Changes to Capital, Leverage, and Liquidity Requirements ...

Collectively, OSFI's guidelines related to capital, leverage, liquidity, ... application of a leverage ratio buffer to D-SIBs; and ... Skiptomaincontent Skiptosecondarymenu ChangestoCapital,Leverage,andLiquidityRequirements,andrelatedDisclosures PageContentAccompanyingDocuments NewsRelease BackgrounderRelatedDocuments CapitalAdequacyRequirementsGuideline LeverageRequirementsGuideline LiquidityAdequacyRequirementsGuideline SMSBsCapitalandLiquidityRequirements Pillar3DisclosureGuidelinesDocumentProperties TypeofPublication:Letter Date:January31,2022 To: BanksBankHoldingCompaniesFederallyRegulatedTrustandLoanCompaniesOSFIisreleasingtodayupdatedversionsofthefollowingguidance: CapitalAdequacyRequirements(CAR)Guideline; LeverageRequirements(LR)Guideline; LiquidityAdequacyRequirements(LAR)Guideline; SmallandMedium-SizedDeposit-TakingInstitutions(SMSBs)CapitalandLiquidityRequirementsGuideline(SMSBCapitalandLiquidityGuideline); Pillar3DisclosureRequirementsforDomestic-SystemicallyImportantBanks(D-SIBs);and Pillar3DisclosureRequirementsforSMSBsGuideline(together,theGuidelines).ObjectivesofOSFI’sReformsTheserevisionsincorporatethelatestandfinalroundoftheinternationallyagreed-upon BaselIIIreformsintoOSFI’scapital,leverage,liquidity,andrelateddisclosureguidelinesfordeposit-takinginstitutions(DTIs).OSFI’scommitmenttoimplementingtheBaselIIIreformswithappropriatedomesticmodificationsstrengthensinstitutions’abilitytowithstandfinancialshocks,allowingthemtocontinuesupportingeconomicgrowthwhileremainingcompetitive.OSFI’simplementationofthesereformshasbeenguidedbythefollowingprinciples:thefinalBaselIIIreformswereusedasastartingpointwithmodificationstotakeintoaccounttheuniquecharacteristicsoftheCanadianmarket;changestothedomesticcapitalandliquidityframeworkshavebeendesignedtoimprovetherisksensitivityoftheserules,therebyprovidingtherightincentivestructurestoinstitutions;and,revisionstotheframeworksaimtopromotethesafetyandsoundnessofinstitutionswhiletakingintoconsiderationlevelplayingfieldandcompetitivenessissues.OSFIregardedtheimplementationoftheBaselIIIreformsasanappropriatejunctureatwhichtoadvancetheproportionalityofitscapitalandliquidityframeworksforsmaller,less-complexdeposit-takinginstitutions.Enhancementsinthisregardaimedtostrikeabalancebetweenimprovingtherisksensitivityoftherequirementsforsmallerinstitutionsandhelpingtoaddressrisingcomplexityoftheframeworkstomakethemmoreeffectiveandtherebyfitforpurpose.Collectively,OSFI’sguidelinesrelatedtocapital,leverage,liquidity,anddisclosurerequirementsareessentialtopreservingfinancialresilience,therebyprotectingdepositorsandcreditors,andcontributingtoCanadians’confidenceinthestabilityofthefinancialsystem.TheattachedAnnexesprovidenon-attributedsummariesofthecommentsreceivedfromstakeholdersduringpublicconsultationsontheGuidelinesinspring2021andanexplanationofwhetherthecommentsresultedinrevisions.StakeholderproposalsthatweredeemedoutsidethescopeofOSFI’sproposedchangesarenotreflectedinthecommentsummariesorrelatedrevisionstotheGuidelines.OSFIthanksallthosewhoparticipatedintheconsultationprocess.OverviewofPrimaryChanges1.CapitalAdequacyRequirements(CAR)GuidelineTheprimarychangesthathavebeenincorporatedintheCARGuidelineinclude:clarificationofOSFI’ssupervisorycapitaltargetsforDTIs,includinginteractionswithcapitalbuffers(Chapter1);implementationofa72.5%BaselIIIoutputfloortobephasedinoverthreeyearscommencinginfiscalQ2-2023(Chapter1);introductionofnewdeductionsfromCommonEquityTier1(CET1)capitalfor(a)certainexposuresformerlysubjecttoa1250%risk-weight,and(b)reversemortgageswithloan-to-valueratiosgreaterthan80%(Chapter2);introductionofnewoperationalriskcapitalrulesthroughthedomesticimplementationoftheBaselIIIStandardizedApproachforoperationalriskandanewSimplifiedStandardizedApproachavailableforSMSBs(Chapter3);maintenanceofthecurrentcapitaltreatmentforgeneralresidentialrealestateexposureswithloan-to-valueratiosbetween70%and80%(Chapter4);reductionofcreditriskcapitalrequirementsforcertainqualifyingrevolvingretailexposures,incorporationofupdatestothecapitaltreatmentofprivatelyinsuredmortgages,andintroductionofacapitaltreatmentforresidentialrealestateexposuresthatdonotmeetOSFI’sexpectationsrelatedto GuidelineB-20(Chapters4and5);eliminationofthe1.06InternalRatingsBased(IRB)scalingfactorinitiallyimplementedaspartofthetransitionfromBaselItoBaselII(Chapter5);andimplementationoftherevisedmarketriskcapitalrules,consistentwiththeBaselCommitteeonBankingSupervision’sFundamentalReviewoftheTradingBook(FRTB),aswellastherevisedCreditValuationAdjustment(CVA)framework(Chapters8and9).2.LeverageRequirements(LR)GuidelineTheprimarychangestotheLRGuidelineinclude:applicationofaleverageratiobuffertoD-SIBs;andotherchangestotheleveragerequirements(e.g.,thetreatmentofsecuritiesfinancingtransactionsandthetreatmentofoff-balancesheetitems)toalignwithrevisionstotheCARGuideline.3.LiquidityAdequacyRequirements(LAR)GuidelineTheprimarychangesthathavebeenincorporatedintheLARGuidelineinclude:enhancementstoNetCumulativeCashFlow(NCCF)requirementstoimprovetherecognitionofcashflowsrelatedtoassetgrowth(e.g.,commitments)(Chapter4);andareductionofthetimetoreportNCCFtoOSFIfornon-D-SIBsandclarificationsofthetimetoreportNCCFtoOSFIforallinstitutionsduringperiodsofstress.4.SmallandMedium-SizedDeposit-TakingInstitutions(SMSBs)CapitalandLiquidityRequirementsGuideline (SMSBCapitalandLiquidityGuideline)ThekeyfeaturesofthenewSMSBCapitalandLiquidityGuidelineinclude:criteriatosegmentSMSBsintodifferentcategoriesforthepurposesofdeterminingcapitalandliquidityrequirements;andseparatesectionsforeachcategoryofSMSBsthatdescribetheapplicablecapitalandliquidityrequirements,aswellasreferencestotherelevantsectionsoftheCAR,LRandLARGuidelines.5.Pillar3DisclosureRequirementsGuidelinesTheprimarychangestothePillar3Disclosurerequirementsinclude:separatePillar3DisclosureGuidelinesforD-SIBsandSMSBs;incorporationofthecompletesetofdisclosuresfromtheBaselFrameworkforD-SIBs;andclearerandmoreproportionaldisclosurerequirementsforSMSBs.RegulatoryReturnsTocomplementtherevisedGuidelines,OSFIisfinalizingcorrespondingchangestotherelatedregulatoryreturns,whichwillbepublishedinFebruary2022.ImplementationDateTheimplementationdateofthefinalCAR(otherthanCVAriskandmarketrisk),LR,SMSBandPillar3GuidelineswillbefiscalQ2-2023Footnote1.TheimplementationdateoftherevisedCVAriskandthemarketriskchaptersoftheCARGuideline(i.e.,Chapters8and9)willbefiscalQ1-2024Footnote2.TherevisionstotheLARGuidelinewillbeimplementedasofApril1,2023forallinstitutions.Sincerely,BenGullyAssistantSuperintendent,RegulationSectorAnnex1-SummaryofComments-CARGuidelineItemandStakeholderFeedbackOSFIFinalPolicyPositionChapter1–OverviewStakeholdersrequestedclarificationregardingwhichOSFIguidelineversionshouldbeapplieduntilthenewcreditvaluationadjustment(CVA)riskframeworkisineffect.Stakeholdersalsoinquiredifbankswithinternalmodelsmethod(IMM)approvalcanuseAdvancedCVAriskcapitalchargefortheircapitalfloorrequirementbetween2023and2024?TherevisedCARchapterrelatingtoCVAriskwillcomeintoeffectinfiscalQ1-2024.Thereforebetween2023and2024,Chapter8ofthe2023CARGuidelineshouldbeusedforguidanceonCVAsandbankswithIMMapprovalcancontinuetousetheAdvancedCVAriskcapitalchargeforpurposesofthecapitalfloor.StakeholdersnotedthattheBaselIIIminimumcapitalconservationprovisionsapplytobothCET1andleveragerequirementsandinquiredifOSFIwouldconsideraddingacrossreferencetoleverageratiominimumsintheCARGuideline.AnewcolumnwasaddedtoTable7inChapter1withthecorrespondingleverageratiorequirements.Chapter2–DefinitionofCapitalStakeholdersrequestedclarificationonOSFI’srevisedcalculationtosplitgeneralallowancesbetweentheStandardizedApproachandtheInternalRatingsBased(IRB)Approachandwhetherthisshouldbedoneinamannerconsistentwiththeinstitution’sinternalandexternalallowancereporting.TheyalsoinquirediftheyshouldfollowtheapproachappliedwhenupdatingtheirPillar3CR1template.InstitutionsarerequiredtofollowtheirinternalallocationofallowancesinaccordancewithIFRS9ratherthanthecurrentRWA-basedproxy.CARChapter2specifiesthatinstitutionsthathavepartiallyimplementedanIRBapproachshouldsplit“generalallowancesbetweentheStandardizedApproachandtheIRBApproachinamannerconsistentwiththeinstitution’sinternalandexternalallowancereporting”.TableCR1fromPillar3isanexampleofsuchexternalreportingbasedonaccountingvalues.StakeholdersquestionedtheproposednewdeductionfromCET1capitalforinstitutions’prepaidportfolioinsuranceassets.Theyarguedthatprepaidportfolioinsurancehasvalueinresolutionordistressandapplyingadeductiontotheseassetswouldcreateadisincentiveforinstitutionstopurchaseprepaidportfolioinsuranceasariskmitigationtool.OSFIhasamendedthetreatmentforprepaidportfolioinsuranceassetstoincludea100%riskweightandprescribedamortizationexpectationsasoutlinedinCARChapters2and4.Chapter3–OperationalRiskSincebanksthatusetheSimplifiedStandardizedApproach(SSA)haveaBusinessIndicator(BI)lessthan$1.5billion,stakeholdersrecommendedthatOSFIuseacoefficientof12%fortheSSA,whichwouldalignwiththemarginalcoefficientforBIunder$1.5billionusedintheStandardizedApproach(SA).TheBusinessIndicator(usedintheSA)isgenerallygreaterthanorequaltoAdjustedGrossIncome(usedintheSSA),andtheamountofthedifferencebetweenthesemeasuresvariesgreatlybetweeninstitutions.Itis,therefore,appropriatetohaveahighercoefficientundertheSSAthantheSA.OSFIbelievesthat15%isanappropriatelevelasitisconsistentwithboththecoefficientusedinthecurrentBasicIndicatorApproachusedbymostSMSBsandthesameasthemarginalcoefficientundertheSAforBIover$1.5billion.Stakeholdersnotedthechallengesinprovidinglossdatainformationforsubsidiaries,sinceitisnotavailableonalegalentitybasis.SubsidiariesareonlyrequiredtoprovidelossdataiftheyareinCategory1andhaveannualAdjustedGrossIncomegreaterthan$1.5billion.StakeholdersrecommendedthatOSFIalignwiththeBCBSBaselIIIFrameworkandallowtheinitialuseof5yearsoflossdatafortheSAonatransitionalbasis.TheBaselframeworkdoesallownationaldiscretionforashorterobservationperiodof5-10yearsinexceptionalcasesif10yearsofgoodqualitylossdataisnotavailablewhentheinstitutionfirstmovestotheSA.OSFIhasdecidedtoretainarequirementof10yearsoflossdataasthisisamorerepresentativesamplesizeofoperationallosshistoryandcreatesmoreconsistencybyensuringthatallSAinstitutionsareusingdatafromthesameduration.Category1SMSBsmayapplytousetheSA(withaminimumInternalLossMultiplierof1)with5-9yearsoflossdata.Undertheproposedrequirements,ifmorethan5%ofaninstitution(measuredusingBusinessIndicator)doesnothave10yearsofhigh-qualitylossdata,theinstitutionwouldneedtouseanInternalLossMultiplier(ILM)equaltoorgreaterthan1.StakeholdersrequestedthatOSFIconsiderahigherthresholdthantheproposed5%.ItwasnotedthatundertheAMArequirement,OSFIhaddefineda“significant”partas75%,whilea"material"partwasdefinedas90%,ofaninstitution’soperations.Stakeholdersalsoquestionedtheproposedrequirementtoincludelossdataforacquiredbusinessesasitmayposeimplementationchallengestomergers&acquisitions.Forexample,itwouldbechallengingtovalidatethequalityoflossdatapriortoanacquisitionorifdataisbeyondtherecordretentionperiod.ThefinalCARGuidelineChapter3hasincreasedthethresholdto10%,whichismoreconsistentwiththematerialitythresholdthatwasusedforAMA.Thethresholdisalsonowmeasuredasthepercentageoftotallossdatathatisestimated,whichmeansthatevenifanacquiredentitydoesnothave10yearsoflossdata,thedatathatisavailableistakenintoaccount.Aswell,institutionswillhavetheabilitytobeabovethe10%thresholdonatemporarybasiswithoutanautomaticILMadjustment.Institutionsmustcomebelowthethresholdinatimelymanner.OSFI’sguidanceforatiminglossevent,istoonlyincludethegrosslossamountwithoutincludingthepreviousrevenueoverstatementasanoffsettingentry.Stakeholdersfeltthatsuchtreatmentoftiminglossescouldimplyadisproportionateamountofcapitalisattributedtoatypeoflosseventthatcarriesnofinancialimpactovertime.ThedraftCARGuidelineChapter3providesexamplesoftiminglosses,includingrevenueoverstatement,accountingerrorsandmark-to-marketerrors.Stakeholdersassertedthattheseeventsdonotresultinatruefinancialimpactonaninstitution(i.e.zeroimpactovertime),andthatnotalltiminglosseventswillgiverisetolegalrisk.Insituationswherethelegalimplicationsarisingfromasingleormultipletiminglosseventsaredeemedrelevant,theadditionalriskandtherelatedlossiscapturedthroughappropriatelegalprovisions.Stakeholdersfeltthattheproposedrequirementtotracktiminglossesusingonlythe“offsettingentry”inthelossdatabaseforcapitalcalculation,inadditiontothelossdataalreadycapturedunderlegalprovisions,willresultinanoverstatementofaninstitution’sriskprofileandcapitalvolatility,particularlyiftheaccountingadjustmentsaresizable.Institutionsshouldincludethenotionalamountoftiminglossesintheirlossdatasets,andthepreviousrevenueover-statementorexpenseunder-statementcannotbeusedasarecoveryagainstatimingloss.Forclarification,thewording“andgiverisetolegalrisk”wasremovedfromthedefinitionoftiminglossesintheCAR.Afterconsideringfeedbackandrecognizingthataccountingerrorsareauniquetypeoftimingloss,OSFIdecidedthatthematerialitythresholdforinclusionoftiminglossesthatareaccountingerrorsmaybesetatalevelhigherthan$30,000.However,banksmustsetthethresholdfortiminglossesthatareaccountingerrorsatalevelbelowthatusedbyexternalauditorsintheirannualfinancialauditwhendeterminingthesummaryofmaterialmisstatements.Accountingerrorsdonotincludeerrorsinthemark-to-marketvaluationoffinancialassetsortimingerrorsthatinvolvethirdparties(e.g.customerover-billingorunderpaymenttothirdparties),whichmustbeincludedinthelossdatasetwhentheamountofthetiminglossexceeds$30,000.StakeholdersfeltthattheproposedCARGuidelinerequirementsrelatedtotiminglossesdeviatefromtheguidancepreviouslyissuedunderAMAandmaycreateagapinthehistoricallossdatabasethatcouldbeimpracticabletoclosepriortoimplementation.OSFIrecognizesthattheguidancearoundtreatmentoftiminglossesunderAMAmaynothavebeenasclearasthedefinitionandexamplesprovidedinthe2023CARGuideline.Therefore,institutionswillnotbepenalizedthroughanILMadjustmentiftheirhistoricallossdatasetsbefore2023donotincludealltiminglossesmeetingthedefinitioninthe2023CARGuideline.ThereisnoIncomeStatemententrytocapturelossesfromeventswhererevenuewasnotcollectedduetoanoperationalerrorandthedateofrecognitionfortheselossescannotbedetermined.Stakeholdersrecommendedthattheseeventsbeexcludedfromthecapitalcalculation.Instead,thebankscanrecordthemforriskmanagementpurposeasopportunitycosts.RevisionstoCARGuidelineChapter3furtherclarifythetreatmentofthesetypesoflossesbyspecifyingthatlossdatamustincludecostsfromuncollectedrevenuethatcanbequantifiedbasedonthecontractualobligationsoftheinstitution’sclientorcustomer.TheCARGuidelinefurtherclarifiesthatforlossesfromuncollectedrevenue,institutionsmayuseeitherthedateinwhichtherevenueshouldhavebeencollected,orthedateinwhichthedecisionwasmadenottocollecttherevenue.Stakeholderscommentedthattheproposedmethodologytoestimatelossdataforacquiredbusinessesinsection3.4.7maybechallengingtoimplementinpractice.Specificchallengesrelatedtothemethodologyinclude:CalculatingtheBIforacquiredbusinessesCalculatinganinstitution’sBIexcludinganacquiredbusinessCalculatingBIforanassetpurchaseTosimplifytheinclusionofMerger&Acquisitionactivities,stakeholdersrequestedthatOSFI:Allowexclusionofpre-acquisitionlossesandBIforassetpurchases(loan/creditportfolios).Allowexclusionofpre-acquisitionlossesandBIforminoracquisitions.Formaterialacquisitions,allowuseofproxydata(internalorexternal)toestimatelossesforthemissingyears.Defineamaterialitythresholdbasedongenerallyavailableinformationsuchastotalassetsacquired,orrevenuesforthepreviousyearatthetimeofacquisition.Toaddressconcernsthattheproposedapproachwouldbechallengingtoimplement,theCARGuidelinewillallowinstitutionstouse,asanalternativemethodology,125%ofAdjustedGrossIncome(detailedinsection3.3ofCARGuidelineChapter3)fortheyearpriortothemergeroracquisitionasaproxyforBIofthemergedoracquiredentity.TheCARGuidelinehasalsobeenamendedtoclarifythattheILMforthequarterpriortothemergeroracquisitionistobeusedwhendetermininghowtoestimatelossesinsection3.4.7.Asaresult,InstitutionswillnotneedtocalculatetheILMexcludingtheacquiredbusinessorentity.FormergersandacquisitionsinthetenyearspriortotheimplementationoftherevisedCARGuideline(i.e.,from2013-2022),institutionsmayestimateanyyearofmissinglossdataat1%oftheacquiredbusiness’BI(sinceinstitutionswillonlyhaveanILMoncethenewSAisimplemented).Notethatinstitutionsmustincludeactualorestimatedlossdatafor allmergedoracquiredbusinesseswithinthepasttenyears,includingfortheperiodbeforetheacquisition.Theonlyexceptioniswhenaninstitutionpurchasesassets(asopposedtotheacquisitionof,ormergerwith,alegalentity),inwhichcasenoadjustmenttoBIorlossdataisrequiredfortheperiodbeforethepurchase.Chapter4–StandardizedApproachtoCreditRiskDifferencesinthedefinitionofassetclassesbetweenChapters4and5canleadtooperationalinefficienciesforanIRBinstitutionsubjecttothecapitalfloorbasedontheStandardizedApproach.Thesedifferenceswillrequireinstitutionstoreporttwosetsofassetclasses–onefortheStandardizedApproachandanotherfortheIRBApproach.StakeholdersrequestedthatOSFIeliminatethedifferencesindefinitions,asappropriate,toimproveoverallefficiency.Examplesofsuchdifferencesincludethedefinitionsofretailexposures,exposuressecuredbyresidentialrealestate,regulatoryretailexposures,andqualifyingrevolvingretailexposures.OSFIhasincorporatedrevisionstobetteralignthedefinitionsacrosstheStandardizedApproachandIRBApproach,includingclarificationstothedefinitionsoftransactors,qualifyingrevolvingretailexposuresandexposuressecuredbyresidentialrealestate.Stakeholdersrequestedfurtherclarificationontheexpectationforthenewduediligenceprocedures.Smallerinstitutionshavelimitedresourcesandexpertisetoeffectivelyperformadequateduediligenceproceduresandstakeholdersrequestedtheseinstitutionscontinuetobeabletorelyonexternalratingswithouttherequirementforadditionalvalidation.StakeholdersalsorequestedthatOSFIclarifywhetherduediligenceisalsorequiredforIRBbanksthatneedtocalculatetheoutputcapitalfloor.Chapter4providesdetailsonthetypesofinformationthatcouldbeusedinmeetingtheduediligencerequirementsandincludesdetailsontherequiredtimingofduediligenceanalyses.Simplifiedtreatments(whichinvolveaflatriskweightregardlessofexternalcreditrating,anddonotrequirethattheduediligencerequirementsbemet)havebeendevelopedforthoseassetclassesrequiringduediligenceanalysestovalidateexternalcreditratings.Thesesimplifiedtreatmentswereintroducedtoreduceoperationalburdenforinstitutionswithimmaterialexposurestotheseassetclasses.Inaddition,duediligenceisrequiredforIRBbankstocalculatethecapitalfloor.ForA-IRBbanksthatmustusetheStandardisedApproachforthepurposesofthecapitalfloor,stakeholdersaskedwhetherOSFIwouldallowthemtocontinuewiththeexistingCARGuidelineStandardisedApproachrequirementofusingonenotchbelowthesovereignratingfortheirbankexposures.Institutionswillnolongerbepermittedtoapplyratingsonenotchbelowthesovereignratingtotheirbankexposures,includingforpurposesoftheoutputfloor.UnratedbankexposurescanbetreatedusingtheStandardizedCreditRiskAssessmentApproach.Alternatively,institutionsmaychoosetoapplya100%riskweighttoalloftheirunratedbankexposures.StakeholdersindicatedthatOSFIhasproposed“base”riskweightsforratedandunratedcoveredbondexposuresthataremorepunitivethantheBaselCommitteeonBankingSupervision(BCBS)riskweightsunderBaselIII.Inparticular,theproposedriskweightsforratedcoveredbondexposuresareidenticaltounsecuredbankexposures.StakeholdersexpressedconcernsthatthisapproachputsCanadiancoveredbondissuersatadisadvantageascomparedtointernationalpeers.Theproposedriskweightswouldlikelyreducefutureparticipationfromcertaininvestors,whichwouldinturnlimitCanadianbanks'accesstotheglobaldebtcapitalmarkets.ThemorepunitiveriskweightsproposedbyOSFIdonotfullyconsiderthestructuring,underlyingsecurity,andoperationalfeaturesoftheCanadianregisteredcoveredbondprograms.Assuch,stakeholdersrequestedthattheBCBS“base”riskweightsbeused.OSFIhasconsideredthestructureandfeaturesoftheCanadianregisteredcoveredbondprogramandwillcontinuetousethe“base”riskweightsforinstitutions’holdingsofcoveredbondsgiventhecollateralpledgedisnoteligibleundertheStandardizedApproach.Inaddition,OSFIallowsissuespecificratings(insteadofissuerratings)tobeusedforcoveredbondholdingsand,assuch,coveredbondswilloftenhavealowerriskweightcomparedtounsecureddebtissuedbythesamebank.StakeholdersrequestedthatOSFImaintainthecurrentmaterialityexemptionallowing100%riskweightingforimmaterialequityholdings.Inaddition,theyrequestedthatOSFIadoptaphased-inapproachforthetreatmentofequityexposuresconsistentwiththeBCBStreatmentandsimilartotheapproachrecentlyadoptedforthecapitalfloor.OSFIhasconsideredthemeritsofthematerialityexemptionandthephase-inapproachforthetreatmentofequityexposures.However,equityexposuresareinherentlyrisky(firsttoabsorblosses)and,assuch,theriskweightsprescribedundertheBaselIIIframeworkareappropriate.Inaddition,aphase-inisnotrequiredgiventhesimplicityoftherule.Undertheproposedrequirements,paragraph93limitsaresidentialrealestateexposuretoafirstmortgage.Thisisnotviewedasconsistentwiththe‘Claimsovertheproperty’sectioninparagraph88,applicabletoallrealestateexposures,andChapter5,Paragraph25,whereresidentialmortgageloansincludejuniorliens.StakeholdersrecommendedthatOSFIremovethe"firstmortgage"requirementintheresidentialrealestatedefinitiontoalignwiththeBCBSframeworkandChapter5,Paragraph25(2),whichincludessubsequentliens.ConsistentwithChapter5,paragraph25,thereferencetoa"firstmortgage"requirementhasbeenremovedfromthedefinitionofresidentialrealestateinChapter4,paragraph93.Regardingincome-producingrealestate,stakeholdersnotedthatthe50%income/cashflowtestisanonerousrequirementwhereinstitutionsmaynothaveenoughdatatoperformthetest.TheyexpressedappreciationforOSFI’spreviousconfirmationthatcontinuoustrackingofthesourceofincomeisnotrequiredthroughoutthelifeofthemortgage.ForbothSAandIRBmortgageloans,stakeholdersalsounderstoodthatdeterminationofthesourceofincomeisonlyrequiredatthetimeofcreditadjudication(e.g.,loanoriginationand/orloanre-finance)andthatOSFIwillpermitinstitutionstouseaflagintheirsystemstoidentifythepropertypurpose(i.e.,owneroccupiedorrentalproperty)providedtheflagresultsinasconservativeanidentificationofincomeproducingpropertiesasthe50%income/cashflowtest.OSFIhasprovidedflexibilityonthisrequirementtoallowinstitutionstousetheirowninternaldefinitionsof“incomeproducing”providedsuchdefinitionsaremoreconservativethanthedefinitionintheCARGuideline.StakeholdersaskedOSFItoclarifytherequirementstousetheriskweightsinTable10titled“Riskweightsforgeneralresidentialrealestateexposures”.Aresidentialrealestateexposureisanexposuresecuredbyaresidentialproperty(e.g.,individualcondominiumresidencesandone-tofour-unitresidences)madetoaperson(s)orguaranteedbyaperson(s).Investmentsinhotelpropertiesandtime-sharesareexcluded.Table10appliesaslongastheexposureissecuredbyaresidentialpropertyandmadetoaperson(s)orguaranteedbyaperson(s);lessthan50%oftheincomefromtheborrowerusedintheinstitution'sassessmentofitsabilitytoservicetheloanisfromcashflowsgeneratedbytheresidentialproperty;anditisnotalandacquisition,developmentandconstruction(ADC)exposure.Iftheexposurerelatestoanimmovablepropertybutisnotmadetoaperson(s)orguaranteedbyaperson(s),thenthecommercialrealestateriskweightswouldapply.Paragraph109definesanADCexposureas“oneforwhichthesourceofrepaymentiseitherthefutureuncertainsaleofthepropertyorcashflowswhicharesubstantiallyuncertain”.Stakeholdersnotedthatrepaymentuncertaintiescanbemitigatedbybothpre-salesandpre-leasecontractssufficienttorepaybankloans.Withrespecttoparagraphs110and111,stakeholdersnotedthatBaselCRE20.91(2)statesthat,inadditiontopre-sale,“pre-leasecontractsamounttoasignificantportionoftotalcontracts”andcanbeacriterionforrisk-weightingADCexposurestoresidentialrealestateat100%insteadof150%.UnderthedraftCARGuidelineissuedforpublicconsultation,thepre-leasingoptionwasnotavailable.StakeholdersrecommendedthatOSFIconsidertheinclusionofthepre-leasingoptionasitcansatisfytheuncertaincashflowsdescribedintheaboveADCdefinition.OSFIhasadded"constructionprojects"aspartoftherequirementtoqualifyfora100%riskweightwhichdiffersfromtheBCBSframework.StakeholdersinquiredabouttheintenttoexcludecertainADCexposures/residentialrealestatesuchasdevelopmentprojectsandlandacquisition,whichcanoftenserveasfeedertransactionsforconstructionprojects.Stakeholdersnotedthathigh-rise,purpose-builtrentalprojectswouldbeentirelyexcludedfromthepreferential100%riskweightifqualificationisonlybasedonmeetingthe50%pre-salecriterion.Stakeholdersalsonotedthat35%equityatrisk(basedonappraisedas-completedvalue)contributionsarerarelyseeninconstructionprojectsandsuggestedthatOSFIreducethisvalue.Stakeholdersrecommendedallowingtheuseof"totalprojectcosts"asanalternativeto"appraisedas-completedvalue”inmeasuringequityatrisk.Theysubmittedthatthe“appraisedas-completedvalue”includesaprofitcomponent,notjustequityatrisk.Theyfurthernotedthatininstitutions’riskassessments,theytypicallycomparetheamountofborrowercontributedequitytothetotalestimatedprojectcost.Pre-leasecontractsarenotincludedbecausepre-leasingcontractsarenotprevalentinCanada.Applicationofthepreferential100%riskweightisbeingmadeavailableforlandacquisitionuptoamaximumLTVof60%.Thehigherthresholdforlandacquisitionreflectsthehigherriskofthoseexposures.High-risepurpose-builtrentalconstructionprojectswillbeeligibleforthe100%riskweightiftheequitythresholdismet. Allotherresidentialconstructionprojectswillonlybeeligibleforthepreferentialriskweightifthe50%pre-salerequirementismet.TobemorereflectiveofmarketpracticesinCanada,OSFIhasloweredtheequityatriskthresholdtoqualifyforthepreferential100%riskweightto25%(basedonappraisedas-completedvalue)from35%.“Appraisedas-completedvalue”ismoreconsistentwiththeapproachusedintheCARGuidelinemorebroadly.Thegeneralrelationshipof“appraisedas-completedvalues’to”totalprojectcosts”weretakenintoaccountwhencalibratingequityatriskandLTVthresholdsforthepreferential100%riskweight.Undersection4.1.16,theproposedrequirementtoapplya1.5risk-weightmultiplierforcertainexposureswithcurrencymismatchwouldinvolveconsiderableresourcestochangefront-endsystems.Thechallengesarefurtheramplifiedbysettingathresholdofwheremorethan10%oftheborrower’sincome,withoutanaturalorfinancialhedge,usedtoqualifyfortheloanisdenominatedinaforeigncurrency.Institutions’systemsdonotcapturethecurrencyoftheborrower’ssourceofincome.Todosowouldrequirechangestoadjudicationsystemsandthisdatawouldonlybecapturedfornewand,potentially,renewedloans.Astheseexposuresareimmaterialformanyinstitutions,stakeholdersrecommendedthatOSFIprovideanexemptiontothisrequirementfordomesticbranchlocalcurrencyretailloansandassumenocurrencymismatchexists.OSFIhasassessedthisrisktoberelativelylowandassuch,toreduceoperationalburden,the1.5risk-weightmultiplierforcurrencymismatchwillonlyapplytoresidentialrealestateexposures.The1.5multiplierwillneedtobeappliedtoallresidentialrealestateexposureswithcurrencymismatchstartinguponimplementationofthenewrulesininstitutions’fiscalQ22023.Stakeholdersrequestedclarificationonwhyundrawnbalancesofcreditandchargecardexposuresaresubjecttoa25%creditconversionfactor(CCF).Theyassertthatthe10%CCFforunconditionallycancellablecommitmentsusedintheBaselframeworkismoreappropriate.The25%CCFwillberetainedandwascalibratedbasedondatacollectedfromCanadianbanksonCanadiancreditcardandchargecardportfolios.Paragraph162readsasfollows:“Deferredplacementfeesreceivable,non-credit-enhancinginterest-onlystrips,andanyotherassetsthatrepresentthepresentvalueoffuturespreadincomesubjecttoprepaymentrisk.”Ourcomprehensionofthistextisthatnon-credit-enhancinginterest-onlystripsmustbeweightedat250%whenexposedtoaprepaymentrisk.ThisstrongweightingreflectsthefactthattheseI/Ostripsaremoreorlessasvolatileasshares.SinceI/Ostripsarecreatedfrompools966and990,whichprohibitprepaymentandhaveaverylimitedhistoryofdefaults,andconsequentlyarelativelylowprobabilityofprepayment,arewecorrecttoconcludethattheseI/Ostripsarefreefromprepaymentrisk?NewtexthasbeenaddedtothisparagraphtoemphasizethatI/Ostriptransactionsnotsubjecttoprepaymentwillberisk-weightedat100%toconformtotheriskweightingassignedtosimilarassets.Thisapproachaccountsforthefactthat,inthecaseofI/Ostripslike966commercialmortgagepools,aborrowerwhodecidestoprepaywouldhavetopayallfutureinterestchargesatthesametime.CMHCwouldonlycoverupto12monthsofaccruedinterestandwouldnotcoveranydefaultonpaymentsresultingfromphysicaldamagetothebuildings.Ifamortgageremainsoutstandingformorethan12months,orisseverelydamagedbyanuninsuredrisk,theI/Ostripassetwouldprobablyloseallitsworth.Regardingparagraph181,stakeholderssoughtclarificationonwhyOSFIdidnotalignwiththeBCBSCRE21.15standardandremovethe"unrated"applicationspecificationfromthedomesticcurrencyandforeigncurrencyratingsrequirement.TheBCBSandCARGuidelinetreatmentsareequivalent.ThefactthattheexposureisunratedisassumedintheBCBStextastheexposureisbeingrisk-weighted“basedontheratingofanequivalentexposuretothatborrower”(i.e.,notthatoftheexposureitself).Regardingparagraphs234,237and238,stakeholdersrequestedthatOSFIclarifywhatismeantbythe“currencyoftheexposure”.Inthesimplecaseofaloandenominatedincurrency1,andcollateraldenominatedincurrency2,itiseasytodeterminewhetherthereisa“mismatch”.However,inthecaseofaderivativeorinsomecasesasecuritiesfinancingtransaction(SFT),thereisnoobviousanswerastowhatisthecurrencyoftheexposure.StakeholdersalsoaskedOSFItoconfirmthatthereisnoconflictbetweentheseparagraphsandfootnote#19inthecurrentCARGuideline,Chapter4.Thisfootnotestatesthatnoforeignexchangehaircutistobeappliedtocashcollateralaslongasthecurrencyofthatcashiseligibletobepostedasperthetermsofthecreditsupportannex(CSA)(which,bydefinition,mustbethecase).Thetableinparagraph237refersonlyto“cashinthesamecurrency”ashavinga0%haircut.Thestakeholdersassumedfootnote19takesprecedencewhereapplicableand,assumingthatisthecase,askedOSFItoconfirmifthereisintendedtobeadivergenceintreatmentofcashcollateralforderivativeagreementscomparedtoSFTagreements.ForderivativeandSFTnettingsets,thecurrencyoftheexposureforvariationmarginisanycurrencywhichispermittedaseligiblevariationmargininthecreditsupportannexorequivalentdocumentation.Forinitialmarginorindependentamounts,thecurrencyoftheexposureistheterminationcurrencyofthenettingset.Footnote19clarifieswhatismeantbycashinthesamecurrencyandthereforeisapplicable.ThetextinChapter4hasbeenupdated.ThereisnointentfortheretobedivergenceforcashcollateralbetweenderivativeandSFTagreements.WehaveupdatedtheCARGuidelinetoreflectthis.Accordingtoparagraph268(2),theportionoftheexposurethatisbelowamaterialitythresholdmustbedeductedfromCET1capitalbytheinstitutionpurchasingthecreditprotection.StakeholdersaskedthatOSFIconfirmthat“thedeductibleportion”ofaprivatelyinsuredmortgage(PMI)exposurewiththeprescribedRWAtreatmentdoesnotfallundertheCET1capitaldeductionrequirementunderthissubparagraph.OSFIconfirmsthatthisparagraphdoesnotapplytoPMI-insuredmortgageswheretheGovernmentofCanadabackstopisreflected.ThesearesubjecttotherulesinChapter4,paragraph271orChapter5,paragraph146.StakeholdersinquiredwhetherthechoicebetweenthefourmethodsofcalculatingRWAforprivatelyinsuredmortgagesisdecidedonacasebycasebasis,ortheelectionisapplicabletoallexposuresandmustbetreatedthatwayonaconsistentbasis.Stakeholdersinquiredaboutparagraph271andtheapplicabilityofthe2.2factortoapproachesi)andii)orjusttoapproachii).Institutionsarepermittedtochoosebetweenanyofthefourapproachesonacasebycasebasis.Theapproachmaychangeforaparticularmortgageoverthelifeofthemortgage.The2.2factorappliesregardlessofwhetherapproach1)i)orii)ischosen.The2.2multiplierisusedtoaccountforthedeductible(firstlossposition)natureofthelossesincurredbylenderspriortotheGovernmentofCanadabackstopbeingavailable.Chapter5–InternalRatingsBasedApproachtoCreditRiskStakeholdersaskedOSFItoreconfirmitsexpectationsarenottochangethegranularityorcalibrationofexistingmodelstoaccountfor(i)thenewcategorizationofriskweightfunction(e.g.,residentialmortgagewhererepaymentismateriallydependentoncashflowsgeneratedbytheproperty)aswellas(ii)therequirementtousethefoundationalapproachforspecificpopulations(e.g.,exposurestothebankassetclass,financialinstitutions,corporateswithannualrevenuegreaterthanCAD$750million).Theexpectationsaroundcurrentgranularityorcalibrationofexistingmodelsarenotchanging.Existingmodelswillcontinuetobesubjecttoback-testingrequirementstoensuremodelscontinuetobeappropriateforaninstitution’scurrentportfolio.Regardingthedefinitionofincome-producingrealestate(IPRE),stakeholdersexpressedappreciationforOSFIpermittinginstitutionstouseaflagintheirsystemstoidentifythepropertypurpose(i.e.,owneroccupiedorrentalproperty)providedtheflagresultsinasconservativeanidentificationofincomeproducingpropertiesasthe50%income/cashflowtest.TheyrequestedthatOSFIalsoalignthedefinitionofIPREwithincome-producingcommercialrealestate(IPCRE)inChapter4.Inparagraph20,stakeholdersnotedthatOSFIhasnotdesignatedanyCanadianpropertytypesasbeinghigh-volatilitycommercialrealestate(HVCRE)butstillprovidesspecificexamplesoftheapplicationofHVCREriskweightsinrelationtocertainCanadianloansfinancingADCofpropertiesandCanadianinstitutions’foreignoperationsloansonproperties.Theyrequestedfurtherclarificationontheseexamplesandanyimplicationswithrespecttothecapitalfloorcalculation.WhenOSFImakesreferencestoADCexposures,stakeholdersaskedOSFItoalignwiththedefinitionsinChapter4.OSFIdoesnotbelieveasimilarchangeisrequiredtoChapter4forIPCREsinceCREprojectsoftenrelyonincomegeneratedbythepropertyforrepayment.TheHVCREriskweightswillapplytoCanadianloansfinancingADCofpropertieswherethesourceofrepaymentisuncertainwithoutsubstantialequityatriskaswellasCanadianinstitutions’foreignoperations’loansonpropertieswherethenationalsupervisorhasdesignatedthesetypesofpropertyasHVCRE.OSFIhasclarifiedthelanguageinthissection.RegardingreferencestoADCexposures,thedefinitionshavebeenalignedbetweenChapter4andChapter5.Stakeholdersexpressedappreciationregardingthecreationofan‘OtherRetail’(non-regulatoryretail)categoryforexposuresfailingtomeetthesixcriteriarelatedtothenatureoftheborrowersandthesizeofthepoolofexposuresinparagraph25.Asnoted,theseexposureswouldbesubjecttotheCorporateSMEriskweightfunction.Theysoughtthefollowingclarifications:Consideringthereisalreadyan“OtherRetail”assetclass,canOSFIdefinethispopulationas“non-regulatoryretail”insteadtoimprovetransparency?ThiswouldalsoapplyforChapter4.Inordertoensureconsistencyinthecategorizationofexposuresinthiscategory(i.e.,regulatoryvsnon-regulatoryretail)betweenChapters4and5,canOSFIuseaconsistentparameterforaggregationinbothchapters(e.g.,authorizationamount,standardizedEAD)?Whatparameterfloors,particularlyforLGD,wouldsuchexposuresbesubjecttopersection5.4.1orsection5.4.2?TheLGDfloorforanunsecuredcorporateandPSEexposureis25%perparagraph97whileitis30%forAllotherretail(thesub-assetclassunderRegulatoryRetail)perparagraph143.Forexposurestoindividuals,thereisnotaconceptof“annualsalesamount”foruseintheCorporateSMERWAformulaunderparagraphs68and69.StakeholdersaskedOSFItoprovideguidanceonwhatshouldbeusedas“annualsales”forthispopulationtoensureconsistenttreatment.Yes.Thischangehasbeenmade.Theconsistentparameterwillbeexposureamounts.TheunsecuredLGDfloorof25%wouldapplytounsecuredexposurestosmallbusinessloanstreatedundertheCorporateSMEriskweightfunction.Fortheseexposures,annualsalesshouldbesettoCAD$7.5million.Stakeholdersrecommendedremovingtheaddedrequirementinparagraph25(4)thatstipulatesthatthemaximumaggregatedretailexposureshouldnotexceedCAD$1.5million.Thisisviewedincontradictionwithparagraphs25(1)and(2)whereexposurestoindividualsandresidentialmortgagesareeligibleforretailtreatmentregardlessoftheexposuresize.ThisisnotdeemedconsistentwiththeBCBSdefinitionofretailexposuresundertheAdvancedIRBApproachinthecurrentCARGuideline.Stakeholders’viewisthatthisrequirementintroducesunnecessarycomplexityandalackoftransparencyintheAdvancedIRBRWAreportinganddisclosure,asthesmallamountofretailexposuresexceedingthethresholdwouldhavetobereportedusingthecorporateriskweights.Therequirementinpart(4)ofparagraph25willbemaintained.However,OSFIhasprovidedadditionalflexibilitytoallowinstitutionstoconfirmimmaterialityoftheamountofexposuresthatbreachthisthresholdonatleastanannualbasis.Immaterialitywillbedefinedas2%oftotalretailexposures.Whenmaterialbreachesoccuroraninstitutioncannotcomplywiththeserules,theyshouldcontactOSFItodiscussthetreatmentoftheseexposures.Regardingparagraph67and68,the"consolidatedgroup"definitionisnotalignedwithparagraph39.Stakeholdersrecommendedaligningthetwodefinitionsandusingthedefinitioninparagraph39whichreliesontheaccountingstandardapplicabletotheultimateparentoftheconsolidatedgroup.Theyalsorequestedalignmentofthedefinitionof“sales”underparagraph68and“revenue”underparagraph38tosimplifydatagathering.OSFIhasalignedthedefinitionofconsolidatedgroup.Footnote10nowreferstothesamedefinitionasinparagraph39.Revenueforlargecorporateexposuresmayincludeincomebeyondthatfromsales.Ifaninstitutionwishestouserevenueinsteadofsalesforpurposesofparagraph68,theymaydosoprovideditisalwaysasconservative(i.e.,thereisnonegativerevenuethatwouldresultinrevenuebeinglessthansales).StakeholdersindicatedthatOSFI’sproposedcapitalrequirementsformortgagesinsuredbyprivatemortgageinsurerswhereabackstopguaranteeisprovidedbytheGovernmentofCanadadonotappropriatelyrecognizealloftheriskmitigation.Theynotedthattheassumptionofthe100%LGDonthedeductibleexposureisoverlypunitiveandnotreflectiveoftheriskofaPMI-insuredmortgage.IfOSFIbelievesthereisaneedtomodifytheexistingrulesforthe"deductionportion"underthebackstopguaranteeoption,stakeholdersrequestedthatOSFIprescribeanLGDof45%insteadof100%toalignwithprivatemortgageinsurers’unsecuredLGDundertheFoundationIRBApproach.Assuch,theyalsosuggestedthatOSFIremovethemultiplierof2.2inparagraph271undertheStandardizedApproach.TherevisedrulesforPMI-insuredmortgagesonlyrequiretheuseofthe100%LGDonthedeductibleexposureifaninstitutionwishestorecognizethebenefitsoftheGovernmentofCanadabackstop. Thisbackstopisstructuredsuchthatitwillonlybetriggeredifaninstitutionsufferslossesequalto10%oftheoriginalprincipal,whichalignswiththestructureofthepartialgovernmentguaranteeofprivatelyinsuredmortgagesprovidedpursuanttothe ProtectionofResidentialMortgageorHypothecaryInsuranceAct.Assuch,ifthebackstopisrecognized,itcomeswiththeimplicitassumptionoftheinstitutionhavingsufferedlossesequaltothedeductibleamount,whichjustifiesthe100%LGDonthisexposure.Inaddition,therevisedrulesforPMIexposuresreflecttheriskmitigationoptionsavailabletoinstitutions.Thatis,institutionscanchoose:i)whetherornottoreflecttheGovernmentofCanadaguarantee,andii)whetherornottoreflectthebenefitsoftheinsuranceprovidedbythePMI.Institutionsmaychoosetheapproachthatminimizescapitalrequirementsatanypointthroughoutthelifeofthemortgage.Whilepromotingflexibilityforinstitutions,therevisedtreatmentprudentlyreflectsthepotentialforrelatedriskstocompound,whilealigningtofoundationalelementsofthecapitalframework(i.e.,thatthereisnorecognitionofdoubledefaultordoublerecovery).StakeholdersrequestedclarificationontheinclusionofLGDinthefootnoteaboutseasoningforparagraph207.DoesthisrequirementapplyonlytotheLGDratesthatinstitutionsuseforaccountsthatarealreadyindefault?WouldthisrequirementbesatisfiediftheircalculationsofBestEstimateofExpectedLoss,whichisusedtocalculateELandRWAfordefaultedaccounts,takestime-since-defaultintoaccount?ThisrequirementforseasoningrelatedtoLGDissimplystatingthatifthereisevidenceofseasoningeffects(e.g.,evidencethatLGDspeakseveralyearsafterdefault),estimatesshouldbeadjustedtoaccountfortheidentifiedseasoningeffects.Footnote26ofparagraph280notedthat“post-defaultadvancesandcorrespondingaccruedinterestcanbecapturedinLGDorEADestimates,provideditisdoneconsistentlyacrosstheinstitution”.Institutionstypicallyhavealargevarietyofassetclasses/portfoliosofdistinctcreditcharacteristics.Itisconceivablethat,forsomeassetclasses/portfolios,itwouldmakemoresensetocapturepost-defaultadvancesandcorrespondingaccruedinterestinLGD;however,forsomeotherassetclasses/portfolios,itwouldmakemoresensetodosoinEAD.Ifthisisthecase,wouldOSFIpermitinstitutionstomakesuchchoiceswithappropriatejustification?Yes,institutionsmaychoosetoreflectpost-defaultadvancesandaccruedinterestinLGDorEADdependingontheassetclass.However,institutionsarenotpermittedtoswitchbackandforthbetweenapproachesforagivenassetclass.Ifaninstitutionwantstoswitchapproachesforagivenassetclass,theymustnotifyOSFI.Regardingparagraph286,giventhedynamicnatureofcitiespubliclyavailablefortheTeranet–NationalBankHousePriceIndex,stakeholdersrequestedthatOSFIbemoreprescriptiveastowhichcitiesshouldbeused.InapreviousversionoftheCARGuideline,OSFImentionedthat25citiesshouldbeused.Inthemostrecentpublicconsultationversion,itis26cities;however,asoftheendofMarch2021,theTeranetwebsitehasindicesfor32publiclyavailablecitiesanditisexpectedthatmorecitiescouldbeaddedbythetimetheupdatedCARGuidelinecomesintoeffect.StakeholdersaskedOSFItodefinethecities(similartothecurrentCARGuidelinewith11cities)aswellasthefactorsrequiredfortheSupplementaryCapitalRequirementindicators(SCRI)inAppendix5-3oftheguideline.Forloansoutsidethe26cities,stakeholdersaskedOSFItoconfirmthatthecomposite-11informationshouldbeutilized.Paragraph286hasbeenupdatedtoreflectall32publiclyavailablecities,andalistofthe32citieshasbeenincludedinAppendix5-3.Forloansoutsidethatlistof32cities,pleaseusethecomposite-11index.Regardingparagraphs300,302and304,thebenefitsofcreditriskmitigationfrombothborrowersandguarantorscanberecognizedforcapitalpurposesifaninstitutioncanestablishthatitcansimultaneouslyandindependentlyrealizeonboththebenefits(e.g.,collateralprovidedbytheborrowerandathirdpartyguarantee),andindoingsonotrecognizedoublerecovery.However,OSFIstillimposedariskweightfloortoensurethattheriskweightresultingfromPDorLGDadjustmentsmustnotbelowerthanthatofadirectcomparableexposureusingthePDoftheguarantorandtheLGDforanunsecuredexposuretotheguarantor.Thiscouldbeoverlypunitiveandpreventtherecognitionofboththebenefitsevenwhentheaforementionedconditionsaremet.Especiallywhentheguaranteeisreceivedfromathird-partybank,theunsecuredLGDof45%prescribedundertheFIRBapproachshouldbeused.ThecollateralprovidedbytheborrowercouldhavebroughtdowntheLGDsignificantly(i.e.,ifthesecuredLGDoftheobligor/guarantorcanbeusedforsettingtheriskweightfloor).Thestakeholderaskedifthiswouldbeanunintendedconsequence.TheynotedthattheBCBSdoesnotprescribethattheunsecuredLGDoftheguarantormustbeusedforthesamepurposeandsoughtclarificationfromOSFIthatinstitutionscannotrealizeonboththeguarantorandcollateralprovidedbytheborrowerandthereforeinstitutionscanreflectoneortheotherbutnotboth.Inasituationwherecollateralandaguaranteearebothreceived,institutionsmaychoosetoreflectwhicheverismostbeneficialfromacapitalperspective.Inthecaseofcollateralprovided,thereisnoriskweightfloor.OSFIdoesnotbelievethereareanycircumstanceswherelenderscansimultaneouslyandindependentlyrealizeonbothaguaranteeandcollateral.Thatis,recovereachdollarlostfromboththecollateralandtheguarantor($2recoveredforevery$1lost).Inthecaseofaguarantee,theriskweightfloordescribedisapplicable.OSFIdoesnotseeanyunintendedconsequencesfromthistreatmentanditisnotanoversightdespitetheBaselIIIrules.Regardingparagraph348,undertheFIRBthereisnocapitalincentiveforalendertoestablishsecurityasafirstlienlenderifthecollateraldoesnotmeetthenarrowrequirementscurrentlyoutlined.Thestakeholder’sdefaultdataandindustrydatabothsupportthatpriorityofdebtisabetterpredictorofrecoveryratesthanthevalueofcollateral(excludingRealEstate,ABL,etc.).Bynotincentivizinglenderstohaveasecuredpositioninthecapitalstructure(andnofurtherincentiveforstructureswithmeaningfuljuniordebt),therecouldbeunintendedconsequencesofreducedrecoveryratesinthenextdownturn.ThestakeholderfurthernotedthatconsistencybetweenFIRBandAIRBcollateralisessentialgiventheyarebothIRBapproaches.Assuch,theyrequestedthatOSFIallowtheuseofadebtcushionmethodologyforlargecorporatesbasedontheexistingparameterestimationmethodology.TheyfurthernotedthattheadoptionoftheFIRBapproachfailstogiverecognitionofthesubstantialcollateralavailableunderageneralsecurityagreement(GSA)ifacounterpartygoesintodefault.GSAsaredeemedeligiblecollateralundertheFIRBapproachprovidedtheassetsofthecounterpartyincludeeligiblecollateral.OnlytheassetsincludedaseligiblecollateralmayberecognizedascreditriskmitigationwhenreflectingthebenefitsofaGSA.IfinstitutionsarehavingdifficultieswithparticularaspectsoftherequirementsrelatedtoGSAs,theymayreachoutbilaterallytoOSFItodiscussthem.Itshouldbenoted,however,thatadebtcushionapproachisnotpermittedundertheFIRBapproach.Chapter6-SecuritizationParagraph4statesthattransactionsofrealestatecashflowsmaybeconsideredspecializedlendingratherthansecuritization.Thestakeholdersinquiredaboutwhatwouldwarranttreatingatransactionasaspecializedlendingexposureratherthanasecuritization.Securitizationsarelimitedtothetranchingofcredit.SecuritizationsstructuredthroughSPVs(specializedlendingorABS)wouldnotfitintothesecuritizationframeworkifthereisnocreditenhancement.Stakeholdersaskedwhetheraninstitutionthatparticipatesinanon-AAAratedsecuritizationexposure(e.g.,an“A”ratedexposurefromaspecificsecuritizationtransaction)isallowedtore-tranchethisexposure(e.g.,into“AAA”,“AA”and“A”tranches)tooptimizecapitalwithoutitsexposuresbeingtreatedasre-securitizationexposures.Theexposurewillnotbeconsideredare-securitizationexposuresolongasallcashflowsmaybereplicatedbyasingletranchingofthetransaction.Thiswouldbethecaseifthe“A”trancheisre-tranched.If,however,securitizationisusedtopooltranchesfromseparatesecuritizationsandthenre-tranchethepooloftranches,theresultingtrancheswouldbeconsideredre-securitizationexposures.Stakeholderssuggestedthatifaprepaymentspeedisnotusedorfactoredintothepricingofthetransaction,thenoneofthealternativefall-backapproaches(i.e.,iftheprepaymentratein#1ofparagraph26(a)isnotapplicabletobeused,thentheprepaymentratespecifiedin#2or#3ofparagraph26(a))shouldbeused):Underapproach1,bothtransactionpricingandhedgingtakeintoaccounttheeconomiclifeofthetransactionandwouldbeamarket-basedproxyfortheprepaymentrate.Underapproach2,bothportfolio-basedprepaymentanalysisandoriginationcurveanalysisshouldbeallowableapproaches.Underapproach2,asuitabilityqualifiershouldbeaddedbecausedatafromtheoriginator’sothertransactionsismoreinformativethanacountry-levelaverage.Underapproach3,amaterialityqualifiershouldbeadded.OSFIhasaddedlanguageclarifyingthatwhereanapproachisnotapplicable,theloweroftheremainingapproacheswouldbeused.OSFIhasalsomodifiedparagraph26toaddressconcernswithrespecttoallowinghedgingtobeusedasaproxyfortheprepaymentrate,allowingbothportfolio-basedandoriginationcurveanalysistobeapplied,andaddingamaterialityqualifiertothetransaction-leveldata.Ratherthanimplementasuitabilityqualifierhowever,OSFIhasindicatedexplicitlythatdatafromthesameoriginatorshouldbeappliedifavailableand,ifnotavailable,thendatafromthesamecountryshouldbeapplied.Regardingparagraph26,astakeholdernotedthattheapproachforrevolvingtransactionsappearstobesoonerousandtimeconsumingthatitmaynotbeusable.Onewouldneedtoupdatethiscalculationmonthlyand,asupdatedpoolcutsmaynotbereceivedmonthly,makefurthermanualadjustmentseachmonthfordifferencesbetweenactualpaydownsataprogramlevelvsexpectedpaydowns.Theyfurthernotedthatnotalloftheserevolvingpoolswillbefullydrawnduringthecommitmentperiod.Additionstothisparagraphhavebeenincorporatedtoclarifythatthecalculationmustbeperformedwithrefreshedtransactioncashflowdataatleastquarterlyandtoclarifythattheundrawnportionsmayremainundrawnunderthiscalculation.Forcommitments,stakeholdersproposedanalternativeapproachbeavailabletocalculatetheeffectivematurityshouldtheapproachproposedbyOSFIinparagraph26forrevolvingtransactionsnotbeused.Theotheralternativewouldallowinstitutionstocalculatethematurityasthesumoftheremainingcommitmenttermandtheexpectedweightedaveragematurityforanewdraw,assumingthatdrawhappensattheendofthecommitmentterm.Thisadditionalconservativeapproachhasbeenaddedasanavailableapproachunderparagraph27underappropriateconditions.Regardingparagraph30,stakeholdersrequestedclarificationonthenewrequirementfor29(a)through(c),insteadofonly(a).Thischangefrom“(a)”to“(a)through(c)”confirmsthatthemaximum40%riskretentiontestmustbemetforsyntheticsecuritizations.Astakeholdernotedthatevenifthereweredrawsonthebackstopliquidityfacilities,theywouldneverbe100%drawn.Asaresult,theyrecommendedthatOSFIconsiderapplyingaCCFsomewherebetween50%and100%fortheseABCPbackstopliquidityfacilities,providedthattheyareforbank-sponsoredABCPconduitsfundingtraditionalassetsecuritizations.OSFIhasnotreceivedsufficientevidencethatliquidityfacilitiesarenotexpectedtobehaveasadirectcreditsubstituteunderstresstomodifythecurrenttreatment.StakeholdersrequestedthatOSFImodifytheSEC-SAandSEC-IRBAapproachestoallowinstitutionstorecognizetherisk-mitigatingeffectsofexcessspread.OSFIdidnotreceiveanyfeasiblesuggestionsonhowexcessspreadmighthavebeenincorporatedintotheSEC-SAandSEC-IRBAapproaches.Regardingparagraph79,stakeholdersrequestedthatOSFIclarifythatifatransactionweretoincludecreditinsurance,theninstitutionscouldusetheriskweightattributabletothecreditinsurer’sratingandthatthiscreditinsurancedoesnotneedtomeetthecriteriaofaBaselguarantee.Asanexample,EDCcreditinsurancecouldbeincludedintradereceivablestransactions.Guaranteesmaybereflectedasasecondstepaftertheapplicationofthetop-downapproach.StakeholdersaskedOSFItoclarifythatthepoolforthereferencesecuritizationexposuredoesnothavetobesharedwiththeassetpoolbackingthetranchewithaninferredrating.Specifically,iftheassetpoolbackingbothexposures(referenceandinferredrating)isfromthesamesellerselectedbasedonsubstantiallythesameeligibilitycriteriaandconcentrationlimitsonano-adverseselectionbasis,anddoesnothaveanymeaningfuldifferenceinthecreditriskprofile,thenaseparateassetpoolfromthepoolbackingthereferencesecuritizationexposurecanbeused.WhileOSFIrecognizesriskprofilesofseparateassetpoolsfromthesamesellerbasedonthesamecriteriaarelikelytobesimilar,differencesmayoccurduetovintageorothereffects.Chapter7-SettlementandCounterpartyRiskStakeholderssoughtclarificationontheapplicationoftheclauseinparagraph37totheEffectiveMaturity(M)calculationunderIMMandconfirmationthatinstitutionsdonotneedtochangetheirmodels.TheyfurtherrequestedclarificationinthetextwithrespecttoSpecificWrongWayRisk(SWWR),Jump-To-Default,andresetting,includingonthetreatmentofresetproductsfortheeffectivematuritycalculationunderSA-CCR.Thisclausewasmistakenlyinsertedinagenericmannerwhenitwasindeedmeantonlyforresettabletrades.Updateshavebeenincorporatedtoreflectthis.StakeholdersexpressedappreciationforOSFI'sinclusionofSpecificRight-WayRisk(SRWR)transactionsintheSA-CCRframeworkunderparagraphs66-69.GiventhatinstitutionswererequiredtocomplywiththeSWWRguidelinesbyQ12020,theyrequestedthatOSFIconsideranearlieradoptionoftheSRWRtreatmentprovidedthatinstitutionshaverobustduediligenceprocessesinplace.Thiswouldallowforconsistencyinthetreatmentofspecificrisksinthecapitalframeworkandensurethatthepricingofthetradesreflectstheeconomicsofthetrade.StakeholdersfurtherrequestedthatOSFIadoptthenewSRWRrulesonacurrentbasisviaanFAQprocess.ThisissupportedbythefactthereisnocorrespondingBCBSrequirement.TherulesforSRWRwillbeimplementedasplannedinQ22023.OSFIdoesnotbelievethereisappropriatejustificationtoearlyadopttheserulesandwithoutdoingsoforotherrules.Paragraph134singlesoutinterestratesinrespectivecurrencyastheonlyassetclasswherelambdamaybeapplied.Astakeholderrequestedanextensionofthisoptiontoallrelevantassetclassestoaddressthepossibilityofnegativepriceandstrikevalues.Forexample,therearecommodityspreadoptiontradeswherethepriceandstrikearebothnegative,renderingthedeltacalculationineffective.Inthecaseofinterestrateproducts,theyrequestedadditionalgranularityoflambdatobecurvespecific.OSFIhasaddedthepotentialforthecommodityassetclasstoalsohavethissameissue.Footnote37ofthedraftChapter7requiresthatinflationtradesbecapturedundertheinterestrateassetclassbutformaseparatehedgingset.Stakeholdersrequestedthatinterestrateandinflationswaps(andcorrelationbetweenthetwo)setsbegivencross-hedgingsetcorrelationsconsistentwiththeSA-CVAframework.InflationtradesmustbeplacedintheirownhedgingsetsundertheSA-CCRandassuchnocross-hedgingbenefitswillberecognizedintheSA-CCR.OSFIisrequiringaregulatorydeductionfordefaultfundcontributionstonon-QCCPsunderparagraph72ofChapter2.However,paragraph185inthecurrentChapter4andparagraph209inthedraftChapter7statethatariskweightingof1250%isonlyrequired.CanOSFIpleaseconfirmthattheproposedregulatorydeductiontreatmentinChapter2iscorrectandthatOSFIwillupdatetheotherrelatedsectionsoftheCARGuidelineaccordingly?ThisprovisionhasbeenremovedfromthedraftChapter7givenitsreplacementwithregulatorydeductiondescribedinChapter2.Chapter8–CreditValuationAdjustment(CVA)RiskStakeholdersrequestedthatAdvancedInternalRatings-Basedapproach(AIRB)orFoundationInternalRatingsBasedapproach(FIRB)institutionsthathavealreadyreceivedOSFIapprovalforinternalratingbeabletoutilizetheinternalratingmappingtoanexternalratingwithoutadditionalapprovalfromOSFI.StakeholdersbelieveexistingproceduresalreadyapprovedforAIRBpurposesshouldalsobeallowedforthepurposesofCVAcapitalcalculations.Similartothecurrentrules,institutionswithapprovedIRBmodelsmaymaptheirinternalratingstoexternalratingsforpurposesofassigningariskweighttoacounterpartyundertheBA-CVA.StakeholdersnotedthatrestrictingeligibleBA-CVAhedgestoonlysinglenameCreditDefaultSwap(CDS),singlenamecontingentCDSandindexCDSperparagraph18couldcreateanincentivetohedgeCanadianderivativescounterpartiesinalessthanoptimalway.Forexample,CanadianprovincialgovernmentshaveliquidbondsbutnoliquidCDS.HedgingCVAwithderivativesreferencingtheunderlyingbondsmayhavelessbasisriskthanhedgingwithCDS.StakeholdersrequestedthatOSFIaddmorehedgingproducts,specificallybonds,totalreturnswapsonbondsandbondindices,andriskparticipationagreementstothelistofeligibleCVAcredithedgesundertheBA-CVAapproach.ThisapproachwouldbetteraligntherecognitionofhedgesinBA-CVAcapitalwiththemanagementofaccountingCVArisk.TheBA-CVAisasimpleapproachtocapitalizingCVArisk.InstitutionswishingtomakeuseofabroadersetofinstrumentstohedgeCVAriskmustusetheSA-CVAapproach.StakeholdersnotedthattheCanadianenergysectorleveragesoilreservestosecurederivativesandloanfacilities.ToenablecompetitivederivativepricingintheCanadianmarket,thissecurityhastobeconsideredintheLGDusedforCVApricing.StakeholdersaskedthatOSFIclarifytheitemsbelowtobetteralignSA-CVAcapitalwithaccountingofCVAandLGDunderFIRB/AIRB.ThederecognitionofcollateralforLGDforcollateralalreadyincludedinexposuressimilartocurrentparagraph31,Chapter4.TherecognitioninLGDfornon-CSAsecurityorothereligiblephysicalcollateralwhichimpactstheseniorityintherecoveryprocess.CVAisamarketpriceofriskandtheLGDsusedinitsdeterminationmustbemarketbased.Therulesclearlystatethatcollateralpledgedbythecounterpartydoesnotaltertheseniorityofanexposureand,assuch,cannotbeusedtomodifythemarketimpliedLGD.Regardingparagraph47,stakeholdersrequestedOSFIclarifythatinstitutions,inadditiontosmallvaluesofriskfactorshiftsaccordingtothetext,mayusealargerriskfactorshiftwherenecessaryprovidedpropervalidationhasbeenconductedtoconfirmappropriateness.TheconcernswithsmallvaluesofriskfactorshiftsisthattheymaymateriallyrestrictsomebanksfromproducinghigherqualitysensitivitiesbasedontheirmodelssuchasMonteCarlosimulationsforthecalculationofCVA.Specifically,smallshiftscanoftenleadtonoisyorunstablevaluesofthesensitivitiesfortheriskfactorsinvolved.OSFIagreesandrecognizesthattherearetimeswhenlargershocksizesareneededinordertoimprovestabilityofmeasurementwithMonteCarlosimulation.Suchanapproachwouldbesubjecttointernalgovernanceandcontrolarrangementstoidentifywhensuchefficienciesarewarrantedwiththeuseoflargershocks.Stakeholdersnotedthatparagraph62specifiesthatFXvegasensitivitiesaretobemeasuredbyshiftingvolatilitiesforexchangeratesbetweenaninstitution’sreportingcurrencyandothercurrencies.However,itiscommonforFXvolatilityinputstobeagainstUSD(thebasecurrency),assuchvolatilitiesaremostcommonlyobservedinthemarketandthereforealsousedforhedgingpurposesaswellasmodelcalibration.StakeholdersproposedthatOSFIpermitinstitutionstomeasureFXvegatovolatilitiesbetweenthebasecurrencyinaninstitution’sCVAmodelandothercurrencies(includingthereportingcurrency),ratherthanbetweenthereportingcurrencyandothercurrencies.OSFIisrevertingtothelanguageinthe2017revisionstoCVAcapitalrequirementsthatprovidesbetterdetailontheuseoftwoFXvegavolatilitysensitivitieswiththebasecurrencyasopposedtoutilizationofsensitivitieswithrespecttothereportingcurrency.ThesubstanceofthepolicydidnotchangesoitrepresentsavalidrepresentationofthedeterminationofFXvegariskfactorsensitivities.Stakeholdersnotedthat,intherevisedCVAframework,allfinancialentitiesareincludedinthesamesectorbucket(counterpartycreditspreadriskclass).Thissectorbucketisverybroad,capturingadiversesetofcounterpartiesincludinghighlyregulatedinstitutionswithmultiplefinancialbusinesslines(commercialandinvestmentbanks,insurancecompanies),unregulatedandhighlyleveragedinstitutions(hedgefunds,privateequity),andinstitutionswithnarrowlydefinedmissionsbasedonearningappropriatereturnsforinvestorstakeholders(pensionfunds,mutualfunds,assetmanagementaccounts).StakeholdersrequestedthatOSFIconsiderincreasingthegranularityofriskweightsforfinancialcounterpartiestoalignandimprovetherepresentationofunderlyingCVArisk(e.g.differentiatingriskweightsbetweenregulatedandunregulatedfinancials).Noadditionalgranularityhasbeenprovidedintheriskweightbucketsforfinancialcounterparties.Ifthereisevidenceofchangesinkeyinternationalrulesmakingchangestothegranularityandriskweightsforfinancialcounterparties,OSFIwillreviewanddeterminethecorrectcourseofactionforCanadianinstitutions.OSFIis,however,exploringthepossibilityofcollectingdatawiththeadditionalgranularityforfinancialcounterpartiesinfutureregulatoryreturns.Stakeholderswelcomedtheexemptionprovidedonthecapitalizationofmarketriskhedgesofcollateralvaluationadjustment(ColVa)andtheexposurecomponentoffundingvaluationadjustment(FVA)toenablethemanagementofvaluationadjustmentsthatarewellacceptedwithincurrentaccountingstandards.StakeholderssuggestedthatOSFIconsiderafurtherexemptioninthefutureshouldothervaluationadjustments(e.g.,capitalvaluationadjustment(KVA))bewellintegratedintoaccountingstandards.TheproposedannexclarifiestreatmentofFVAhedgesandonlyconsidersanexemptionformarketriskhedgesforFVA,butexplicitlyexcludeshedgesforthecredit/fundingcomponentofFVA.Institutionsareactivelymanagingthegeneralmarketriskcomponentofthefundingspread(e.g.throughproxybasketorindexhedges)soexcludingthesehedgesfromtheexemptionandincludingtheminmarketriskasopenexposurespenalizesinstitutions’managementofthiskeyP&LcomponentofFVA.StakeholdersfurthernotedthatbacktestingofhedgesincludingthexVAcomponentwouldbeverychallengingasVAsarenottypicallymeasuredunderVaRandbacktestingoftotalP&Lwouldbechallenging.StakeholdersproposedtoextendtheexemptionthatistobeappliedtothemarketriskcomponentofFVAtotheprudentP&LmanagementofallFVAcomponents.TheyrequestedthatOSFIexemptgeneralmarketriskhedgesforfundingspreadsfrommarketriskcapitalasthisiscriticaltoenablemanagementofthecredit/fundingriskP&LcomponentofFVA.Inaddition,theyrequestedremovingthebacktestingrequirementfromtherequiredconditions,andthatOSFIprovideflexibilitytoleveragecurrentinternalcontrolframeworkssubjecttointernalauditandOSFI’ssatisfaction.TherulestextallowsfortheexemptionfrommarketriskcapitalrequirementforhedgesofxVAriskwherebyamarketstandardiswellestablishedandmoreorlessconsistentlyused.OSFIfeelsthattherehasnotbeensufficientconvergenceinmarketpracticeforhedgingotherareasofxVArisktopermitthesehedgestobeexemptedfrommarketriskcapitalrequirements.OSFIagreeswiththeapproachthatinstitutionstakewithrespecttovalidationofvaluationandhedgeeffectiveness.ConductingadailyVaRbacktestofriskmeasureforxVAriskcanbealternatelyachievedthroughthecombinationofP&LattributionofrelevantriskfactorsandassessingthecorrelationrelationshipbetweenxVAandmarketriskhedges.Chapter9–MarketRiskStakeholdersaskedOSFItoclarifyitsinterpretationofparagraph61indraftChapter9giventheirunderstandingthat,whileaccountingclassificationandmarketriskcapitaltreatmentshouldalignwherepossible,theywillnotnecessarilybethesame,andneithertreatmentshoulddictatetheother.OSFIhasnotincorporatedanychangetothisparagraph.Thechapterincludesothercriteriaforinstrumentstobeclassifiedinthetradingbook–i.e.,shorttermresale,profitingfrompricemovement,lockinginarbitrageprofit,etc.Dailyfairvalueaccountingthroughtherecognitionofanyvaluationchangeintheprofitandlossaccountisthetreatmentrequiredfortradingbookinstruments.Stakeholdersnotedthepotentialdivergencesbetweenhowdifferentinstitutionsclassify“liquiditymanagement”andproposedthefollowing:Amendfootnote9indraftChapter9toclarifyeithertheliquiditymanagementpurposeortheaccrualaccountingmethodologyasanecessaryandsufficientconditionforexemptingrepo-styletransactionsfromthepresumptivelist;orClarifythedefinitionof“liquiditymanagement”eitherdirectlyintheCARGuidelineorthroughanFAQtoavoidambiguity.OSFIhasamendedthetext.Repo-styletransactionsthatare(i)enteredforliquiditymanagementor(ii)valuedataccrualforaccountingpurposesarenotpartofthepresumptivelist.Institutionsmusthavedocumentationforthedefinitionofliquiditymanagementandinternalcontrolprocessestomonitorthesetransactions,whichshouldbemadeavailabletoOSFIuponrequest.Stakeholderssuggestedrevisingtheexemptionforarm’slengthtransactionsbetweenthetradingbookandthebankingbook.Theysuggestedamendingthe“CAD-denominated”requirementto“CAD-denominatedorCanadian-basedissuers”.Inaddition,stakeholderssoughtOSFI’sopiniononpermittingthemovementofalleligiblesecuritiesthatareLevel1and2Ahighqualityliquidassets(HQLA)perChapter2ofOSFI'sLiquidityAdequacyRequirementsGuideline.OSFIhasamendedpartoftherelatedguidelinelanguage.Institutionsarepermittedthefollowingexclusionsfromtherestrictionsonmovinginstrumentsbetweenregulatorybooks:CAD-denominatedLevel1andLevel2AHQLA;andnonCAD-currencydenominatedLevel1andLevel2AHQLAissuedbyCanadianentities.OSFIhasalsoincludedclarificationsinthetextpertainingtothedefinitionofissuancebyCanadianentities.Stakeholdersaskedforanexemptionforinstitutionstopurchasenewissuancesoftheirownbank-stampedBanker’sAcceptances(BAs)fromtheirdealer.CanadianBAsareashort-terminvestmentvehicletoparkexcessliquidityandakeysourceoffundingforsmallandmediumsizecorporateborrowers.OSFIhasincorporatedrevisionstonotethatwhereaninstitutionpurchasesnewissuancesofitsownstampedBankersAcceptancesfromitsdealer,suchsecuritiesdonotneedtobeincludedwithintherestrictionsonmovinginstrumentsnotedinthetextbetweenthebankingbookandtradingbook.Stakeholdersrequestedclaritywithrespectto:theapplicationof“theResidualriskadd-on”(RRAO);andthe“exactmatch”definitionandtheinclusionofmultipletransactionswithinthecontextofInternalRiskTransfers(IRTs).OSFIhasremovedtheoriginalsentencerelatedtotheapplicationoftheRRAOcharge.OSFIaddedclarificationsastowheninstitutionsareexpectedtocaptureanyRRAObetweentheinternalandexternalhedgewithrespecttoinstrumentswithexoticunderlyingandinstrumentsbearingotherresidualrisks,consistentwithsectionofChapter9.OSFIhasalsoaddedlanguagetorefertothepermissiontoincludemultipletransactions.StakeholdersrequestedthatIRTrequirementsshouldonlyapplytoIRTsexecutedonorafterthestartoftheyearofFRTBimplementation(i.e.November1,2023forinstitutionswithanOctober31fiscalyearend).Stakeholderspointedtoaneedforgrandfatheringoflegacytradeswhichhasbecomemorepronouncedasaresultofpandemic-relatedchangesintheindustry.ExistingIRTsextendwellbeyondtheimplementationdateoftheFRTBduetotheALMstructureatCanadianinstitutions.Further,thepandemichastriggeredasurgeinsurgeindeposits/loansandconsequenthedgingrequirementswhichmaturewellbeyondQ12024.OSFIhasamendedthelanguageforinternalrisktransferofgeneralinterestratefromthebankingbooktothetradingbook.Thisistoclarifytheapplicationofthenewrequirementsfortradesexecutedonorafterthebeginningoftheinstitution’sfiscalQ12024.StakeholdersrequestedthatOSFIimplementtheoriginalBCBSrequirementsonthefrequencyandgranularityofSAcapitalandHPLcalculation,whereincalculationsofSAwouldbeonamonthlybasisandonahigherlevelthandesklevel,suchaslegalentityorenterpriselevel.OSFIhasrevisedtherelevanttexttorevertbacktotheBCBSlanguage.CapitalrequirementsundertheSAmustbecalculatedandreportedtoOSFIonamonthlybasis.OSFImayrequestadditionalreportingrequirementsorinformationaspartofitssupervisoryactivities.StakeholdersrequestedthatOSFIextendtheoptiongivenforundecomposedEquityInvestmentFunds(EIFs)underparagraph147toundecomposedindices.Namely,theyrequestedthatOSFIallowtheconservativecapitaltreatmentofeitherplacingindicesinthe“Othersector”equitybucketorapplyingthemandate/hypotheticalapproachaslongasdailypricesandtheindexdescriptionandobjectiveareavailable.Guidelinetexthasbeenamendedaccordinglytopermitanolook-throughapproachforsuchindexinstrumentswherealookthroughapproachisnotpossible.ThisamendmentisconsistentwiththetreatmentofEIFs.StakeholdersaskedtoextendthetreatmentandgovernancegrantedtoaninvestmentgradebondorlargecapequityhedgingaTotalReturnSwap(TRS)toabondforwardhedgingaLevel1HighQualityLiquidAsset(HQLA).Thestakeholders’viewisthattherevisedmarketriskrulespresentanexaggeratedchargeforderivativesdynamicallyhedgedwiththeirunderlyingsecurities.Specifically,bondforwards,wheretheunderlyingisaLevel1HQLA,arewidelyusedintheCanadianmarketsbyadiversifieduserbaseconsistingofparticipantsintheeconomyincludingassetmanagersandpensionplans,smallbanksandcorporations,andprovincialtreasurydepartments.OSFIhasextendedthetreatmentandgovernancepreviouslygrantedtoaninvestmentgradebondorlargecapequityhedgingaTRStoabondforwardhedgingaLevel1HQLA.Themismatchappliedbetweenlongandshortpositionswillbecappedat40daysunderboththeSAandtheIMA.StakeholdersrequestedthatOSFIlowerthecoveragerequirementsignificantlytopreserveincentivestoadopttheIMAandtoreduceuncertaintyforIMAapprovalstatusandinitialapplication.Alowerthresholdwouldalsoalignbetterwithinternationalstandards.Institutionsapplyingfortheuseofinternalmodelswillberequiredtomeetaninternalmodel’scoveragethresholdof50%atalltimes.Tosimplifytheframework,OSFIwillnotimplementaseparatehigherapplicationthresholdbutwillneedtobesatisfiedthroughtheapprovalprocessthattheongoing50%thresholdcanbemaintained.StakeholdersrequestedthatOSFIexcludenon-fairmarketvalued(non-FV)positionsfromAPLandHPLrequirementsatdeskandbankwidelevels,includingtheHPLreportingrequirementforSAinparagraph108ofdraftChapter9.Insteadarisk-theoreticalP&L(RTPL)back-testingprocessatthedesklevelcouldbeestablishedascompensatingcontrolforthesebankingbookdesks.OSFIhasnotincorporatedanychangestothetext.Undertherevisedmarketrules,therisksubjecttomarketriskcapitalincludeFXandcommodityinstrumentsinthebankingbook.ThetextdoesspecifyintheterminologythatAPLincludesFXandcommoditiesrisksforbankingbookinstruments.OSFIcontinuestoreviewtheapplicableandacceptablemethodologyatinstitutionsrelatedtothisrequirement.StakeholdersrequestedthatsubsequentOSFIorBCBSQuantitativeImpactStudies(QIS)revisittheproposedstatisticaltestthresholdsdescribedinparagraph356duringparallelreportingorduringthegraceperiodtoensurethatamodelledapproachisnotundulypenalized.OSFIhasnotincorporatedanychangestothetext.TheBCBSmayconductfurtherQISexercisesandOSFImaycollectfurtherinformationregardingthisitemaspartofparallelreportingpriortoimplementation.Regardingparagraph371,stakeholdersviewthatcappingtheLiquidityHorizon(LH)atinstrumentmaturityasatoddswiththeregulatoryLHdefinition(whichisperrisktype)andriskmanagementpractice,creatinganoperationalburden.InstitutionsshouldbeallowedtoassignallinstrumentstotheregulatoryLH.Stakeholdersrequestedcappingtheinstrumentmaturityoptionalshouldaninstitutionchosetodoso.OSFIhasconfirmedthatliquidityhorizonshouldbecappedatthematurityoftherelatedinstrumentwhenthematurityoftheinstrumentislongerthantheprescribedliquidityhorizonassigned.Ifthematurityoftheinstrumentisshorterthantherespectiveliquidityhorizonoftheriskfactor,thenextlongerliquidityhorizonlength(10,20,40,60or120daysassetoutintext)comparedwiththematurityoftheinstrumentitselfmustbeused.RegardingthecalculationofcapitalforNMRFsunderparagraph375,stakeholdersrequestedthatinstitutionsbeallowedtoincludemodellableriskfactorsintheSESchargeforcurvesandsurfacesgiventhat,asaresultofnotincludingthem,brokenhedgesbetweennon-modellableandmodellableriskfactors(orarbitrageviolations)occur.TheNMRFchargeisdeterminedbyonlyshockingtheNMRFinisolation,leavingallotherriskfactorsconstant.However,inthecaseofaNMRFrepresentingaportionofacurve,surfaceorcube,onlytheriskfactorsinonebucketareshockedandtherestofthecurve,surfaceorcubewouldremainunchanged.ThiscouldleadtolargefluctuationsinP&Lfrombrokenhedgesorinconsistentresults(e.g.,arbitrageviolations).OSFIhasnotincorporatedanychangestothetext.TheconstructoftheFRTBkeepsseparatethepotentialimpactofmodellableriskfactorsonthecapitalchargedeterminedfornon-modellableriskfactors.Regardingparagraph383,intheeventthatothernationalregulators(e.g.,EUandUS)lowertheProbabilityofDefault(PD)floorfrom3bpsto1bpfortheirrespectivedebtsecurities,CanadianinstitutionswithexposuretosovereignsmeetinglocalcriteriashouldbeabletoassignalowerPDfloortothosesovereigns.Thisisviewedascriticalgiventheimportanceofnon-domesticsovereigndebttoinstitutions’prudentmanagementofHQLArequirementsinforeigncurrenciesandwouldensureacompetitiveandlevelplayingfieldacrossjurisdictions.OSFIhasnotincorporatedanychangestothetext.OSFIisnotcompelledtomeetthepoliciesimplementedbyotherjurisdictions;however,OSFIdoesconsiderinstitutions’abilitytocompeteeffectivelyandtakereasonablerisks.Paragraph391indicatesthataninstitutionmayuseasimplifiedmodellingapproachforequityderivativepositionswithmultipleunderlyings.Stakeholdersproposedthatasimilarsimplifiedapproachbepermittedfornon-correlationtradingportfoliocreditderivativepositionswithmultipleunderlyings.OSFIdoesnotbelievethatachangeinthetextofChapter9isnecessary.OSFInotesthatthetextinChapter9aimstoshowoneexampleforequityderivativesproductswithinthecategoryofpositionswithnonlinearpositions.Inthiscase,asimplifiedmodellingapproachmaybeadoptedsubjecttoOSFIapproval.TheunderstandingisthatasimilarapproachcanbeadoptedforothersimilarinstrumentspendingOSFIapproval.StakeholdersproposedthatOSFIremovetheformalrequirementforariskfactorbacktestingprogramunderparagraph427.Backtestingatthedesklevelprovidessufficientgranularitytocoverbacktestingresultsbyriskfactorclassesincludingrelevantcorrelationbetweenriskfactors.Furthermore,anyrequiredinvestigationintobacktestingbreachestypicallyincludesinvestigationintospecificriskfactorswithintheclassforrelevantdesklevelbreache.OSFIagreeswiththecontentoftheproposalandtheremovalofsuchrequirementandnotesthatthissub-paragraphiswithinthecontextof“Exampleoftheapplicationoftheprinciplesforriskfactormodellability”.ThetextclarifiesthatOSFImayusediscretionregardingthetypeofevidencerequiredofinstitutionstoprovideriskfactormodellability.Annex2-SummaryofComments-LRGuidelineItemandStakeholderFeedbackOSFIFinalPolicyPositionStakeholdersquestionedwhyOSFIrequiresacreditconversionfactor(CCF)of25%forundrawnunconditionallycancellablecreditcardbalanceswhenotherjurisdictionshaveapplieda10%CCF.Stakeholdersnotedthat,similartootherunconditionallycancellablecommitments(e.g.linesofcredit),bankscancancelacreditcardatanytime,whichsupportsthebasisforaligningitwithotherunconditionallycancellableproducts.AlthoughthereisappreciationforOSFI’sdesiretoalignwithCARGuidelinerequirements,stakeholdersdonotbelieveitnecessarytodosoforcreditcardsintheleverageframework,whichisnotmeanttobearisk-basedmeasure.The25%CCFforcreditcardbalanceswascalibratedbasedondatacollectedfromCanadianbanksontheutilizationofCanadiancreditcardportfolios.CCFsareconsistentacrossOSFI’scapitalframework;thus,the25%CCFwillberetained.Thatsaid,oncetheundrawnexposuresareconvertedtoon-balancesheetamounts,thetreatmentdiffersbetweentheleverageratioandCARguidelinesreflectingtheleverageratio’sroleasanon-risk-basedmeasure.Stakeholdersnotedthatcashpoolingrequirementsarenotmaterialformanybanks;however,adoptionofthisnewleveragerequirementiscostlygivenbanksmusthaveamethodologytotrackwhethercashpoolingisinplaceinordertoprovetheyaremeetingtherequirement.StakeholdersbelievethattheoperationalburdenofthisrequirementimposedonCanadianbanksisdisproportionatecomparedtotheimmaterialcontributionthisadditionaldatawouldmaketotheleverageratio.StakeholdersrequestedthatOSFIuseitsnationaldiscretiontoensurethatadoptionofthisrequirementisappropriateandcosteffectiveforCanadianbanks.Institutionsmayreflecttheindividualbalancesoftheparticipatingcustomeraccountsseparatelyintheleverageratioexposuremeasureintheeventthatthecashpoolingrequirementsaredeemedtobedisproportionatelyoperationallyburdensome.StakeholdersrequestedthatOSFIclarifythemeaningofgrossaccountingvaluesfortheleverageratiocalculation.Grossaccountingvaluesforthepurposesoftheleverageratioarebalancesheetassetsbasedontheregulatoryscopeofconsolidationassumingnoaccountingnettingorcreditriskmitigationeffects.Underparagraph50, “Theeffectivenotionalofawrittencreditderivativemayalsobereducedbyanycashindependentamountpledgedbyacounterpartytooffsettheriskofthewrittencreditderivative.”Consistentwiththereasoningbehindallowingtherecognitionofcashcollateral,stakeholdersrequestedthatthisoptionalsoconsideranon-cashindependentamount(IA),whichaddsthepost-haircutvalueofnon-cashIAasamitigant.Writtencreditderivativesposeauniqueriskfromaleverageperspectiveand,assuch,shouldbetreateddifferentlythanotherderivatives.Theleverageratiodoesnotrecognizethemitigatingeffectsofcollateral,withsomeexceptions.OSFIhasprovidedreasonableflexibilitybyallowingthecashindependentamounttooffsetthewrittencreditderivativenotional.Therefore,independentamountsreceivedintheformofnon-cashcollateralwillnotbepermittedtooffsetthenotionalamountofwrittencreditderivatives.Annex3-SummaryofComments-LARGuidelineItemandStakeholderFeedbackOSFIFinalPolicyPositionChapter1–OverviewStakeholdersnotedthatreportingtheLiquidityCoverageRatio(LCR)andtheNetCumulativeCashFlow(NCCF)withatimelagofthreebusinessdaysinastresssituationcouldrepresentachallengeforinstitutionsthatdonotproducedailypositions.Thesemeasuresaretiedtoend-of-monthaccountingprocessesthatrequiremorethanthreedays.Intra-monthLCRandNCCFshouldbeprovidedonabest-effortbasisasaccountingprocessesarenotsettoproducedailyfinancialstatements.OSFIacknowledgesinitsfinalguidancethatintra-periodreportingmaynotbesubjecttothesamerigourandcontrolinfrastructure(e.g.,stalleddata,proxies)asthatofmonth-endandquarter-endreporting.Institutionsshouldnonethelesshaveaframeworkinplacethatoutlinestheirprocesstoreportintra-periodLCRsandNCCFs.Itshouldbenotedthattheabilitytoproduceintra-periodreturnsinnotanewrequirement.StakeholdersnotedthatthereisaninconsistencyinthefrequencyofreportingunderstressconditionsbetweentheLCRandtheNCCF.OSFIhasaddressedtheinconsistencybyclarifyingthat,understressconditions,DSIBsshouldhavethecapacitytoincreasethereportingfrequencyofbothLCRandNCCFtodaily,whilenon-DSIBsshouldhavethecapacitytoincreasetherelatedreportingfrequencytoweekly.StakeholdersaskedwhetherOSFIhasatentativetimelinefortheimplementationdateoftheintradaymonitoringtools(Chapter7).Implementationoftheintradaymonitoringtoolsisstilltobedetermined.OSFIwillengageearlywithindustryaheadofadefinitiveimplementationdate.Chapter2–LiquidityCoverageRatioStakeholdersquestionedwhetherthetreatmentofpreciousmetaldepositsindicatedinthenewfootnotecouldalsobeextendedtoderivativeinstrumentsthathavethesameeconomicfeaturesasmetalloans(e.g.,longprepaidfutures).Thenewfootnotesarestrictlylimitedinscopetopreciousmetaldepositsandpreciousmetalloansanddonotextendtoderivativesorotherproductsthathavesimilareconomicfeatures.Chapter3–NetStableFundingRatioStakeholdersobservedthatifaCategoryIinstitution’swholesalefundingrelianceexceeds40%basedonthenewdefinition,thentheCategoryIinstitutionwillhavetocomplywithLARChapter3(NSFRrequirements)andsuggestedthatcomplianceninemonthsafterthelastquarterlyreferencedateisinadequate.OSFIstillbelievesthatninemonthsisasufficientleadtimeespeciallygivenexpectationsthatfundingplans/strategiesbeinplaceseveralmonthsinadvance.Duetothenatureofthecalculationofthethreshold,institutionswillhavesufficientleadtimetoimplementtheNSFR.Inparticular,inadditiontotheformalninemonthslead-time,institutionswouldhavehadtohavebreachedthe40%thresholdinapreviousquarterinorderforthemovingaveragetotrendup,whicheffectivelyprovidesanearlywarningindicatorfortheinstitution.OSFIexpectsinstitutionstoobservetrendsandusetheirinternalforecaststoprojecttheirpositionvis-a-visthe40%thresholdinfutureperiods.Althoughfundingmixesdonottendtofluctuatedrasticallyquarter-over-quarter,liquidityisdynamicandinstitutionsincreasinglyrelyingonwholesalefundingshouldbesubjecttoenhancedmonitoring.StakeholdersnoticedthatthewholesalefundingdefinitionhasbeenamendedtotakeintoaccountfeedbackprovidedinresponsetoOSFI’s2020SMSBproportionalityconsultativedocument.StakeholdersfurtherrecommendedthatOSFIonlyconsiderlargebusinessdeposits(greaterthan$5million,asdefinedintheNCCF)aswholesalefundingwhencalculatingthewholesalefundingreliancethreshold.TheLCRsegmentsdepositsbetweenretaildepositsandsmallbusinesscustomerdeposits,resultingineasilyidentifiabledatapointstosubtractwithintheNSFRthresholdcalculation.ThecurrentbreakdownintheNCCFdoesnotdecouplesmallbusinesscustomerdepositsfromotherretaildeposits(i.e.,thereisnodistinctdatapoint),soOSFIwouldneedtorelysolelyontheinstitutions’inputwithoutameanstoverifythenumbers.Further,theLCRisamorestablereturn(consideringthesubstantialrevisionsunderwayforNCCF)andissubjecttoamorestructuredreportingprocessandmorevalidationrules.OncetheNCCFisfullyimplementedandreachesmaturityasastructuredreturnwithvalidationrequirementsinthefuture,OSFIwillconsiderrevisitingthisdecision.Chapter4-NetCumulativeCashFlowSomestakeholderssuggestedthatcertainassumptionsintheproposedNCCFweretoosevereandwouldmaketheNCCFtheirmostconservativeliquiditymetric