counterparty credit risk. Identify and measure exposure; ensure acceptable credit standing; ensure liquidity portfolio is guaranteed by entities with acceptable credit standing; ISDA agreements contractual provisions protect Borrower C against declining creditworthiness. Discussion of credit assessment and Limits by credit rating and term, ratings and amounts, exposure threshold for derivatives. Review of creditworthiness of counterparties - daily by Risk Management Unit.

No list of permitted derivatives.

ALCO approval for each new derivatives strategy. Independent valuation of positions.

N/A

 

 

Foreign Currency Risk Management

Interest Rate Risk Management

Liquidity Risk Management

Counterparty Credit Risk Management

Permitted Derivatives Instruments and Strategies

Responsibility & Procedures for Derivative Management

Other Risk Management

Borrower D - Market Risk Management Policy Manual

Risk limits will be established to measure the impact of interest rate and foreign exchange rate shocks on projected Net Interest Income and economic value of the corporation. Interest rate risk will be managed according to the Asset Liability strategy.

Measurement of Tier 1, Tier 2 and Tier 3 liquidity requirements.

Compliance with Minister of Finance guidelines. Counterparties must meet minimum rating standards in order to warrant credit exposure (ST, MT, LT). ISDA Master Agreement with each counterparty. In order to measure Counterparty exposure against approved credit risk limits, market risk management will determine the value of all existing exposures in addition to potential credit exposures related to possible changes in market factors on a daily basis. Counterparty risk limits are set to equal maximum aggregate net amount of credit exposure that Borrower D is allowed to hold at any time with a counterparty - avoid undue concentration of risk. Collateral agreement.

Borrower D will limit its use of Derivatives or Structured Notes whose value and hence financial risk it is unable to calculate, monitor and manage internally on a timely basis. It will abstain from issuing Structured notes where the principal redemption amount is subject to leverage that could lead to leveraged principal losses on the part of the investor. New transactions require endorsement by a cross-functional New Transaction Type Panel prior to execution. Maximum 3 transactions and maximum USD 100 Million notional amount for transactions not priced internally (maximum 6 months to be able to price them internally).

Market Risk Management Dept will formally review Borrower D's Structured notes and associated hedging deals at time of inception, and also on a monthly basis to provide an independent check and control on valuation of deal structures, effectiveness of hedge and associated financial risks. Review and sign-off of new structured note issues will be reported to the Treasurer, Chief Risk Officer and Chief Financial Officer.

N/A

 

 

Foreign Currency Risk Management

Interest Rate Risk Management

Liquidity Risk Management

Counterparty Credit Risk Management

Permitted Derivatives Instruments and Strategies

Responsibility & Procedures for Derivative Management

Other Risk Management

Borrower E - Risk Management Reports & Responses to KPMG Interview Guide

Requirement to hedge foreign currency risk in the Lending activity portfolio with currency swaps.

Limit on change in net interest margin as a result of changes in interest rates. Impacts of interest rate shocks on interest margin and economic value are evaluated. Stress-testing.

Risks are managed on a micro-basis, assets and liabilities are matched, and cashflows are matched/hedged. Authorized instruments: Mortgage Backed Securities, treasury bills, and certain highly rated money market securities.

Compliance with Minister of Finance guidelines. Swaps counterparties are reviewed and approved by Risk Management and subject to negotiation of ISDA agreements. Minimum credit ratings. Collateral requirements. Net swap position with each counterparty in CAD. Total Credit exposure by rating (in %). Total number of upgrades and downgrades. Credit Risk policy exceptions.

Interest rate and cross currency swaps for hedging purposes. Approved strategies govern use of derivatives. Positive swap exposure. Net mark to market swap exposure. Notional value of the swaps.

Independent valuation of positions.

Funding benchmark versus results achieved in terms of cost of funds. Assets and liabilities are generally matched within the market risk limits, which minimizes refinancing risk. Strong demand for and prudent management of CP program to minimize short term refinancing risk.


Appendix C -
Improvements to Current Framework

Enhanced Status Quo

Improvements to Borrowing Plans and Reporting of Actual Results

Borrowing Plans vary in quality and comprehensiveness from Borrower to Borrower and are not standardized as to format, content and level of detail, making it difficult to combine the Borrower's prior years of results and future five year plans into one comprehensive consolidated plan which would be required to provide benchmark comparisons and to determine the overall Canada-wide position of the group which materially utilizes and represents the Canada Credit.

