Review of Borrowing Framework of Major Federal Government-Backed Entities : 4
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Analysis of Borrowing Cost - Approach


Borrowing Categories


Key Assumptions


Assumptions - Future Borrowing Requirements


Base Case and Sensitivity Analysis


Five Year Cost of Funds

Money Market CAD

Money Market USD

Term Floating CAD

Term Floating USD

Term Fixed CAD (excluding CHT)

Term Fixed CAD (including CHT)

Overall - with CHT - Average Borrowing Requirements $42.3 billion / Without CHT - Average Borrowing Requirements $28.3 billion

Appendix I


The various alternatives are being assessed according to the following nine attributes:

  • Direct Borrowing Costs

  • Management of the Canada Credit

  • Diversity and Appropriateness of Borrowing Products

  • Quality and Liquidity of Canadian Capital Markets

  • Financial Reporting

  • Borrower Liquidity

  • Borrowing Operations

  • Financial Risk Management

  • Governance and Accountability

Direct Borrowing Costs

Why Relevant?
  • The publicly stated fundamental objective of the Debt Management Strategy of Finance Canada is to raise stable, low-cost funding for the Government of Canada.

  • In the broader macroeconomic context of public policy, any issuer benefiting from the Canada Credit has a responsibility to Canadian taxpayers to achieve the lowest possible risk weighted cost of borrowing.

All-in Cost of Borrowing
  • It is important to take into account spreads, commissions and infrastructure costs.

  • Based on our interviews, Treasuries of Borrowers collectively employ 58 people, but not all of these are involved in direct funding operations.

  • This aggregate headcount would likely not change significantly under a centralization scenario

- the Borrowers will retain their in-house ALM, debt management, liquidity management, lending and insurance program support and investment management expertise ;

- the few resources (if any) that Borrowers could save would be needed at the CFE.

  • Despite there being some overlap, there is no standard trading or information system between the Borrowers.

  • Any assessment of alternatives other than the status quo would need to analyze and take into account the transition costs required to modify the existing treasury infrastructures.

Cost of Funds ("COF") Targets

  • Short term: for money market CAD and USD activity, Borrowers established targets ranging from:

- T-Bill flat to +5 bps or US LIBOR -10 bps to -20 bps;

- All-in COF achieved over the last year ranged from T-Bill +1 bp to T-Bill +2.5 bps;

- No commission paid by borrowers for money market issuance.

  • Floating rate and fixed rate term financing

- Depending on the characteristics of their funded assets, Borrowers will set their targets either in terms of Canada Bonds ("CB") or in floating rate terms.

- Observed targets thus ranged from:



CB +12 bps in the 5Y

BA's -20 bps to -40 bps

CB +18 bps in the 10Y

LIBOR -30 bps to -40 bps

  • Above targets for floating and fixed rates are all-in, including commissions.

Risk Weighted Cost of Funds
  • Currently no formal risk weighted cost of fund methodology is in place - and structured products bear more risk than vanilla products.

  • Targets posted by some Borrowers (who are the most active and have the longest expertise in issuing structures) are much more aggressive than for vanilla issues of similar maturities; we understand that all these issues are "reverse inquiry" (proposals made by dealers) and that the Borrower needs the capacity to independently vet that its resulting cost of funds through structured notes does fully price the credit risk as well as the option granted to the counterparty to call the issue.

  • Structured notes includes the following additional risks:

    • Valuation, complexity and counterparty risk issues.

    • Reliance, in certain structures, on indices which may have difficulties in the long term.

    • Investor response risk when called.

    • Rollover (refinancing) risk when called.

Management of the Canada Credit

Why Relevant?
  • The Government of Canada has a AAA rating, and is well-respected as a borrower in Canadian and international markets.

  • The Borrowers are using the same credit, i.e. their borrowing programs depend upon their reputation and AAA rating of GOC.

  • Actions taken by parties that share a rating will impact all of the other parties.

  • As a sovereign, the market and public perception of the Canada Credit is critical. In this connection, the

  • "move to auctions by the government for the issuance of securities denominated in its domestic currency was in line with the evolution of practices of other major sovereign countries."[1]

  • GOC's borrowing must be seen as having a transparent process that is fair to all market participants. Over the last few years, Finance Canada and the Bank of Canada have implemented a number of measures to improve transparency of the Canadian fixed income markets, while aiming at a balanced trade-off between greater transparency and market liquidity. And these developments occurred in a context of shrinking debt issuance and increased concentration among fewer primary dealers.[2]

Observations on Market Perception and Process
  • While sharing a rating with GOC, the Borrowers have their own distinct market reputations, which are generally high.

  • Most sovereigns use the auction process, as used by GOC, as it is the most transparent.

  • CHT does not issue via auction, but does have quarterly issuances that are expected by the market.

  • The other Borrowers are "opportunistic", in that they do not issue any benchmark or regular issuances, instead monitoring the market and executing borrowing when market conditions are favourable versus their desired borrowing costs.

Diversity and Appropriateness of Borrowing Products

Why Relevant?
  • Market perception and reputation are extremely sensitive factors for GOC.

  • Exploring innovative ways to address the shrinking debt concept is encouraged as is the maintenance of a variety of funding channels.

  • The benefits of structures have to be looked at in terms of risk-adjusted cost of funds.

  • Funding through retail oriented structured products raises public policy and reputation risk issues that ought to be carefully weighted.

  • The Borrowers, except CMHC and CHT, issue structured notes to reduce their borrowing costs; in fact, structured finance allows the Borrowers to obtain lower-cost floating rate funding than would be achievable by issuing commercial paper (replicates existing financial products at a lower cost).

  • This Borrower approach is not dissimilar to many other "agencies" around the world.

  • It provides access to niche markets where sovereigns are not typically present (less than USD 10 million) and where Borrowers are most appreciated by investors because of their clear ownership structure (the ultimate credit risk is sometimes less clear for European quasi sovereigns).

  • Through their structured MTNs, Borrowers fill a market need by issuing synthetic products which are otherwise not available in the marketplace and hence meet specific investor demands, i.e.

    - Financial instruments to match institutional investors' requirements for higher returns during low-interest-rate periods or for purposes which relate directly to an individual investor's other portfolio requirements

    - Allow investors to take market risk but minimize credit risk through a principal protected AAA rated underlying issuer.

  • Dealers value MTNs due to the commission and derivative income they generate while servicing the needs of borrowers and investors.

  • Structured notes issued by the Borrowers allow international institutional investors to access AAA-rated issuers requiring no credit risk capital charge (0% BIS weighted). Issuance of structured notes adds credit risk management complexity to debt management strategies of the Borrowers as mark-to-market levels of credit exposures change with movements of currency and interest rates and must be measured to assess accurate levels of credit exposures to counterparties.

  • In Canada, according to our interviews, institutional investors typically avoid these products, deeming them too expensive compared to what they can achieve on their own - they definitely see these structures as more of a retail product. Concerns raised about retail targeted issues include: (1) do retail investors understand the role of the Borrower in the transaction; or (2) if investors receive no return from the issue, will the reputation of the Canada Credit suffer?

