Activity

The “Payment Clearing and Settlement Act” (PCSA) in Canada provides the legal framework for the oversight and resolution of Financial Market Infrastructures (FMIs), also known as clearing and settlement systems. The Bank of Canada is the designated resolution authority for Canadian FMIs.
Here’s a breakdown of the regulations and framework for FMI resolution under the PCSA:
I. Policy Objectives of the FMI Resolution Framework:
* Maintain availability of critical services: Ensure the continued operation of essential services provided by FMIs.
* Promote financial stability: Minimize disruption to the financial system in the event of an FMI failure.
* Minimize exposure of public funds to loss: Reduce the likelihood of taxpayer money being used to bail out a failing FMI.
II. Key Aspects of the Resolution Framework:
* Resolution Authority (Bank of Canada):
* The Bank of Canada is empowered to declare an FMI non-viable, take control, and resolve it to achieve the regime’s objectives.
* It has powers to ensure continuity of services, facilitate timely settlement, allocate losses, and replenish FMI resources.
* The Bank can appoint itself as the receiver or vest shares of the FMI in itself.
* Resolution Plans:
* The Bank of Canada is required to develop and maintain resolution plans for designated FMIs in accordance with the regulations.
* These plans must include key elements such as resolution strategy for various scenarios (e.g., participant default, non-default events), financial losses, liquidity shortfalls, and maintaining pre-funded resources.
* The Governor of the Bank of Canada is responsible for approving these plans and reviewing/revising them annually or after significant changes to the FMI.
* Limited Clearing Members (LCMs):
* The regulations introduce the concept of “limited clearing members.”
* These are FMI participants subject to modified risk controls for default management and recovery.
* LCMs are explicitly not required to contribute to a default fund or absorb losses from another participant’s default, but are subject to additional margin requirements. This design aims to ensure they do not participate in mutualizing losses.
* Entry into Resolution:
* If the Governor determines an FMI is no longer viable, a written declaration is made, and relevant authorities and the FMI’s operator are notified.
* Once in resolution, the Bank acts quickly to stabilize the FMI and can inject temporary financial resources if needed.
* Compensation:
* The regulations address compensation for creditors and participants in the event of an FMI’s resolution.
* An assessor may be appointed to determine compensation if there are objections to an offer or its absence.
III. Relevant Legislation and Regulations:
* Payment Clearing and Settlement Act (PCSA): The primary legislation governing the oversight and resolution of FMIs in Canada. It grants the Bank of Canada the authority for these functions.
* Payment Clearing and Settlement Regulations (SOR/2019-257): These regulations provide further details and operationalize the FMI resolution regime set out in the PCSA amendments. They specify requirements for resolution plans, define “limited clearing member,” and outline aspects of compensation and cost recovery.
The FMI resolution framework in Canada, implemented through the PCSA and its accompanying regulations, is designed to ensure the stability of the financial system by providing a robust mechanism to manage the unlikely failure of critical financial market infrastructures.

Video courtesy of ABN-AMRO

Video courtesy of ABN-AMRO