Additional details applied uniformly and consistently by each Borrower would make the Borrowing Plans more useful for assessing past performance and the next five-year plans. This should include CWB, which being outside the FAA, is only required to do a one-year plan. We suggest that the application of a standard reporting format should be developed and include standardized and comparable tables and data for the prior year, the current year and the next five years, addressing (with commentary):

Funding:

  • New financing amounts

  • Refinancing amounts

With each debt issuance amount broken down by type and market relative to borrowing ceilings:

  • Short-, medium- or long-term

  • Fixed or floating rate

  • Synthetic, structured or plain with related derivatives activity

  • Relative and effective cost of funds and their repricing basis

Risk management:

  • Interest rate and currency mismatches against policy limits

  • Borrowing and risk management strategies

  • Maturity / refinancing schedules

  • Application of funding to program assets

  • Extent of liquidity and its application as contingency funding, investment arbitrage or pre-funding

  • Counterparty credit risk

Standardized reporting of actual results should be submitted quarterly to Finance Canada.

Scope of Borrowing Plans

There are program activities that equate to a borrowing or guarantee equivalent, like the Canada Mortgage Bond (CMB) program or occasional bond guarantees supporting export or agricultural sales, for example. These transactions are done in the furtherance of achieving mandated objectives or missions and so they are not included in the Borrowing Plans. They are covered in the program or lending sections of the Corporate Plans, and brought to the attention of Finance Canada as a matter of business, often through the relevant Finance Canada policy branch.

The materiality of these guarantee programs can be significant. The CMB program, for example, annually issues competing securities to the five-year benchmark Canada Bond in comparable or greater volumes, but at a higher cost. CMB issuance is approximately twice the bond issuance of all the other Borrowers combined annually, and as an asset class, the aggregate CMB's outstanding is about equivalent in size to the debt of consolidated group and growing, whereas much of the Borrowers' issuance activity is for refinancing of existing obligations with modest net growth. We suggest that the CMB program should be included in the Borrowing Plan as a matter of supervisory control given its importance in the domestic bond markets, in much the same way as Minister of Finance approval is required for other guaranteed entities' capital market activities.

Spreads and Limits

The spreads and, in many cases, the debt ceilings or borrowing limits approved in the Borrowing Plan process by the Minister of Finance tend to be quite wide of actual market levels or requirements. A common example of this phenomenon, which was observed, was a limit on Canadian dollar bond issue spreads of no more than 75 basis points over comparable benchmark Canada bonds. This is a holdover from years past, when Borrowers paid much higher spreads than they have done since the mid-1990's, to avoid having to go back to the Minister of Finance for an amendment to the standing approval in the advent of a declining market. In the current context, this wide spread limit provides no practical guideline or control. The same may be said of issuance ceiling of, say, $4 billion when the intention is to issue no more than half that amount. We suggest that reduced but adequate and realistic spread and issuance levels should be included in the annual Borrowing Plans.

Finance Canada and Borrower Coordination

Finance Canada does not specifically manage a new issuance calendar for the Borrowers, so for example, it is technically possible that an uncoordinated new bond issuance in the domestic bond market could occur. Similarly, Finance Canada does not typically review the Borrowers' pre-issuance financing documentation (e.g.; underwriting agreements), so a Borrower could agree to a poor documentation or covenant precedent that would adversely affect the Government of Canada and the Borrowers. As a practical matter, the entire group are experienced and professional, and as a result there are few incidents where either of these events have happened, but isolated events have occurred. Furthermore, two Borrowers could be giving different market quotations for virtually identical products at virtually the same time on the same day. All Borrowers and Finance Canada could benefit from improved coordination, and we suggest that steps should be taken. For example, Borrowers could alert Finance Canada and the other Borrowers of their intentions to borrow in the Canadian dollar domestic or international medium- and long-term bond markets before committing to any material transaction with the underwriting syndicate in enough time to delay the transaction should there be a Canada-wide reason not to issue just then. Materiality would need to be defined.

Aggregate Financial Risk Policies and Guidelines

We suggest that Finance Canada should review its aggregate financial risk policies and guidelines to instill standards in the way that limits are defined by Borrowers, on the methodology used, on minimum content for ALCO reporting, on monitoring and on statutory reporting.

a)  Structured Notes:

Structured notes should be made the object of a thorough specific review, resulting in a precise policy and guidelines integrating the concept of risk weighed cost of funds. However, before issuing any prohibitions or limitations of authorized types of structured instruments, this review should consider the possible repercussions of limiting what is today a key source of funding for many of the Borrowers.

b) Counterparty credit risk

Borrowers take seriously the monitoring of counterparty credit risk and comply with the overall guidelines of Finance Canada with respect to the minimum acceptable credit ratings of counterparties. However, we suggest that Finance Canada should clarify the requirement for Credit Support Annexes ("CSAs"), setting out thresholds where the unrealized profit for the Borrower exceeds a given amount, function of the counterparty credit rating, which trigger the obligation for the counterparty to pledge collateral with the Borrower, thereby mitigating credit risk. CSA's should be mandatory for all counterparties.

Liquidity

Borrowers maintain diversified liquidity sources by being regularly present on the Canadian and US money markets. In general, they keep their liquidity levels at around five to eight percent of total assets. This could go higher when, for instance, there are timing discrepancies between large maturities and term refinancing which require use of short term funding to bridge the gap. Liquidities are invested in instruments authorized by Finance Canada guidelines. However, we believe that Finance Canada should clarify guidelines of acceptable levels of liquidity, in order to avoid perceived or real situations of arbitrage, whereby a Borrower would exploit its credit to raise surplus liquidity at AAA rates and generate trading profits by investing in higher yielding instruments.