  • Issues underlying all structured note issuance include:(1) do the Borrowers fully understand the issues, and can they reverse engineer the product?; (2) to translate the structured note into what the Borrower needs, complex swaps are executed with counterparties rated lower than the Borrowers; and (3) do the Borrowers appropriately price the structural and counterparty risk into their borrowing targets?

  • In our review of a sample of structured notes issued by the Borrowers, we noted that the counterparty to the swaps or other other-the-counter derivatives hedging these structures is the official calculation agent. Whereas this is neither a wrong or unusual situation per se, it reinforces the fact that Borrowers should be able to reach their own independent valuations to ensure that they are treated fairly by their counterparty and that they properly value their market and credit risks on said structures. The Borrowers indicated that they have this capability.

  • As many of the structures include a callable feature, they can exacerbate rollover risk hence market risk - that is in cases where debt will have to be rolled over at unusually high cost.[3] The calls are usually hedged and if not the Borrower is not likely to pay more than its average cost rather than high cost. Call dates are usually fairly short.

  • In their Guidelines for public debt management[4], the IMF and Worldbank propose that

  • "Where appropriate, issuing instruments with embedded options (such as savings bonds, which are redeemable by the bondholder on demand) may also contribute to instrument diversification. However, even where valid reasons exist for issuing such securities, debt managers should exercise considerable caution to ensure that the risks inherent in embedded options and other derivative instruments are integrated in the risk management framework, and that the instruments and risks are well understood by the issuer and other market participants."

Quality and Liquidity of Canadian Capital Markets

Why Relevant?
  • Canada Treasury Bills and Bonds are used as the benchmark against which all other borrowers in the Canadian fixed income capital markets are measured.

  • Therefore the Government of Canada establishes benchmark issues, and continually is taking steps to maintain a viable and liquid yield curve.

Measures of Liquidity
  • The narrowness of the bid - offer spread.

  • Size of benchmark issues: the buybacks, switches and reopening of issues were very helpful in sustaining healthy benchmark sizes over the last few years. However, the Bank of Canada and other market observers agree that these programs have matured and that given the shrinking size of the overall debt combined with the transfer of a larger part of debt issuance into Treasury Bills, the minimum benchmark sizes could decrease somewhat over the next few years, posing a challenge in terms of liquidity maintenance.

  • Trading volumes.

  • Ability to transact substantial size trades with nominal market impact.

  • Number of market participants: There were 30 dealers distributing GOC securities in 1997 and 20 as of October 2004. Three large US primary dealers departed the Canadian market in 2001. The concentration of the primary market is increasing - the five major primary dealers accounted for 57.4% of issues in 1999/2000 and for 68.1% in 2003/2004.

Observations from Interviews
  • GOC bond program issuance peaked at $54B in 1996-1997 and has fallen since then to $35.5B in 2004-2005 - a reduction of roughly one-third over that period; the program is expected to fall further this year to $33B.

  • A large portion of Canada's liquidity is consumed by "buy and hold" investors who do not often trade their issues.

  • About half of the Canadian dealers indicated they have no concerns about liquidity, the other half indicated that while liquidity is acceptable today, they are concerned about the future.

  • Investors overall are more concerned about future liquidity than dealers, and those who transact in long-term Canada bonds tend to find that liquidity at the long-end is insufficient, and that it is difficult to easily trade large amounts at that point in the curve.

  • Foreign dealers indicated that they saw sufficient liquidity for Canadian dealers and investors, but not for international dealers and investors.

  • Foreign dealers and investors both expressed concerns about the concentration of power with the Canadian dealers.

  • Interviewees indicated that Canadian and international bond demand is at an all-time high and growing.

  • The only Borrower issues considered to have reasonable liquidity are the CMBs.

  • Interviewees indicated that 5-year point on the yield curve tends to be the most desired in the markets, and GOC should not abandon that point on the yield curve for any reason.

  • International dealers and investors indicated that GOC has an excellent world reputation, and that any additional supply could be easily absorbed by the market without an impact on price.

Financial Reporting

Why Relevant?
  • Changing the status quo could change the amount of debt reported on the "Public Accounts of Canada" (Canada's financial statements), and therefore could change various figures reported, such as the debt to GDP ratio and interest expense as a percentage of spending.

Accounting and Financial Reporting Policies
  • GOC follows the Public Sector Accounting Board ("PSAB") guidelines for financial reporting.

  • Under these guidelines, all of the Borrowers, except CHT, are "government business enterprises" because they: (i) are separate legal entities; (2) carry on a business; (3) sell goods and services to individuals and organizations outside of the government; and (4) are self-sustaining in the normal course.

  • The PSAB guidelines require that Government Business Enterprises be consolidated using the equity basis. GOC uses a modified equity basis, as the Borrowers typically use private sector accounting policies, and their equity is consolidated on that basis instead of being translated into equity on a PSAB basis.

  • Thus, GOC presents each Borrower as an investment asset at its equity level, and does not include the debt issued by the Borrowers in the Public Accounts.

  • Under PSAB guidelines for long-term debt, netting of long-term debt is by GOC only allowed if the terms and conditions of the debt between GOC and the Borrower mirrors that of the terms and conditions of the debt issued to the market by GOC.

  • It is unlikely that any CFE would most effectively borrow by mirroring Borrower needs, and therefore netting should not be expected - leading to an increase in reported debt in this scenario.

  • From an economic basis, nothing would change, however reported figures could change significantly, as shown below.

Observations on Interest Ratio
  • Under a worst case centralization scenario, assuming that all existing Borrower debt was issued by GOC and that no netting was permitted, the reported interest ratio as at March 31, 2004 would have increased by about 1% from 18% to 19%.

  • Excluding CHT, the impact would be reduced to about 0.5%, increasing the ratio to 18.5%.

  • If any centralization scenario evolved, and such scenario did not involve netting, then it would likely be applied on a prospective basis as new debt is issued, such that this increase would occur over time.

Observations on Debt and Debt to GDP Ratio
  • Under a worst case centralization scenario, assuming that all existing Borrower debt was issued by GOC and that no netting was permitted, the reported total market debt as at March 31, 2004 would have increased by 23% from $440 billion to $545 billion.

  • Excluding CHT, the impact would be reduced significantly, increasing the total market debt by 11%.

  • If any centralization scenario evolved, and such scenario did not involve netting, then it would likely be applied on a prospective basis, such that this increase would occur over time.

  • Debt to GDP ratio would be unlikely to be affected as any additional debt would be offset by a financial asset (i.e. an amount due from the Borrower) and this ratio considers and deducts financial assets from gross debt.

Hedge Accounting Issue
  • The new hedge accounting rules could lead to more volatility in Borrowers' reported earnings. This impact should be the same whether the elected alternative is the status quo or one of the centralization models, as ALM related derivatives hedges would continue to be posted in Borrowers books.

  • However, the amount of structured products being issued going forward could influence the size and complexity of the issue.

Borrower Liquidity

Why Relevant?
  • The ability of Borrowers to manage their day to day liquidity requirements is critical to the accomplishment of their mandate.

  • Changing the status quo could change the amount of short term liquidity that the Borrowers maintain.

