OSFI upholds 100% liquidity requirement for HISA ETFs to promote financial resilience

OTTAWA, ON, Oct. 31, 2023 /CNW/ - The Office of the Superintendent of Financial Institutions (OSFI) remains committed to core liquidity adequacy principles, which promote the prudential stability of, and resilience in, Canada's financial system. After a thorough and extensive consultation, OSFI has decided to uphold those principles by maintaining the liquidity treatment of wholesale funding sources with retail-like characteristics, such as high-interest savings account exchange-traded funds (HISA ETFs).

HISA ETFs, which blend characteristics of a savings account with an exchange-traded fund, have become popular among fund management companies, retail investors, and deposit-taking institutions (DTIs) in recent years. Despite some retail-like characteristics, these sources of funding for DTIs are provided directly by fund managers for purposes that are not specifically operational.

Accordingly, any DTIs exposed to such funding must hold sufficient high quality liquid assets, such as government bonds, to support all HISA ETF balances that can be withdrawn within 30 days. All DTIs should apply this treatment, as outlined in OSFI's Liquidity Adequacy Requirements Guideline, by January 31, 2024, if they are not already doing so. OSFI will also require corresponding changes to DTI's public disclosure liquidity metrics.

In determining the appropriate policy direction, OSFI initiated a public consultation on HISA ETFs and similar products on May 10, 2023. This included reviewing over 175 submissions from stakeholders.

While OSFI recognizes the importance of innovation to a healthy financial system, its responsibility is to ensure the institutions it supervises manage liquidity risks prudently. This decision is consistent with established banking principles and reflects, in OSFI's view, the appropriate liquidity treatment for these funding sources.

Quote

"After extensive consultations with stakeholders, we upheld our core liquidity principles in the treatment of wholesale funding sources with retail-like characteristics, such as high-interest savings account exchange-traded funds. These principles ensure deposit-taking institutions are resilient through uncertain times while still allowing for new financial products and services that responsibly meet consumer needs."

- Peter Routledge, Superintendent of Financial Institutions

Quick facts

• Interest in HISA ETFs in Canada has experienced rapid growth, spurred by rising rates. Unlike traditional savings accounts, units are exchange-traded and lack government guarantees or deposit insurance.
• OSFI considered systemic concerns with contagion, potential for regulatory arbitrage, and the absence of guarantees or deposit insurance typically found with traditional savings accounts.
• The Basel Committee on Banking Supervision emphasizes the importance of financial institutions being able to withstand periods of financial stress. This approach, fully described in Basel III, is supported by the 100% liquidity requirement for wholesale funding that can be withdrawn by other financial institutions on demand, including HISA ETFs.

Related links

• OSFI upholds current LAR guideline treatment for HISA ETFs (October 31 industry letter)
• OSFI clarifies expectations around wholesale funding sources such as HISA ETFs (July 19 news release)
• Update to LAR guideline review for wholesale funding sources with retail-like characteristics (July 19 industry letter)
• Liquidity Adequacy Requirements (LAR) Guideline
• Basel III: The Liquidity Coverage Ratio and liquidity risk monitoring tools (PDF)

SOURCE Office of the Superintendent of Financial Institutions

OSFI - Media Relations, Email: [email protected], Telephone: [phone]