The Borrowers typically have stand-by bank lines of credit for emergency liquidity purposes. We suggest that the GOC should investigate the possibility of replacing these bank lines with a similar GOC commitment, to allow for the Borrowers to reduce the costs paid to the banks for such credit facilities.

Intra-year Reporting to Finance Canada

In line with current leading practices, more frequent official regulatory review and oversight should be considered, along with certain reporting and administrative enhancements, including:

  • Consolidate the Borrowers' key ALCO performance and policy compliance metrics quarterly in one management view for Finance Canada, which can be shared with the group.

  • Borrowers, including CHT, clear significant new issue Canadian dollar domestic or international medium- and long-term bond offering through Finance Canada prior to committing to launch.

  • Finance Canada review each market risk policy annually in consultation with the Borrowers with periodic ad hoc reviews, if considered necessary, to accommodate new market developments. Include the review of the policies and guidelines for interest rate risk, currency risk, investments, derivatives, liquidity, operations risk, settlements risk, legal risk and reputation risk.

  • Borrowers should be provided with appropriate feedback on overall risk management.

Enhancements that may Decrease Borrowing Costs

All Borrowers have developed the infrastructure required to perform their Treasury duties in the main fields of funding, liquidity management, settlements, risk management and reporting. Treasurers of the various entities exchange ideas and communicate informally with each other from time to time. However, we have observed very little commonality of platforms among the Borrowers. The same can be said about procedures, for instance with respect to the setting of performance benchmarks. Should one take the bid, the offer or the mid-point when comparing one's cost of funds with the benchmark? Areas where more coordination could probably bring value are:

  • Identify and review the information technology platforms used by the Borrowers to estimate the benefits (if any) that could be obtained from greater standardization, be it only to have more negotiating power with outside vendors

  • Standardize benchmarks for performance measurement

  • Warehouse data in a way that facilitates statistical aggregation, peer to peer and year to year comparisons

Actions to Tighten the Agency Spread

The agency spread has narrowed significantly over the last five years, especially as demand for high quality paper has increased, and as the Borrowers have worked on developing their names and reputations in the capital markets. Additional actions could be undertaken to potentially tighten the agency spread such as:

  • Borrowers securities could be recognized as general collateral by the Bank of Canada and at the same margin rates as Government of Canada issues by the Investment Dealers Association and other regulatory and self-regulatory organizations.

  • Borrowers and Finance could lobby for inclusion/recognition of Borrowers securities in major indices and in the eligible pools of bonds deliverable under exchange traded futures contracts.

  • Finance could also work with the Borrowers to market the fact that "Borrower = Government of Canada" to potential investors, at least for the Crowns.

These possibilities should be discussed with the Borrowers.

Board Governance

The treasury departments of the Borrowers are extremely sophisticated, engaging in, among other things, the issuance of advanced borrowing products, management and issuance of complex derivative products and strategies, undertaking asset-liability management and more. Due to the extremely technical nature of this knowledge, many Board members would have limited capability to independently assess the efficiency, effectiveness and risk management activities of their treasury operations. We noted that the boards of the Borrowers do not appear to consistently include individuals who have all of these required skills. Therefore, we suggest that each Borrower should require that at least one non-executive board member have skills in treasury, capital markets and financial risk management.


Appendix D -
International and Provincial Frameworks

International

Sovereign entities borrow and manage their debt and market risks in various ways, depending on their respective fiscal and monetary frameworks and performance, size, economic conditions, governmental system, organization and priorities. Despite the variation among sovereign entities, there are many debt and risk management characteristics held in common among sovereign borrowers. Usually a nation's Ministry of Finance, Central Bank, autonomous debt management agency or central depository are involved in establishing the objectives and carrying out the nation's sovereign debt management. Whether one or more of these institutions are involved, the principles of transparency and accountability to the public are upheld through defined and disclosed public debt management roles and responsibilities, objectives, policies, strategies, plans, and annual debt management performance reports covering primary and secondary markets in government securities.

Ultimate borrowing authority is invariably held by the parliamentary body that sets the fiscal budget with the borrowing limits set to finance any net budgetary deficits and refinancing of existing maturing debt obligations. Budgetary deficits/surpluses and refinancing requirements are the two key factors determining the gross issuance of government bonds. The borrowing and debt management is delegated most often to the Ministry of Finance for operational and control purposes.

Many sovereigns have established a single national debt management office to centralize borrowing operations. Sweden, which has historically had the principle of separating its government policy determination from its operations, has had a national debt office since 1789. In 1988, New Zealand adopted a similar approach to support its fiscal restructuring and, in the 1990's, Ireland, Austria, Belgium, Finland, Portugal, and UK followed suit.