  • In a centralized model, it would be essential for the CFE to establish normal lead times that Borrowers would provide as forewarning of their expected borrowing needs. This is especially critical for money market activity.

Framework and Ranges
  • Each Borrower has a policy in place which governs liquidity targets and limits.

  • Predictability of cash flows: for some Borrowers, cash flows are fairly predictable, whereas for others, cash flows are very unpredictable as they are driven by several external factors (i.e. crop transportation delays, weather, large export transaction closing, etc.).

  • Liquid assets (cash and marketable securities) are generally maintained at around 5% to 8% of total assets.

  • Some Borrowers compare regularly their liquidity ratios with those of their peers, in either the private or sovereign, supra-national sectors.

  • In some cases, Borrowers keep high levels of liquidity, with as much as 11% to 13% of their assets liquid, due to the unpredictable character of their cash flows and due to a desire to earn revenue from a liquidity portfolio.

Liquidity Sources
  • All Borrowers (except CHT) have direct regular presence on the domestic commercial paper markets and, in most cases, in US markets and Euro CP markets.

  • Each Borrower has Intraday and overnight credit lines in place with commercial banks.

Short Term Investments
  • Short term liquidity is placed in investments allowed by policy in compliance with Finance Guidelines.

  • Keeping too much liquidity could be perceived as using the Canada Credit to obtain cheap resources which are then placed in higher yielding short term money market instruments.

  • In theory, given efficient operations, (under any alternative chosen) decentralized pools should be reduced and "arbitrage" possibilities eliminated.

Liquidity Crisis Management
  • Borrowers have diversified funding sources (geographic, institutional, retail, etc.) and keep more channels open.

  • In crisis, Borrowers have noticed a flight to quality, generally implying that their borrowing requirements may still be readily met.

Borrower Operations

Why Relevant?
  • The effectiveness of Borrowers in managing treasury and borrowing operations is critical to fulfill their mandates.

  • Changing the status quo could add further complexity and increase operational risk.

  • The Borrowers are autonomous, well-established as relatively stand-alone entities with their own boards.

  • The Borrowers value treasury and capital markets operations as a core activity.

  • Each of the Borrowers has fully operational Treasury department set-up, including front, middle and back-office.

  • Some systems are the same (i.e. Bloomberg), but most are different between Borrowers.

Role of Treasury
  • Borrowing, investing, cash management, asset/liability management, lending program support, investor relations, and liquidity management.

  • To obtain funding in global markets in the most efficient and cost effective manner and to optimize the net interest income of the Borrowing entity that they serve.

  • To various degrees, Borrowers have developed sophisticated financial engineering capabilities to manufacture structured notes or fund securitization issues.

  • Active role in helping the borrowing entity set the design and pricing of its various products and services.

  • Perform ALM recommend policies/procedures to Asset Liability Management Committee (ALCO) and report on ALM issues and compliance with risk management policies.

Observations from Interviews
  • The Borrowers are extremely concerned that centralization would negatively impact their mandates in three major areas: (1) loss of flexibility; (2) loss of market intelligence; and (3) loss of autonomy

  • The Borrowers feel that with funding handled by a CFE, treasury capabilities in the treasury department will become fragmented and inefficient;

  • They also believe that the CFE will not be sufficiently responsive, thereby reducing the flexibility of the treasury department;

  • Regarding autonomy, centralization is viewed as a forced outsourcing of a core activity, which reduces the ability to act as a relatively independent stand-alone entity; accordingly, the Borrowers believe that centralization would significantly impair their ability to support their respective mandates;

  • Having their own Treasuries is viewed by the Borrowers as benefiting their core mandates, for example, through exchange of market intelligence and help in setting the price of services.

  • Conversely, there is a perception that centralization could hurt the fulfillment of Borrowers' mandates through loss of these benefits.

Mitigating Factors
  • Under any of the envisioned centralized borrowing frameworks, each Borrower will need to retain its Treasury department expertise and practitioners to perform ALM and effect derivative hedges

  • Many of the efficiency issues can be mitigated with a well planned CFE, with a tight service level agreement

  • The CFE would likely add, not subtract treasury and capital markets expertise, thus increasing overall market intelligence for the whole group, provided that communications are set up properly among the CFE and Borrowers

  • It could be argued that international capital markets intelligence could be of limited value for those Borrowers with predominantly domestic businesses

ALM and Derivatives
  • Each Borrower has developed in-house asset liability management expertise.

  • It is widely accepted that people performing ALM must understand very well the core business that they are funding/hedging.

  • All Borrowers are currently preparing for the implementation of new derivative accounting rules (Accounting guideline 13).

  • Frequent informal relationships between Borrowers, but no formal exchange of services or information.

  • Yearly submission of borrowing plans to Finance.

  • Quarterly filing at the Bank of Canada of the counterparty exposures.

  • Otherwise, (with exception of one Borrower whose borrowing ceilings are based on a formula computed every quarter) no other formal contacts or filings by Borrowers with either Finance or Bank of Canada, as long as they remain within limits authorized in the borrowing plan.

  • There is, to a limited extent, some mobility of staff transferring from one Borrower to another.

Financial Risk Management

Why Relevant?
  • Best practice guidelines of the World Bank for sovereign issuers invite debt managers to identify and manage the trade-offs between expected costs and risks in the government debt portfolio.

  • Sound risk management by the public sector is essential for risk management by other sectors of the economy.

Approach and Organization
  • Risks monitored and managed individually by each Borrower and reported to local ALCO.

  • Borrowers have comprehensive risk management policies in place - please refer to table entitled "Financial Risk Management Practices" in Appendix B.

  • No aggregate view of risks - other than counterparty credit risk.

  • Borrowers indicated that they are opened to doing more risk reporting/would appreciate feedback.

  • At the time of our interviews, there were 31 persons involved in risk management at the Borrowers.

Foreign Currency and Interest Rate Risk Management
  • Risk limits are established to minimize the impact on interest incomes and economic value of the Borrowers

  • Hedging strategies using derivatives are set to offset foreign currency and interest rate risks.

Permitted Derivatives Instruments and Strategies
  • For some Borrowers, a list of authorized derivatives is mentioned in their Risk Management Policies; in the absence of such explicit list, the approval process for new derivatives strategies is documented.

  • All Borrowers limit their use of derivatives to the types they are able to value, monitor and manage internally on a timely basis.

  • Risk monitoring for derivatives activities is in place, with emphasis on counterparty/credit risk management.

Counterparty / Credit Risk Management
  • For derivatives, the Borrowers deal only with highly-rated counterparties, in accordance with Finance guidelines.

  • A regular monitoring of counterparty/credit risk is in place.

  • Collateral requirements are applied when necessary.

  • Borrowers policies provide for mandatory International Swaps and Derivatives Association ("ISDA") Master Agreements with clauses allowing the winding down or recouponing of swaps in the event of a credit downgrade of the counterparty; further credit mitigation arrangements include, for each Borrower surveyed, the possibility of having Credit Support Annexes (to the ISDA Master Agreement), however, it is not clear whether these CSA's are mandatory for each and every counterparty - if not, Finance Canada should clarify that CSA's are mandatory.

  • Counterparty exposures are reported by the Borrowers to the Financial Risk Office on a quarterly basis - however Borrowers indicated that they seldom get any feedback from such reports.

Structured Notes
  • In order to achieve sub-LIBOR borrowing rates, mainly through the implicit premium tied to the embedded options of such products, some Borrowers are active issuers of structured notes to retail investors. Those notes are typically swapped into basic floating rate issues.

  • All Borrowers issuing structured notes indicated that they are able to value the corresponding hedges independently either directly or by outsourcing to an independent outside firm.

  • Borrowers issue structured notes which are capital guaranteed only; however, no formal guidelines or policies exist with respect to potential retail client suitability issues and reputation risk.

Governance and Accountability

Why Relevant?
  • Minister of Finance, Finance Canada and the Bank of Canada are ultimately responsible for the Canada Credit, Government borrowing and investing operations, the smooth functioning of the Canadian capital markets, and prudent debt management (including asset/liability management) for GOC, among other things.

  • Borrowers in the fulfillment of their mandates must also ensure their own prudent debt management and their own ALM, which could differ from the ALM done by Finance as they have essentially financial assets whereas the Government has a significant amount of non financial assets to fund.

  • Borrowers operate corporately under the overall umbrella of the federal legislative framework, being mainly the Borrower's individual enabling legislation (e.g.; National Housing Act, Export Development Act, etc.) and the Financial Administration Act.

  • Governance and accountability are critical to the underlying success and stability of Canada's capital market operations - a significant misstep by any Borrower can have repercussions on the Government and all other Borrowers.

Observations on Ministerial Control and Oversight
  • The main formal means by which Minister of Finance and Finance Canada oversee Borrowers' borrowing plans and performance is through the legislatively required annual Borrowing Plans approved by Minister of Finance.

  • There is very limited homogeneity in the formats used by the various Borrowers to submit their borrowing plans, which makes aggregation and backward comparisons very arduous if not impossible.

  • As the CHT is not subject to the FAA, the CMB program is not currently formally submitted in a borrowing plan to Finance Canada.

  • Borrowing Plan approval is given by a letter from the Minister of Finance to the Minister responsible for the Borrower.

  • Minister of Finance, Finance Canada and Treasury Board are active in the annual Corporate and Borrowing Plan reviews, policy setting, performance reviews, and developing and setting regulatory guidelines and their enforcement. There is currently little formal interaction between Finance Canada and Borrowers other than this annual planning and approval process, as long as the Borrowers remain within these authorized limits.

  • In between these annual reviews, Finance Canada has access to the ALCO reports but is not part of the monthly or quarterly ALCO review; as a general practice, Finance Canada neither routinely reviews the quarterly ALCO reports nor analyzes each Borrower individually or as a consolidated group.

  • Finance Canada currently relies on the Borrowers to comply with the terms of their approved borrowing plans and on the Office of the Auditor General to check compliance upon their external audits.

Observations on Board of Directors and Management's Control and Oversight
  • Borrowers' Boards of Directors approve the Corporate Plan, which includes the Borrowing Plan.

  • Borrowers' Treasury management reports to corporate level ALCO per leading practices.

  • However, further to our observation of monthly or quarterly ALCO reports, we concluded that in general, there is room for improvement to align their contents or the organization thereof with leading practices, improve clarity and facilitate aggregation for Finance Canada.

  • Recent studies indicate prolonged vacancies and other issues at the Borrowers' Board level, and in one case, at the CEO level, indicating need for improvement.

  • Some Boards have stronger treasury and capital markets expertise than others, however according to the OAG, the situation is gradually improving as "we found fewer gaps in the collective skills and expertise of board members. We also found that the composition and operating practices of board audit committees had improved and that audit committees are operating more effectively than in 2000".

  • All Borrowers undergo annual external audits and are also subject, at least once every five years, to special examinations conducted by the Office of the Auditor General of Canada.

Observations on Borrowers' Independence
  • Balance needs to be made between independence to act quickly and decisively in an active, international capital markets environment on the one hand, and control and optimal deployment of the Canada Credit, on the other hand.

  • Historical trend has been towards increasing independence as markets and Borrowers' capabilities have grown.

Appendix J

Structured Notes

Appendix K

Alternatives Matrix


Borrowers Views on Centralization

Market Views on Centralization

Market Views on Centralization (cont.)


Addendum 1 - Glossary



Asset/Liability Committee


Asset Liability Management


Banker's Acceptance


Business Development Bank of Canada


Bank of Canada


Basis Point

C$ or CAD

Canadian Dollars


Canada Bond


Canadian Dollar Offered Rate


Canadian Depository for Securities Ltd.


Consolidated Fund


Centralized Funding Entity


Canada Housing Trust


Canadian Imperial Bank of Commerce World Markets


Canadian LIBOR


Canada Mortgage Bond


Canada Mortgage and Housing Corporation


Cost of Funds


Commercial Paper


Canada Premium Bonds


Canada Pension Plan


Consolidated Revenue Fund


Canada Savings Bond


Committee on Uniform Securities Identification Procedures


Canadian Wheat Board


Export Development Canada




Financial Administration Act


Farm Credit Banks


Farm Credit Canada


Federal Funds (overnight rate)


Federal Home Loan Mortgage Corporation ("Freddie Mac")


Federal Home Loan Bank


Federal National Mortgage Association ("Fannie Mae")

GOC or Government

Government of Canada


Government Sponsored Entity


Japanese yen


International Swaps and Derivatives Association


London Inter-Bank Offered Rate


Long term


Money market




Medium term


Medium term note


National Loans Fund


Net present value




Public Sector Accounting Board


Securities and Exchange Commission


Swedish kroner


Sarbanes-Oxley Act


Short term




Treasury bills


US Treasury


United States (of America)

US$ or USD

US dollars




US Treasury


United Kingdom

Terms and Phrases


The simultaneous purchase and selling of an asset in order to profit from a differential in the price.

Basis point

A unit for measuring a bond's yield that is equal to 1/100th of 1% of yield.

Basis swap

An exchange of interest rates at two different points along the yield curve.

Bid-offer spread

The difference between the bid and the ask prices of a security or asset.

Counterparty risk

The risk to each party of a contract that the counterparty will not live up to their contractual obligations.

Credit risk

The possibility of a loss occurring due to the financial failure to meet contractual debt obligations.

Cross-currency swap

A swap that involves the exchange of principal and interest in the currency for the same in another currency.


A security whose value depends on the performance of an underlying security or asset.

Interest rate swap

A deal between banks or companies where borrowers switch floating rate loans for fixed rate loans in another country. These can be either the same or different currencies.

Off-the-run securities

All Treasury bonds and notes issued before the most recently issued bond or note of a particular maturity.

Repurchase Agreements

A form of short term borrowing for dealers in government securities. The dealer sells the government securities to investors, usually on an overnight basis, and buys them back the following day.

Short position

The selling of a borrowed security, commodity or currency.


The difference in the yield, expressed in basis points, of a security relative to the underlying yield of it's comparable government benchmark.

Structured notes

A hybrid security that attempts to change its profile by including additional modifying structures.