The determining principle behind the establishment of operationally autonomous national debt management offices was the separation of borrowing operations from direct political and budgetary pressures. This has especially been the case since the 1980's, when deregulation in global financial markets combined with the advent and then explosive growth of the swap and derivatives markets has provided sovereign borrowers with the opportunity to issue large non-domestic currency issues outside their domestic market and many varied synthetic or structured financing opportunities. These structured transactions combined conventional cash market instruments with swaps and/or other derivatives and options to provide previously unavailable opportunities to reduce costs and consequently reduce budgetary pressures. At the same time, these structures increased the financial risks and exposures to previously unknown proportions and concentration. Financial policy makers were concerned that using these complex funding structures with embedded option or currency risks to reduce borrowing costs in the short-term would prove ultimately to be no more than an expedient reallocation of costs from the current budgetary period to a later one. Debt management centralization in a specialized unit was viewed as one way to control the temptation to enter into complex financing arrangements to gain short-term over long-term benefits and so protect the long-term interests of the nation. Additional benefits included building its reputation as a quality sovereign borrower and more effectively managing the financial market risks faced by any corporate entity, such as interest rate risk, foreign exchange risk, counterparty credit risk, liquidity or refinancing risk, legal risk, and operational risk.

In most cases, monetary policy is determined and implemented by the nation's central bank separately from the debt management entity to ensure that the debt and risk management operations are not, in fact or in perception, trading on insider knowledge of the policy decisions and open market operations that influence the direction of domestic interest rates.

Specialized, dedicated debt and risk management entities were also considered to foster professionalism, expertise and experience in an increasingly technically demanding activity, to provide a career path and, in some cases, better compensation for the public sector debt management professionals more in line with their better compensated private financial sector counterparts to reduce attrition.

Centralizing debt and risk management operations was also viewed as a more efficient means to facilitate direct coordination of the nation's borrowing and risk management by providing a single clearinghouse for market intelligence gained from all sources for the benefit of improving the domestic market.

Other sovereigns (e.g.; Japan, France, Germany) have more than one government agency or equivalent issuing securities with similar mandates to the Borrowers (e.g.; official export credits and guarantees), although, in many cases, these mandates are concentrated in fewer entities than in Canada.

The United States is the most salient comparator to Canada because of the large volume of US-Canada cross-border currency and capital markets transactions. The US is different in many respects, because many of the roles carried out by the Borrowers are the responsibility of US government departments directly, such as the US Export-Import Bank, Housing and Urban Development (HUD) and General National Mortgage Association (GNMA or Ginnie Mae). Additionally, the US has many borrowers that have been established through official Congressional mandates, called Government Sponsored Entities (GSE's) or government agencies, to achieve government purposes which are comparable to some of the Borrowers, like the Farm Credit Bank System, but which differ materially because they do not have explicit government credit support, and in most cases, have non-governmental shareholders or association members. The Canadian Borrowers tend to have attributes of both; the explicit Canada Credit like a department, but the corporate structure and public policy delivery mission of a GSE or agency.

The oldest GSE is the Farm Credit Bank System. It is also an example of centralized funding. The Federal Farm Credit Banks Funding Corporation (Funding Corporation) pools the borrowing activity of the five regional Farm Credit Banks (FCB's) in one centralized borrowing entity. Funding Corporation issues Federal Farm Credit Banks Consolidated Systemwide Debt Securities on behalf of the FCB's which have a broad range of maturities and structures. The individual FCB's are responsible for managing their market risks but cannot borrow outside of the System. The FCB's manage their own interest rate risk, currency risk, credit risk, and liquidity risk through the cash liabilities available through the Funding Corporation and through the use of investments and derivatives sourced from investment broker / dealers and commercial banks.

The next level of centralization would be found in the Federal Home Loan Bank (FHLB) System, where the twelve regional FHLB's borrow individually but consolidate their financial reporting as one entity, the Federal Home Loan Bank Finance Corporation.

Both the FCB's and the FHLB's have inter-bank operational agreements setting out the operating rules, parameters and metrics that must be met to be included in their respective groups, because all banks report as one system-wide entity and are rated as one entity, so a weak or poorly performing individual FCB or FHLB would have negative consequences for their entire group. In all cases, the GSE's have a dedicated regulator reporting to the federal government.

Nationally Recognized Statistical Rating Organizations (NRSRO's or Rating Agencies) such as Standard & Poors and Moody's Investor Services, rate debt issued by GSE's or government agencies (independently or as a consolidated group, as the case may be) the same as the underlying US government's credit, either because these government agencies have implicit or explicit guarantees, direct access to treasury funds, deliver government programs under federally decreed mandates deemed essential to national development or strategic interests, or some combination of one or more of the foregoing characteristics. Due to the large size and banking characteristics of many government agencies, Moody's further applies a bank-financial-strength rating, which measures the likelihood that, as a financial institution, it will require financial assistance, such as a capital infusion, from a third party such as the government or a shareholder / member. Even though government agencies' short- and long-term debt have the highest ratings equivalent to the US government, they do not always receive the highest bank-financial-strength ratings.