Addendum 2 - Bibliography




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April 28, 2004

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October 18, 1999

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April 18, 2001

Prospectus. Business Development Bank of Canada - US$1,000,000,000 Euro Medium Term Note Programme.

August 8, 2003

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April 2005

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March 30, 2004

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October 16, 2001

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Fiscal 2005 - 2009

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January 2005

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December 10, 2004

Business Development Bank of Canada Act

November 3, 2004

BDC Activity report

December 31, 2004

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Treasury Management Governance Framework.

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Kennedy, Sheryl. Canada's Capital Markets - How Do They Measure Up?

Summer 2004

The Bank of Canada Securities-Lending Program: Terms and Conditions.

September 30, 2002

Terms and Conditions Governing the Morning Auction of Receiver General Cash Balances.

September 4, 2002

Consolidated Crown Corporations Quarterly Report

September 30, 2004

The Federal Government's Use of Interest Rate Swaps and Currency Swaps

Winter 2000-2001

Review of the Government of Canada Debt Distribution Framework

October 2004

Anderson, Stacey and Lavoie, Stephane. The Evolution of Liquidity in the Market for Government of Canada Bonds

Summer 2004

Bibliography (cont.)



Deloitte & Touche LLP. Financial Statement of Canada Housing Trust No1.

December 31, 2003

Graph depicting CMB 5 Year Spreads.


Evaluation of Borrowing Framework.


Declaration of Trust of CIBC Mellon Trust Company Canada establishing Canada Housing Trust No1.

April 9, 2001

Creation of Canada Housing Trust (CHT) & Master Agreements.

April 2004

Financial Services Agreement between CIBC Mellon Trust Company, as trustee on behalf of Canada Housing Trust No1 as trust, and Canada Mortgage and Housing Corporation as Financial Services Advisor.

April 9, 2001

Administration Agreement between CIBC Mellon Trust Company, as trustee on behalf of Canada Housing Trust No1 as trust, and Canadian Imperial Bank of Commerce as Administrator.

April 9, 2001

CHT Submission in Response to KPMG Interview - Follow-up.

February 2005

CIBC World Markets presentation

February 1, 2005

Canada Mortgage Bonds - New Product and Funding Developments

February 2005

Canada Mortgage Bonds - Securitization Operations

February 1, 2005

Canada Mortgage Bonds - Overview of the CMB Program

February 2005

Canada Mortgage and Housing Corporation

Offering Circular.

September 15, 2004

Legal Processes on Individual Transactions.

April 2004

Canada Mortgage Bonds Information Kit.


Canada Mortgage Bonds Media Fact Sheet.


Monthly Risk Management Report.

September 2004

Summary of the Corporate Plan.


"D. Borrowing and Investment Plan".


Annual Report.


Canada Mortgage and Housing Corporation Form 18-K December 31, 2003.

June 10, 2004

Evaluation of Borrowing Framework.


Eligible collateral for the Bank of Canada's Standing Liquidity Facility.


Eligible collateral for use in the Large Value Transfer System (LVTS).


Bailey, Karen. Letter re response submission.

February 24, 2005

CMHC Submission in Response to KPMG Interview - Follow-up.

February 2005

Overview of CMHC's Treasury

January 2005

Lending Activity Third and Fourth Quarters Strategy 2004

July 2004

Bevilacqua, Maurizio. Letters re approvals and standing authorities re issuances


Prospectus Supplement re US Bonds due Dec 1, 2008

November 13, 2003

Funding, Investment and Risk Management Policies

March 2004

Organization charts

November, 2004

Quarterly Risk Management ALCO Report

June 30, 2004

Canadian Wheat Board

Letter from Secretary of State, Finance re approval to enter into banking arrangements, etc.


Letter from Secretary of State, Finance re approval to enter into banking arrangements, etc. (2)

Received July 30, 2004

Office of the Auditor General Special Audit Report to Board of Directors

February 27, 2002

"Appendix A" Financial Risk Management Policies


Financial Risk Management Policies

September 30, 2004

Tables re Wheat Board Notes Year-to-Date Summary, USCP Program, ECP Program

September 30, 2004

FRMC Meeting Agenda and attachments

November 12, 2004

2002-2003 Annual Report


2004-05 Corporate Plan

June 4, 2004

Letter to Minister of Finance re CWB Borrowing Plan

June 4, 2004

Excerpts from 2002-2003 Report to Farmers


Goldman Sachs & Co. Commercial Paper Memorandum re CWB ratings

May 14, 2002

Long term Plan 2003 - 2008

June 2003

CWB Organizational Chart

October 15, 2004

CWB Organizational Chart - Finance and Accounting

November 2004

Office Consolidation of Canadian Wheat Board Act

November 1, 1999

Letter to Minister of Finance re CWB Borrowing Program for the three months of July through September 2004

November 4, 2004

Statistics Canada - Balance of Payments Division CWB Statement of Liabilities

September 2004

Letter from Secretary of State re approval to borrow for period August 1, 2003 to July 31, 2004


Office of the Auditor General Special Audit - Managing Financial Operations

November 13, 2001

Report of Financial Risk Management - Notional Exposures Outstanding by Instrument and Counterparty

September 30, 2004

Report of Financial Risk Management - Notional Exposures Outstanding by Instrument and Counterparty (Summary)

September 30, 2004

Letter from Minister of Finance to Secretary of State re authorized to approved CWB banking arrangements


Overview of CWB's Borrowings

November 9, 2004

Letter and attachments re borrowing programs July to Sept 2004.

November 4, 2004

Comparisons of CWB's weighted average cost of Euro Commercial Paper

Jan 00 to Feb 05

Comparisons of CWB's weighted average cost of Cdn Commercial Paper

January 2000 to February 2005

Comparisons of CWB's weighted average cost of US Commercial Paper

January 2000 to February 2005

Report on Financial Risk Management

September 30, 2004

Treasury Operations Report

September 30, 2004

Credit Exposure Data

September 30, 2004

Euro Commercial Paper Programme Information Memorandum

December 31, 1998

Euro Medium Term Note Programme Offering Circular

October 30, 2003

Summary of CWB Funding and Investing Activity for 2003/04


Forecast of CWB Funding and Investing Activity for 2004/05


Short Term Promissory Notes Information Memorandum

September 7, 2000

EMTN Pricing Matrix

March 21, 2005

CWB Sample Financial Risk Management Report

January 31. 2005


2004 - 2008 Corporate Plan Summary

March 2004

2003 Annual Report


EDC Fact Sheet (re ratings, etc.)


EDC's Form 18K dated April 26, 2004

April 28, 2004

Export Development Act, RS, c.E-20

December 21, 2001

2004 Investor Presentation


News Release re JCR affirming rates on EDC notes

November 12, 2004

Standard & Poors report "Sovereigns"

October 28, 2003

Treasury Organization Chart

October 2004

Information memorandum - Programme for the Issuance of Debt Instruments

April 30, 2004

Market Risk Management Policy Manual December 11, 2003, as amended February 25, 2004)

February 25, 2004

Prospectus Supplement (to prospectus dated June 27, 2002)

May 25, 2004

Asset/Liability Management Report as at December 31, 2004

February 18, 2005

Bibliography (cont.)



Euro-Commercial Paper Programme

September 21, 2001

2000-01 to 2004-05 Corporate Plan Summary

2000-01 to 2004-05

2001-02 to 2005-06 Corporate Plan Summary

2001-02 to 2005-06

2002-03 to 2006-07 Corporate Plan Summary

2002-03 to 2006-07

2003-04 to 2007-08 Corporate Plan Summary

2003-04 to 2007-08

2004-05 to 2008-09 Corporate Plan Summary

2004-05 to 2008-09

Treasury Key Contacts

October 25, 2004

Organization charts

October 2004

Treasury Policy

May 2003

Brochure re FCC Bonds


1999 - 2000 Annual Report

1999 - 2000

2000 - 2001 Annual Report

2000 - 2001

2001 - 2002 Annual Report

2001 - 2002

2002 - 2003 Annual Report

2002 - 2003

2003 - 2004 Annual Report

2003 - 2004

Investor Presentation


Medium and Long-Term Note Program

September 15, 2001

Letter to KPMG Re funding strategies re borrowing framework

November 4, 2004

Promissory Note Program

September 15, 2001

Offering Circular - Euro Medium Term Note Programme

November 14, 2003

ALCO Report - Report on Funding Activity

March 31, 1999

ALCO Report - Report on Funding Activity

March 31, 2000

ALCO Report - Report on Funding Activity

March 31, 2001

ALCO Report - Report on Funding Activity

March 31, 2002

ALCO Report - Report on Funding Activity

March 31, 2003

ALCO Report - Report on Funding Activity

March 31, 2004

ALCO Report

January 31, 2005

Memorandum of Understanding on Treasury Risk Management between the Bank of Canada and the Department of Finance

April 30, 2004

Departmental Response, Governance Evaluation - Debt and Reserves Management, Plamondon & Associates

August 2004

Summary Report, Governance Evaluation: Debt & Reserves Management

March 25, 2004

Debt Management Report


Debt Management Report


Debt Management Report


Debt Management Report


Debt Management Report


Debt Management Strategy


Debt Management Strategy


Debt Management Strategy


Debt Management Strategy


Debt Management Strategy


Debt Management Strategy


Plamondon & Associates. Departmental Response. Governance Evaluation - Debt and Reserves Management.

March 2004

Public Accounts of Canada 2004, Volume I


Corporate Governance in Crown Corporations and Other Public Enterprise

June 1996

Fiscal Reference Tables

October 2004

Chapter 7 - Governance of Crown Corporations of the Report of the Auditor General for Canada

February 2005

Federal Debt Management


Chapter 8 - Managing Canada's Debt: Facing New Challenges from the Report of the Auditor General for Canada

April 2000

Report of the Auditor General of Canada to the House of Commons re Chapter 21 Federal Debt Management

November 1996

Agent Status and Crown Corporations


Crown Corporations and Other Corporate Interests to Canada - Report to Parliament


Crown Corporations and Other Corporate Interests to Canada - Report to Parliament


Guidelines - Corporate Governance in Crown Corporations and Other Public Enterprises

June 1996

Review of the Governance Framework for Canada's Crown Corporations - Report to Parliament


2004 Annual Report to Parliament on Crown Corporations and Other Corporate Interests of Canada

December 2004

Strengthening Public Sector Management


Public Policy Forum. "Protecting the Shareholder". A Review of the Governance Structure of Canadian Crown Corporations.

September 1998

Office of the Superintendent of Financial Institutions. Guideline re Derivative Best Practices

May 1995

Receiver General for Canada. Public Accounts of Canada. Volume 1, Summary Report and Financial Statements.


Financial Administration Act - Chapter F-11


CDIC Standards of Sound Business and Financial Practices

September 2001

CICA Public Sector Accounting Handbook, Section PS 3230 (long-term debt) and Section PS 3070 (investment in government business enterprises)


Bibliography (cont'd)



Municipal Finance Authority of British Columbia - 2003 Annual Report


Scotiabank Group. Global Economic Research. "Provincial Pulse - New Brunswick Economic View"

August 2004

Scotiabank Group. "Fiscal Pulse". New Brunswick's 2004/05 Budget

March 2004

Scotiabank Group. "Fiscal Pulse". Quebec's 2004/05 Mid-Year Update

November 2004

Securities and Exchange Commission Form 18-K. Annual Report of Financement-Quebec

March 2003

Annual Report of Quebec

March 31 2004

Currie, Elizabeth. The Potential Role of Government Debt Management Offices in Monitoring and Managing Contingent Liabilities

January 2002

Guidelines for Public Debt Management

April 2001

Guidelines for Public Debt Management - Accompanying Document

November 2002

Guidelines for Public Debt Management - Amendments

November 2003

Guidelines for Public Debt Management - Amendments

December 2003

Guidelines for Public Debt Management - Executive Summary


Australia: Australian Office of Financial Management. Interest Rate Swaps.


Australia: Australian Department of Treasury


Australia: Reserve Bank of Australia Bulletin - The Reserve Bank's Domestic Market Operations

December 1990

Australia: Reserve Bank of Australia Bulletin - The Separation of Debt Management and Monetary Policy

November 1993

Australia: Australian Government Foreign Debt Management

October 15, 1997

Germany: KFW Bankengruppe. Business and Funding.

October 2004

Germany: Deutsche Bundesbank. Annual Report.


Germany: KFW Bankengruppe. Moody's Analysis of Ratings supported by the Federal Republic of Germany through a guarantee.

August 2004

New Zealand: Storkey & Co., International Government Cash Management Practices.


Sweden: Swedish National Debt Office. General description.


Sweden: Swedish National Debt Office. Legal Arrangements for a Debt Office.

June 1999

United Kingdom: Department of Trade and Industry. Consolidated Resource Accounts 2002-03

November 26, 2003

United Kingdom: HM Treasury history.


USA: Reuters. Greenspan Sees GSE Portfolio Risk for Swaps Market

May 5, 2005

USA: OFHEO. Report of Findings to Date. Special Examination of Fannie Mae.

September 17, 2004

USA: Wall Street Journal. What Next For Fannie, Freddie

April 18, 2005

USA: Reuters. Bankers Wants Farm Credit Under Fannie Regulator

April 7, 2005

USA: Wall Street Journal. Bush Team Considers Limiting Fannie Mae, Freddie Mac Assets

February 7, 2005

USA: McKinsey Global Institute. Taking Stock of the World's Capital Markets.

February 2005

USA: Federal Housing Enterprise Regulatory Reform Act of 2005, A Bill To address the regulation of secondary mortgage market enterprises, and for other purposes, 109th Congress, 1st Session

January 26, 2005

USA: Nickerson et al. The Federal Home Loan Bank System and the Farm Credit System: Historical Parallels and Implications for Systemic Risk

September 23, 2001

USA: Title 12 - Banks and Banking, Chapter 11 - Federal Home Loan Banks, sec 1441. Financing Corporation, US code

January 26, 1998

USA: Standard & Poor's Report re Canadian Government Debt

February 9, 2005

USA: Standard & Poor's. National Development & Export Credit Institutions.

June 2004

RBC Capital Markets. International Markets Swaps table.