This difference in debt and bank-financial-strength ratings recognizes that government agencies share the common risk of balancing conflicting objectives. Government agencies have specialized mandates, often restricted to a region or economic sector, or both, that are designed to support public policy objectives. On the other hand, government agencies are required to be commercially operated and viable. The combination of public policy and commercial objectives often results in financial institutions with less diversified and lower quality portfolios than would otherwise be possible in the strictly for-profit commercial sector. The relative inflexibility and low margin attributes of the lending or program delivery mandate adds extra pressure on government agencies' treasuries to pursue as many cost saving opportunities as possible to offset, at least partially, the lack of profit and diversification opportunities on the asset side.

Provincial

Many Provinces (or States) borrow centrally at the provincial level through their respective finance ministries. To complement the provincial treasury, many have created centralized borrowing entities to aggregate the needs of many borrowers, such as municipalities and other public entities, into one borrowing pool to gain economies of scale, to create centres of expertise and to improve choice, delivery and control. Examples in Canada include the Municipal Finance Authority of British Columbia, Alberta Capital Finance Authority, Ontario Strategic Infrastructure Financing Authority (which to date has financed 170 municipalities' infrastructure investment needs), Ontario School Boards Financing Corporation, and Nova Scotia Municipal Finance Corporation. Typically, the large power utilities like Hydro Quebec, Ontario Power Generation and Hydro One continue to borrow individually due to their large requirements and special regulatory, tariff, contractual and trade circumstances. The overall result has been to consolidate the number of individual small municipal and other public borrowers over the last few years.

This trend is observable in other jurisdictions as well, for the same reasons. Department of Treasury & Finance - State of Victoria, Australia is comparable to the Canadian provinces that have more centralized debt and risk management. Comparisons with the US States are more difficult to make, because much of the state and municipal borrowing is done under separate authorities using various forms of tax-exempt bonds and debentures using many security structures other than direct guarantees or their equivalent. For example, tax-exempt revenue bonds secured by toll proceeds under a joint state-municipal transportation authority are commonly issued, with such projects managed by private sector interests for a fee or participation.

Some provinces borrow using conventional debt instruments issued by the provincial treasury, and some add opportunistic structured offerings to achieve the lowest possible cost of funds. There is no single consistent approach. Each province has its own requirements and strategies. For example, Alberta has a low funding requirement while Quebec is a relatively large, active domestic and international borrower using a mix of different structures and currencies.

The implications for the Government of Canada are that there has been a gradual but determinable trend towards centralization in government debt management operations over the past two decades to gain the operational, risk management, administrative and economic benefits of aggregating smaller borrowing entities into one or a few larger units.


Appendix E -
International and Provincial Perspectives

Leading practices are developing most evidently in the USA, where the quality and effectiveness of corporate governance, accountability and securities regulation has become prominent due to significant accounting and securities disclosure incidents that have lead to well publicized corporate failures, addressed by unprecedented levels of litigation and legislative and regulatory reform.

United States of America

  • The government of the United States has a rating of AAA

  • The Bureau of Public Debt, a bureau of the US Department of Treasury, is responsible for borrowing the money needed to operate the US government. It issues and services US Treasury marketable, savings and special securities

Export-Import Bank of the United States
  • The Export-Import Bank of the United States ("Ex-Im Bank") is the official export credit agency of the United States. Ex-Im Bank's mission is to assist in financing the export of US goods and services to international markets

  • Ex-Im Bank is a US government agency that is backed by the full faith and credit of the US government

  • Ex-Im Bank borrows from the US Treasury for its cash needs for loan disbursements and claim payments that are in excess of amounts appropriated for claim losses

Farm Credit Bank System
  • The Farm Credit System provides more than US$90 billion in loans to more than half a million borrowers. It maintains the same rating as the US government

  • The Federal Farm Credit Banks Funding Corporation ("Funding Corp") is the centralized borrowing function for the five regional Farm Credit Banks

  • FCBs may only borrow from Funding Corp, except for back-up liquidity lines of credit from commercial banks but FCBs can borrow daily to match assets specifically as to amount, terms and conditions, including option risks

  • FCBs conduct their own treasury operations, including liquidity, investment and lending programs

  • FCBs are responsible for their own asset/liability management and loan pricing and program design

  • FCBs consolidate their financial statements and have an inter-bank agreement with financial ratios and covenants to monitor and control each participant's financial and operational performance and capitalization. FCBs scoring below a certain threshold are denied access to Funding Corp until remedied

Federal Home Loan Bank System
  • Established by Congressional Charter to support member mortgage lenders including community-based lenders

  • Each of the 12 regional Federal Home Loan Banks ("FHLBs") consolidates their financial statements to comprise one borrowing credit under the FHLB System Office of Finance to the financial markets, but borrow individually