March 2005

Investment Dealers Association of Canada. Review of Debt New Issues and Trading; Fourth Quarter 2004.

February 2004

Anderson. Relevant passage from article re liquidity and the effect on issuance volumes.


Office of Thrift Supervision Handbook

November 1999

Teachers Pension Plan: comments to the government and the Bank of Canada re design and operation of the Government of Canada domestic debt programs

November 23, 2004

Steiner, Doug. "Capital Ideas", Report on Business Magazine

February 2005

Lynn, Matthew. "Investment banks are too dependent on hedge funds", National Post newspaper

March 23, 2005

Financial Post. Rein in the Crowns

February 24, 2005

Canadian Investment Review. How Liquid are Canadas?

Winter 2004

Report on Bond Exchanges and Debt Buy-Backs. A Survey of Practice by EC Debt Managers.

June 2001

Moody's Investors Service. Sovereign Ratings List.

November 2004

Moody's Investors Service. Statistical Handbook - Country Credit.

November 2004

Moody's Investors Service. Sub-Sovereign Ratings List.

November 26, 2004

Blommestein, Hans. Strategic Trends and Policies Shaping Government Securities Markets in the OECD Area.

September 28, 2004

International Monetary Fund. Global Financial Stability Report - Chapter 4: Corporate Finance in Emerging Markets


Bibliography (cont'd)

Key Websites Examined

Department of Finance Canada:
Bank of Canada:
Business Development Bank of Canada:
Canada Mortgage and Housing Corporation:
Canadian Wheat Board:
Export Development Canada:
Farm Credit Canada:

Canadian Federal

Treasury Board of Canada Secretariat:
Office of the Auditor General for Canada:

Canadian Provincial

Ontario Financing Authority:
Government of Ontario:
Ontario Strategic Infrastructure Financing Authority -
Financement - Québec :
Alberta Finance:
Provincial Treasury of British Columbia:
Municipal Finance Authority of British Columbia:

Canadian Other

Tricycle Asset Management:


World Trade Organization:
Euronext Liffe:
Euromoney Magazine:
Moody's Investor Service:

Australia/New Zealand

Australian Office of Financial Management:
Australia Department of the Treasury:
Axiss Australia:
Reserve Bank of Australia:
New Zealand Debt Management Office:


Agence France Trésor:
Caisse d'amortissement de la dette sociale:


Bundesrepublik Deutschland Finanzagentur Gmbh:
Debt Management of the Federal Republic of Germany:


Ministry of Finance Japan:
Japan Bank for International Cooperation:


Swedish Export Credit Corporation:
Riksgälds Kontoret:

United Kingdom

Government Accounting 2000:
Bank of England:
Tagish Ltd.:
Debt Management Office:
HM Treasury:
Department of Trade and Industry:
Public Works Loan Board:


Standard & Poor's:
Investing in Bonds:
SLM Corporation:
Government National Mortgage Association:
Federal National Mortgage Association:
Federal Home Loan Mortgage Corporation:
Export-Import Bank of the United States:
United States Department of the Treasury:
Federal Farm Credit Banks Funding Corporation:

Addendum 3

Listings of Organizations Interviewed

Unless otherwise noted, all interviews were conducted in person at the offices of the interviewee. A small number of interviews were held via teleconference.

In order to protect the privacy of the individuals involved in the interview process, we have not included their names herein.


Bank of Canada

Department of Finance


Export Development Canada

Canadian Wheat Board

Farm Credit Canada

Business Development Bank of Canada

Canada Mortgage and Housing Corporation

Canada Housing Trust

Dealers - Canadian

BMO - Nesbitt Burns

CIBC World Markets

National Bank Financial

RBC Capital Markets

Scotia Capital Markets

TD Securities

Dealers - International

Citigroup (New York) (via teleconference)

Deutsche Bank (Toronto)

JP Morgan Canada (Toronto)

Merrill Lynch Canada (Toronto)

Merrill Lynch UK (via teleconference)


Addenda Capital

British Columbia Investment Management Corp. (via teleconference)

Caisse de Dépôt et Placement

Desjardins Asset Management

Investors Group (via teleconference)

MFC Global Investment Management (Manulife) (via teleconference)

Philips Hager & North (via teleconference)

Ontario Teachers Pension Plan (via teleconference)



Ontario Financing Authority

Standard & Poors (via teleconference)

Addendum 4

Interview Guide

Review of Borrowing Framework of Major Federal Government-Backed Entities

It should be noted that these interview guides were intended as a springboard for discussion of various topics. Accordingly, interviews typically expanded upon the themes outlined herein.


Finance Canada/Bank of Canada


Dealers & Investors

Part I - Introduction




Part II - Alternatives




Part III - Finance Canada/Bank of Canada




Part IV - Borrowers




Part V - Dealers/ Investors




Part VI - Individual Borrower Options






Name and Title: 




Part I - Introduction




  • KPMG to provide brief reminder of scope and purpose

  • This is not an evaluation of individual crown corporations but of their collective group as "the Borrowers"

  • Results will be rolled-up for purposes of assessing the various alternatives, including the status-quo


Part II - Alternatives and International Models

  • Discussion of your views of the alternatives listed in the alternatives matrix (previously viewed).

  • Consider the various models used around the world.

  • Consider particularly the international organizations with a same/similar mandate as yours.

  • Do any of these models appear appropriate for Canadian use?

  • Any other alternatives that should be considered?


Part III - Finance Canada/Bank of Canada

Questions to discuss with Department of Finance and the Bank of Canada


The CHT / CMB program under CMHC is not a borrowing program, but a structured finance vehicle on the program or asset side that creates a competing (cheap) investment alternative to Canada bonds. The borrowing framework alternatives address how to borrow but not why Crowns issue guarantees pursuant to their mandates, in this case, housing finance. Finance and the Borrowing plans do address asset sales and securitization as a source of funds, but not the extension of guarantees on the lending/program/insurance side. The CBT program is a repackaging of existing loans with the addition of the Canada guarantee. Therefore, we need some guidance from Finance on how to handle this as the mandate discussion is out of scope.


Please clarify: When and if Canada does the borrowing and pass on the funds to the Crowns, will Canada be doing any asset/liability management, i.e., match funding their loans to Crowns?


Discuss role of the Financial Risk Office

  • Interaction with crown corporations

  • Does the FRO set limits?

  • Does it conduct aggregate stress testing to see how the aggregate balance sheet of the Government and borrowers would cope with simulated economic and financial shocks?


Uniformity of risk targets and borrowing limits set for each borrower


Coordination between the Bank of Canada auction schedule and market activities of the borrowers:

  • Does the Bank or Department of Finance impose restricted windows where the borrowers cannot access primary markets at the same time as the Bank performs an auction?

  • Otherwise, is there a coordination of issues between the Bank and the borrowers?

  • How does the Bank see the participation of borrowers in the repo markets?


How do you, under the current framework, ensure that the various borrowing entities do not operate at cross-purposes in the financial markets?


Participation of crown corporations to

  • Auctions

  • Repo markets


Part IV - Borrowers

Overview of Context

Could you describe the background that led to establishment of your direct management of borrowing operations for your crown corporation?