  • FHLBs conduct their own treasury operations, including all borrowing, liquidity, investment and lending programs

  • FHLBs are responsible for their own asset/liability management and loan pricing and program design

  • FHLBs have an inter-bank agreement with financial ratios and covenants to monitor and control each participant FHLBs' financial and operational performance and capitalization

  • Maintains the same rating as the US government

Ginnie Mae
  • Ginnie Mae guarantees the timely payout of principal and interest on MBS back by federally insured or guaranteed loans - mainly loans insured by the Federal Housing Administration or guaranteed by the Department of Veterans Affairs

  • Ginnie Mae-backed securities are the only MBS to carry the full faith and credit guarantee of the government of the United States

Sallie Mae
  • Sallie Mae is the nation's leading provider of education funding, providing federally guaranteed student loans

  • This Government Sponsored Enterprise ("GSE") will be phased out by 2006 and Sallie Mae will become a private sector company

France

  • The French national government is a large issuer of government bonds, in domestic and international markets. It guarantees, or is deemed to support 13 additional users which benefit from the AAA rating of the Republic of France

  • The most significant of these borrowers is La Caisse d'Amortissement de la Dette Sociale ("CADES"), which was created to finance and distinguish the debt accumulated by the basic national social security program from 1994 to 2006

- CADES is not guaranteed, but receives a dedicated source of tax revenue and has access to the French Treasury "special accounts" to meet any shortfall.

- It issues large benchmark issues at a spread to Bons du Trésor à intérêt annuel négociables ("BTANS") and Obligations Assimilables du Trésor ("OATs") in the French domestic and international markets

- In fiscal 2004, it has issued benchmarks of Euro 4 billion and Euro 3 billion in the domestic market, Euro 1 billion and US$ 1 billion internationally

Agent France Trésor ("AFT") is in charge of government debt and cash management. It issues debt in the form of BTANS and OATs which are fully guaranteed by the French Government. Maturities range from three months to 30 years. OATs, introduced in 1985, has made the French government securities markets one of the most active in the world. AFT has simplified the issuance procedure by regularly publishing auction calendars and introducing fungible bonds.

United Kingdom

  • The United Kingdom does not have any guaranteed or government owned agencies which access capital markets. The government of the UK is rated AAA

  • In order to raise funds, the UK government issues Gilts, which are U.K. government issued securities issued by the UK Debt Management Office, an executive agency of HM Treasury

  • The National Loans Fund is the government's main borrowing account. It operates in tandem with the Debt Management Account (the main operational channel for wholesale borrowing and cash management operations) and National Savings & Investment (retail borrowing). The NLF can and still does, however, borrow directly in some instances

  • The NLF is backed by the Consolidated Fund. The CF receives the receipts from taxation, and all other money payable to the Exchequer. Government departments are accountable to Parliament for its expenditure. Parliamentary approval for spending plans is sought through Supply Estimates presented to the House of Commons. These spending plans specify the estimated expenditure and ask for the necessary funds to be voted. The government departments then draw down voted funds from the CF as required

Sweden

  • The Kingdom of Sweden carries a AAA rating

  • The Swedish National Debt Office acts as the central coordinator of financing for the Swedish Government. It provides a forecast for the annual financing requirement based on economic and fiscal projections, and then develops a financing recommendation for the Government

  • This recommendation is updated three times a year, and outlines percentages of domestic conventional and index-linked issuance, foreign currency issues, duration strategy, derivatives strategy and portfolio strategy for outstanding debt

  • The annual financing requirement gives estimates for, among other things, debt servicing and net lending by the Debt Office to government agencies, public enterprises and state-owned companies

  • Swedish Export Credit Corporation ("SEC") is owned but not guaranteed by Sweden. It is rated AA+, one level below the Kingdom of Sweden. SEC has large funding requirements, and has international funding programs in the US, Europe, Asia, Australia and Japan. In addition, it has domestic long term and short term programs in Swedish Krona

  • Swedish Housing Finance Corp ("SBAB") is wholly owned by the Swedish Government, but its debt is not guaranteed. SBAB was originally established to support new home construction, but has expanded its program to become one of Sweden's largest mortgage lenders. SBAB tries to balance its funding between domestic and international markets. SBAB has a rating three to four levels below Sweden's (Standard & Poor's and Moody's, respectively), despite being wholly owned by the Swedish Government

  • State owned entities Akademiska HUS (provides university housing), Apoteket AB (distributes pharmaceuticals nationally) and Specialfastigheter Svierge (constructs state owned buildings) are not guaranteed by the Swedish government. These entities borrow almost exclusively in the domestic or Swiss francs markets, and are rated two to three levels below the Swedish Government

Australia

  • The Commonwealth of Australia holds a rating of AAA.

  • The Australian Office of Financial Management ("AOFM") is responsible for all aspects of the Commonwealth's debt management. Its operations encompass the execution of instruments including Treasury bonds, Treasury notes and associated derivatives. AOFM uses interest rate swaps to manage the Australian net debt portfolio

  • The Australian domestic debt market closely resembles the Canadian market in its basic characteristics and issuer base. Australia has been allocating its budget surpluses to repay Australian Government Bonds, which has led to greater liquidity for the development of the corporate market

  • Export Finance and Insurance Co ("EFIC") is the only remaining Australian state-guaranteed entity which accesses the public markets. It shares the AAA rating of the Australian government

- EFIC is a US$ based borrower and sources its financing almost exclusively from its EMTN program

New Zealand

  • The government of New Zealand carries a AAA rating

  • New Zealand manages its borrowing operations through the New Zealand Debt Management Office ("NZDMO"). The NZDMO has an objective of maximizing the long term economic return on the government's financial assets and debt in the context of the government's fiscal strategy, particularly its aversion to risk

  • Since the float of the New Zealand dollar in 1985, the government has borrowed externally only to finance foreign exchange reserves. All other borrowing has been in the domestic market

  • Unless otherwise directed by the Minister of Finance, net foreign-currency debt is kept close to zero

  • Major responsibilities of the NZDMO include disbursing cash to government departments and facilitating departmental cash management and undertaking lending to government organizations and state-owned enterprises and facilitating and executing derivatives transactions, in accordance with government policy

  • The NZDMO applies the following principles, among others, for managing the New Zealand-dollar debt portfolio:

  • -  In order to manage risk in respect of refinancing, NZDMO maintains a relatively even maturity profile for term debt across the yield curve to reduce pressure on the domestic bond market when supply increases unexpectedly and provide the government with greater flexibility in a time of fiscal surpluses

    -  NZDMO builds benchmark bonds of approximately NZD 3 billion to improve liquidity in the market and consequently, reduce the government's cost of borrowing

    -  To diversify interest-rate risk and lower the cost of the portfolio, NZDMO maintains a mix of fixed-rate and floating-rate debt and uses interest rate swaps. Inflation-indexed debt also makes up a portion of the portfolio and is issued when it is cost-effective to do so.

Germany

  • The debt management of the Federal Republic of Germany is managed by four institutions:

    -  The Federal Ministry of Finance - the issuer. It is responsible for shaping the fiscal policy of the federal government and the underlying orientation of its economic policy

    -  The Germany Finance Agency - central service provider to the issuer. It is a private company under control of the Federal Republic of Germany, responsible for management of the federal debt and liquidity management. Core activities include the issuance of German government securities, borrowings by means of a German type of promissory notes, the use of derivatives and money market transactions.

    -  The Federal Securities Administration - service provider for sale and custodian services of German government securities. It issues collector coins, offers federal securities for sale to the public and administers them

-  Deutsche Bundesbank - provider of bank services to the Federal Ministry of Finance. It carries out the auction of federal securities

  • The German domestic bond market is the largest national capital market in Europe, and the third largest in the world

  • Standard & Poor's has rated four issuers which it defines as Government Sponsored Enterprises, and rates at the AAA rating of the Federal Republic of Germany. Only two of these issuers, Kreditanstalt für Wiederaufbau ("KfW"), and Landwirtschaftliche Rentenbank ("LwR") are permitted to access the international markets

  • KfW has multiple roles in the German economy. It funds export business, project and infrastructure finance, lending to small and medium sized enterprises, housing modernization and is also responsible for providing finance to developing countries

  • LwR is a specialized development bank with a public policy mandate to promote German agriculture, forestry, fisheries and rural areas

Japan

  • Japan has the second largest national bond market in the world. The Japanese Government has a rating of AA-

  • The issue amount of Japanese government bonds is determined for each fiscal year that begins on April 1, and ends on March 31 of the following year. Four main laws provide for the issuance of government bonds:

-  Construction bonds under Public Finance Law - Public Finance Law in stipulates that in principle, government expenditure must be financed by tax revenue, but it allows for government bond issuance or borrowing only as a means to finance public works

-  Special deficit-financing bonds under the Special Laws - when there is a budgetary deficit, a special law enacted for each fiscal year authorizes the government to issue special deficit-financing bonds

-  Refunding bonds under the Special Account Law of the Government Debt Consolidation Fund - the government can issue refunding bonds (except for fiscal loan fund special account bonds) up to the amount required for consolidation or redemption of government bonds during a given fiscal year

-  Fiscal Loan Fund Special Account Bonds under the Fiscal Loan Fund Special Account Act - the government can issue bonds or borrow to finance fiscal loan programs due to the reform of the Fiscal Investment and Loan Program ("FILP") system that took effect in 2001

  • The Minister of Finance is granted the authority to determine government bond issuance

  • There are three Japanese issuers which are active in the foreign currency markets with the guarantee of Japan. These Special Public Institutions ("SPIs") are required to incorporate issues of non-guaranteed bonds (FILP bonds) in the domestic market as a component of their borrowing plan, however they can still issue domestic guaranteed bonds to supplement FILP issuance

  • Standard & Poor's has maintained its foreign guaranteed rating of AA- for the unguaranteed issues of the major SPIs due to their government sponsorship and strategic role

  • Japan Finance for Municipal Enterprises ("JFM") is the Japanese SPI responsible for supporting improvement and development of local infrastructure. JFM foreign currency bonds are guaranteed by Japan

  • Japan Bank for International Cooperation ("JBIC") has two distinct roles - to promote Japanese exports and imports and international financial stability. It is also responsible for providing aid to developing countries. JBIC finances its lending with a combination of grants and loans from the Government an public financing

  • Development Bank of Japan ("DBJ") has a mandate to provide low cost fixed rate financing for private sector projects with high public policy content such as technology promotion and regional development. DBJ's annual borrowing requirements are aligned to the government's current economic and social policies

  • Japan Finance for SMEs is responsible for financing the growth of small and medium enterprises

  • Japan Highway is responsible for the planning, construction and maintenance of the Japanese highway system, including toll roads

  • According to JBIC's investor presentation, the Japanese government is currently reviewing operations of Japan's 77 SPIs, and will decide, for each SPI, whether to abolish it, privatize it, etc.

Provincial Perspective

Ontario
  • The Ontario Financing Authority ("OFA") is responsible for the borrowing, investment and financial risk management activities on behalf of the Province, its Crown corporations and other public bodies. It also provides centralized cash and liability management and advises on financial policies and projects

  • OFA and the Ministry of Finance carries out the daily operations of the Ontario Electricity Financial Corporation ("OEFC"), an agency of the province of Ontario. OFA manages OEFC's debt, derivatives and non-utility generator portfolios

  • The province of Ontario is rated AA. OEFC shares the same credit rating

  • Ontario Strategic Infrastructure Financing Authority ("OSIFA") is an agency of the Government of Ontario. It was created to provide Ontario municipalities, universities and other broader public sector partners with access to low-cost and longer-term loans to renew and rebuild critical public infrastructure. OSIFA is based on a "pooled financing" concept that aggregates the infrastructure investment needs of many borrowers into one borrowing pool. OSIFA has a rating of AA+

  • Ontario School Boards Financing Corporation ("OSBFC") is a non-profit corporation, created to provide Ontario school boards with access to the debt capital markets. It is rated by Moodys as Aa3.p

British Columbia
  • Provincial Treasury manages the province's borrowing and financial needs, and banking and cash These services are extended to all ministries, Crown corporations and public sector agencies

  • There are six branches of Provincial Treasury - the Debt Management branch borrows money, manages the liability portfolio and provides financial advice to government and public sector agencies

  • The Province of British Columbia is rated AA

  • The Municipal Finance Authority of British Columbia ("MFABC") is rated AAA

  • MFABC was established in 1970, and is a non-profit corporation that acts as a central borrowing agency for local governments

  • MFABC borrows in domestic and international capital markets

Québec
  • The Province of Québec issues debt in domestic and foreign markets and carries an A+ rating

  • The duties of the Ministère des Finances include securing financing for the government and various other organizations. It manages the debt, asset portfolios and debt service

  • The Financing Fund was created in 1991 to provide financing to certain public bodies that had formerly borrowed in their own names. In 1998, the functions of the Financing Fund were limited to government organizations and enterprises whose results are consolidated in Quebec's financial statements. The government of Québec borrows in its own name and then makes advances to the Financing Fund, who in turn lends to its clientele

  • In 1999, Financement-Québec was created to assume some of the functions previously provided by the Financing Fund. Its objective is to provide financial services to public organizations, in particular granting loans to them and providing advice. Currently Financement-Québec only makes loans to educational and health and social services entities

  • The borrowings of Financement-Québec are fully secured by the Government of Québec. These borrowings must be approved by the government of Québec

Alberta
  • The Ministry of Finance, through the Treasury Management Division, is responsible for the province's cash management including short-term borrowing and investing, management of banking arrangements and cash forecasting, as well as arranging short and long term financing for the government and provincial corporations

  • The province of Alberta has a rating of AAA, and accumulated debt, net of cash set aside in the Debt Retirement Account, is forecasted to be eliminated as of March 31, 2005

  • The Alberta Capital Finance Authority ("ACFA") was established in 1956 and provides financing to local authorities including municipalities, towns, counties, hospitals, and schools for capital projects

  • AFCA borrows in capital markets and its obligations are guaranteed by the Province of Alberta. As such, AFCA is rated AAA


1  International Monetary Fund and the World Bank Guidelines for Public Debt Management: Accompanying document. Prepared by the staffs of the International Monetary Fund and the World Bank. November 2002. [Return]

2  Memorandum of Understanding on Treasury Risk Management between the Bank of Canada and the Department of Finance. April 30, 2004. [Return]

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