  • Issues encountered

  • Trends and vision

  • Recent developments

  • Evaluation of impact of decentralization


Issues tied to FAA Part X and regulatory regime and statutes

  • Discussion of the legislative and Ministerial guidelines under which you operate your borrowing program

  • Issues arising from OAG's Special Exams

  • Borrowing limits imposed by statutes and constituting laws


Borrowing Plan

  • Process for preparation, review and approval: current practices and frameworkHow do you ensure that your borrowing plan ties in with your corporate business plan strategies?

  • Discuss the key strategies of your borrowing plan (tactics will be covered at a later stage in the interview).

  • -What are the scope, depth and breadth of your borrowing strategy?

  • Markets covered

  • Types of instruments

  • Usage of derivatives

  • Counterparties

  • Main investors

  • How did your borrowing strategy evolve over the last 5 years?

  • How do your government support programs (e.g. subsidies, interest rate, buy-downs, equity capitalization assistance, etc.) affect your borrowing strategy?

  • To what extent would you say that you achieved your borrowing plan stated objectives?




  • What are the means of reporting to the Minister of Finance and to the Minister responsible for your Crown Corporation?

  • How would you rate the effectiveness of your inter-relationships with the Department of Finance and the Bank of Canada with respect to your treasury and borrowing activities - and what enhancements, if any, would you recommend?

  • Frequency of communications/ coordination and interactions with Department of Finance and with Bank of Canada?

    •  i.e. coordination of timing of issues, size and maturities
    • Extent of your input in the design of Ministerial policies governing treasury and financial risk for your borrowing and investment operations
  • Please describe framework for oversight and approval of your investment and borrowing activities on an ongoing basis.

  • Do you feel that the current framework provides sufficient direction from and accountability to the Ministry of Finance?

  • Please describe the types of reporting and interaction with the Financial Risk Office (FRO) of the Bank of Canada to report your financial risk exposures.

  • Must the FRO approve your risk policies?

  • If not, are these market risk policies approved at senior management level, or at Board of Directors level?

  • Describe the accountability/oversight by your Board of Directors.

  • Is there any level of standardization required from the crown corporations with respect to type of measurement tools, models and reporting on risk?


Risk Management



  • What do you view as optimal liquidity levels?
  • Are these prescribed by policy?
  • Is this stable over time? Evolution over the last five years.
  • Any issues in managing day-to-day liquidity requirements?
  • Strategy for investing surplus liquidity:
    • Authorized instruments and tenor
    • Authorized counterparties
    • Extent of activity on repurchase agreement market
  • Cash management operations: size and scope



  • Key limits and controls i.e.
    • Duration targets
    • Refinancing risk
    • Correlation of debt servicing costs with non interest income and non interest expenses
  • Trade-offs between cost of funds and maturity risk
  • Role of ALCO


Hedging strategies/ usage of derivatives

  • type of derivatives used
  • Limits and constraints in Borrowing plan, risk policies, accounting regulations
  • Natural hedges?
  • Limits and control of counterparty credit risk
  • Independent valuation of positions


Market risk:

  • Global Value at risk or Budget at risk measures and limits
  • Monitoring of compliance with market risk policies and delegation of authority (Who and how?)
  • Interest rate risk
  • Currency risk
  • Equity risk or commodity risk (if any)
  • Stress tests simulating financial shocks
  • Segregation of duties


Operational risk:

  • IT risk and other operational risks (such as reputation, legal and fraud risks) related to borrowing and treasury activities - at a high level, could you describe how these risks are addressed?




  • What are the key performance measurements and attributes with which you evaluate the efficiency of your borrowing strategy?
  • All-in cost of funds
  • Budgetary stability year over year
  • Who would you define as peers when comparing your performance?
  • Part of your Corporation surpluses generated by Treasury?


Interaction with capital markets


  • Number of dealers and turnover for each major market segment (i.e. domestic, global, derivatives...)
  • Access to the international capital markets
  • Form of remuneration paid (spreads and/or commissions)
  • Types of investors and breakdown of their participation
  • Private/direct placements vs. public capital markets
  • Consultation process with intermediaries and investors
  • In your experience, what is the level of arbitrage done by participants in capital markets between your issues and those of other crown corporations and/or GOC issues?


Cost of funds


  • How do you measure it?
  • Evolution of spreads against comparable GOC benchmarks?
  • What are your debt issuance/retirement costs? Other costs?
  • How did your all-in cost of funds evolve over the last 5 years in parallel with the level of risk - actual, projected, and maximum risk?
  • How do you see your cost of funds going forward? Please elaborate as needed on any structural or tactical intended changes that could explain your projection.


Implementation of borrowing plan


Borrowing volume and type of issues/preferred maturities:

  • Evolution of last five years
  • Projections
  • Main drivers of volume
  • Cost and availability of funds in the domestic and international sovereign debt markets


Part V - Brokers/Investors

Subjects/Questions Common to all Dealers



  • KPMG to provide a brief note of scope and purpose of work
  • This is not an evaluation of individual Crowns, but of their collective group as the "Borrowers"
  • Results will be rolled up for the purposes of assessing the feedback from the Dealer community


Could you provide a brief description of your firm's overall approach to Crown Corporations and discuss:

  • The significance of their capital markets activity?
  • Their revenue generation?
  • Their ranking within capital markets coverage?


Areas of firm involved:

  • Capital markets?
  • Government finance?
  • Domestic?
  • International?
  • Retail?


Product areas involved:

  • Money market?
  • Bonds?
  • MTN's?
  • Swaps?
  • Securitization?


How would you rate the Canadian Fixed Income markets in comparison with those of other G-10 countries ? This comparison could be made in terms of returns and liquidity, given their different perceived credit quality and their efficiency to provide benchmarks for corporate issuers and the markets in general.



What is your assessment of:

  • Current and historic spreads
  • Domestic and international
  • Floating/fixed
  • Short term/long term


Do you have knowledge of other sovereign borrowers with similar/unique borrowing structures?


Please comment on the following possible alternative borrowing structures:

  • Status quo?
  • Fungible plan?
  • CRF draw?
  • Central Agency funding?
  • Debt office?


What are the market relationships between crown issuers?


Please comment on the Canada Mortgage Bonds program. Specifically, what are your thoughts on its:

  • Effectiveness?
  • Liquidity?
  • Impact on enhancing mortgage securitization?
  • Prepayment risk?


Please comment on Government Bond Market liquidity in Canada and the prospect of:

  • increase in borrowing by Central Agency, and/or
  • decrease in market borrowing by crowns

as a result of alternative borrowing structures.


Part VI - Individual Borrower Questions

(This section deleted due to Borrower confidentiality.)


1  Finance Canada, Review of the Government of Canada Debt Distribution Framework, October 2004, p. 4 [Return]

2  Finance Canada, Review of the Government of Canada Debt Distribution Framework, October 2004, p. 9. [Return]

3  Guidelines for Public Debt Management - Amendments December 2003, issued by the Staffs of the International Monetary Fund and the World Bank, p. 10. [Return]

4 Guidelines for Public Debt Management, issued by the Staffs of the International Monetary Fund and the World Bank, April 2001 60. [Return]

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