.Thiscouldhaveasignificantimpactonfundingrequirementsandtransferpricingconstructs.SomestakeholdersrequestedthatOSFIreviewtheneedforsupervisory-communicated,institution-specificNCCFlevels,and,inthecasethatthesewillberetained,reviewtheappropriatenessofcurrentlevelsfollowingrevisionstotheNCCF’sunderlyingassumptions.AsnotedinthecoverletteraccompanyingthereleaseofthedraftLARGuidelineforpublicconsultationinMarch2021,OSFIrequestedinstitutionstoprovideestimatesoftheimpactofproposedrevisionsonNCCFsurvivalhorizons.Basedonthisinformation,OSFIadjustedthecalibrationofselectassumptions,notably:i)run-offratesforallretailandsmallbusinessdeposits,andii)outflowratesforundrawnamountsofcommittedcreditfacilitiestonon-financialcorporates.Inaddition,supervisory-communicated,institution-specificNCCFlevelswillremainandcontinuetobesupervisoryexpectations.Wheresupervisory-communicated,institution-specificNCCFlevelsarecurrentlyappliedtoinstitutions,OSFIwillreviewtheselevelspriorto2023implementation.Severalstakeholdersnotedthatasymmetricalcashflowimplications(i.e.incrementalcashoutflowsmateriallyexceedinginflowsgivennoincreasesinprojecteddepositsorfundingorrecognitionofrepayment)wouldhaveasignificantnegativeimpactontheNCCFsurvivalhorizon.Stakeholderssuggestedtherecognitionofadditionalinflows,inparticularthoserelatedto:BBB-ratedcorporatebonds,whichcurrentlydonotmeettheeligibilitycriteriawiththeBankofCanadaStandingLiquidityFacility(SLF)tobeeligibleasEULAintheNCCF.CommentersnotedthesebondshaveinternationallyrecognizedliquidityvalueintheLCR,andbelievethattheexclusionoftheseassetsundertheNCCFisunnecessarilyconservative.Othertransactionssuchasunsettledsecuritizationtransactionsorcommittedliquiditylinesfromotherfinancialinstitutions.OSFIconsideredthecommentsreceived;however,ithasnotmadechangestothedefinitionofeligibleunencumberedliquidassets(EULA)nortothescopeofeligibleinflows.RegardingBBB-ratedcorporatebonds,whileOSFIrecognizesthatBBB-ratedcorporatebondscouldhavesomevalueinstress,thegeneralprincipleforrecognitionofassetsasEULA(suchthattheywouldbegivenliquidityvalueundertheNCCF)isthattheybeeligiblecollateralatcentralbanksundernormaloperatingconditions(e.g.BankofCanadaSLF)andshouldbeunencumbered.Regardingtheothertransactionsmentionedbycommenters,OSFIagreesthatthesetypesoftransactionscouldbeexecutedintimesofstressandthatinstitutionsshouldcontinuetoconsiderthemasmitigatingrecoveryactionsshouldstressconditionsemerge.However,theunderlyingprinciplesoftheNCCFareareductionoffunding,ahaircutonthevalueoftheassetsandadditionaloutflowsfromvariousactivities.Assuch,recognizingnewfundingwouldbecounterintuitiveconsideringthegeneralspiritofthemetricandwouldaffectitsintegrityandpurpose.Regardingthetreatmentofundrawnamountsofcommittedcreditfacilitiestonon-financialcorporatesintheComprehensiveNCCF,somestakeholdersquestionedwhetherdifferentiationbytheproposedcriteriawasjustifiedgiventhat:itisunclearthatthevariationofcashflowswasdrivenbythepresenceofanoperationalrelationship.itisunclearifusingcreditratingsasadriverisjustified,giventhatexperienceduringthepandemicwasthathigherratedcounterpartiestendtobemoresophisticatedanddrawfasterontheircreditlinesinastress.Additionally,OSFI’sproposalcouldunfairlydisadvantagesmallercommercialandcorporateclients,whentheyarenotratedaneligibleexternalcreditassessmentinstitution(ECAI).Thiscouldhavethepotentialtocreateunfairpricinggapsbetweenlargerandsmallerclients.itisdifficulttoassess“wherethepricingtermsalonewouldcreateafinancialincentiveforthecounterparty”.Counterpartieswouldnotdivulgetherelativefundingcostsforaccessingalternativesourcesoffunding.Regardingthecalibration,stakeholderssuggestedthatoutflowratesforundrawncredit/liquidityfacilitiesshouldbecappedatLCRprescribedratestoensureCanadianinstitutionsremaincompetitivewithinternationalpeers.Regardingcommitmentsforcommercialrealestate,specificallyconstructionloans,stakeholdersnotedthepresenceofstrictperformancecriteriaandphasedrepaymentschedules,whichcanoccurwith/withoutcompletion,whichprecludestheuseofthelinesasgeneralpurposefacilities.Stakeholdersnotedthattherecognitionoffinancingoutflowwithouttherepaymentexaggeratestheconstructionand/orcompletionriskfromcommercialrealestatelending.OSFIhasmodifiedthesegmentationcriteriaandcorrespondingoutflowrates.Thesegmentationcriterianowincludesadifferentiationofcounterparties–i.e.,commercialvscorporates,wherecommercialclientswillbedefinedasclientswherethegrouphastotalconsolidatedannualrevenuelessthanCAD$750million,asreportedinthefinancialstatementscalculatedonanaverageofthethreeprioryears(consistentwithCARGuideline,Chapter5).RevisedoutflowratestobeappliedintheComprehensiveNCCFinclude:Commercialclients: Lenderistheprimaryproviderofbankingservices:5%Otherwise:10%Corporateclient: Lenderistheprimaryproviderofbankingservices:5%Otherwise:15%InstitutionssubjecttotheComprehensiveNCCFwillberequiredtoreportundrawnamountsaccordingtothecreditqualityofclients.UndertheStreamlinedNCCF,allundrawnamountsofcommittedcreditfacilitiestonon-financialcorporateswillbesubjecttoa10%outflowrate.Nospecifictreatmentforcommitmentsforcommercialrealestatehasbeenincludedinthefinalversion.OSFIwillneedtoundertakeadditionalanalysisofproductswithperformancecriteriabeforeconsideringthisfurther.Somestakeholdersindicatedthatthecalibrationofreservesforcommittedfacilitiesmaybemoreconservativethanjustifiedbyexperience,assupportedbythepandemicexperiencewhereexistingLCRreserveswere(inaggregate)morethansufficient.Assuch,thestakeholderssuggestedthatratesshouldbecalibratedloweroverallwhilestillincorporatingthelearningsfromthepandemicintothegranularityofindividualreserves.OSFIconsidersgeneralalignmentofNCCFratestothosewithintheLCRaspreferable.OSFIhasintentionallyintroducedadditionalriskdriverswhererelevant(e.g.,transactorsvsnon-transactors),andadditionalrisksensitivityforcommittedcreditfacilitiestonon-financialcorporates.Somestakeholdersnotedthattherequirementtofundplannedgrowthinlendingunderabusiness-as-usualassumptionisnotconsistentwithotheraspectsoftheNCCF.Theynotedthatundermoststressscenarios,boththemacroeconomicbackdropandbusinessplanschangematerially.Forexample,duringtheCOVID-19pandemic,overallloandemanddeclinedmaterially,resultinginmateriallylesstermloanoriginationscomparedtopre-stressforecasts.Thisdynamiccanmakebusinessasusualloangrowthoriginationforecastsapoorpredictorofstressliquidityneeds.OSFIcontinuestoconsiderthatinstitutionsshouldpre-fundacertainleveloflending,especiallyattheearlystagesofthestress.The2019versionoftheLARGuidelinemakesnoassumptionofcontinuedlendingtobusinessesandgovernments.Afterconsideringstakeholderfeedback,OSFIhasmodifiedthemethodologytoaccountforcontinuedlendingtoclients,specifically:Balancesatmaturityofmortgageswillretainthesametreatmentasinthe2019LARGuideline(i.e.,norecognitionofinflows);and,Only50%ofbalancesatmaturityandpaymentsofbusinessandgovernmentloanswillberecognizedaseligibleinflows.Severalstakeholdersnotedthattheintroductionofnewdataconceptswouldbecumbersomeandoperationallychallengingtoimplement,specificallyintegratingthebalancesheetforecastingprocessintotheNCCFproductionprocess,andthiswouldrequireanextendedtimelinetoimplement.Additionally,stakeholdersindicatedthatupdatingforecastscouldposesignificantoperationalchallengesespeciallyonareal-timebasisinastressenvironment,whichwouldbecomplextooperationalize.Furthermore,theyindicatedthattherequirementtoincludeforecastscouldmeanthattheNCCFmeasurecouldvarywidely,givendifferentmethodologiesandassumptionsacrossinstitutions.Therefore,anumberofstakeholderssuggestedthatadefinedandstandardizedmeasurewouldbemorecomparableandappropriate.Related,severalstakeholdersnotedthatincorporatingnetnon-interestexpenseswouldnothaveamaterialimpactontheNCCFmeasure.TheeffortandcomplexitytoforecasttheseitemsovertheNCCFhorizon,includingintegrationofaccountingsystems,wouldnotbecommensuratewiththeresults.OSFIrecognizesthechallengesassociatedwiththerequirementtoreportforecastsintheNCCFwiththerequestedgranularity,aswellasthepossibleinconsistencyacrossinstitutions.Asaresult,OSFIwillremoveforecastsfromtheNCCFcalculation.However,OSFIconsidersitimportantforinstitutionstohaveforecastingcapabilitieswhicharesufficienttomeettheserequirements.Assuch,allinstitutionswillhavetoreportforecastsofexpectedlendingovertheprojectionperiodasamemoitemintheNCCFreturn.Inaddition,allnon-DSIBswillhavetoreportnetnon-interestexpensesasamemoitemintheNCCFreturn.Whilenetnon-interestexpensesmightbeconsideredimmaterialinanormalenvironment,OSFIremainsconcernedthatthesecanbecomematerialunderstress,especiallyfornon-DSIBs.SomestakeholdersrequestedthatOSFIclarifythetreatmentofcommittedliquidityfacilitiesbackstoppingasset-backedcommercialpaper(ABCP).UndertheLARGuideline,institutionswouldneedtohold,inadditiontoLCRrequirements,liquidityforamountsofoutstandingABCPissuedbytheSPEthatmaturesafter30daysaswellastheunutilizedcapacityliquidityfacilitiesprovidedtoSPEsthatcanbedrawnonlyafter30days.Inaddition,thesewouldallneedtoberecognizedonweek1withintheNCCF.CommentersnotedthatthemajorityofABCPcoveredbyliquiditybackstopsthatwaslargelyrestructuredtomeetOSFI’s30-dayLCRtimehorizonwillnowbecapturedasa100%outflowinNCCF,whichexceedstheexperienceoverthepasttwoveryseveremarketstresses.CommentersindicatedthattheintroductionofthisNCCFtreatmentwouldhavesignificantimpactontheproducts,fundstransferpricingandcompetitivepositionofCanadianinstitutionsparticipatinginthismarket.OSFIrecognizesthepotentialimplicationsontheABCPmarket.Assuch,OSFIclarifiedtheLARGuidelinesuchthattheNCCFwillonlyassignoutflowratestopapermaturinginthefirst30days,aswellastotheunutilizedcapacityoffacilitiesthatcanbedrawnwithin30days.Papermaturingafter30dayswouldbeexcludedfromtheNCCFcalculation;however,institutionswouldstillneedtoreportmaturitiespastthe30-dayhorizon.Chapter7–IntradayLiquidityRequirementsSeveraltechnicalquestionswerereceivedfromstakeholdersrelatedtointradayliquidity.Chapter7wasnotwithinscopeofthepublicconsultation;however,OSFIwillconsiderthequestionssubmittedandprovidearesponsetostakeholdersinduecourse.Annex4-SummaryofComments-SMSBCapitalandLiquidityGuidelineItemandStakeholderFeedbackOSFIFinalPolicyPositionOverallCommentsStakeholdersagreedthatcapitalandliquidityrequirementsshouldreflectthenature,size,complexityandbusinessactivitiesofSMSBs.However,therequirementsshouldnotonlyprotectdepositorsandcreditorsbutshouldalsoenableSMSBstocompeteonalevelplayingfieldandtakereasonablerisks.Toachievethis,stakeholdersbelievethatOSFIshouldreducethecomplexityofthecurrentframeworkandensurethatitisfitforpurposeandsuitableforthesize,natureandcomplexityofdifferentcategoriesofFIs.OSFIhasreducedthecomplexityofcapitalandliquidityrequirementsforSMSBscomparedtotheBaselIIIframework,andmadethemmorefit-for-purpose,throughthecreationofsimplifiedcreditandoperationalriskapproaches,proportionalapplicationoftheNSFRandNCCFfordifferentcategoriesofSMSBs,andtheintroductionoflesscomplexcapitalandliquidityrequirementsappropriateforinstitutionsnotprimarilyinvolvedinfinancialintermediation.StakeholderssuggestedOSFIaltertheminimumcapitalrequirementsforCategoryIIItotakeintoaccounttheriskprofileofaninstitution’sassetsorprovideamechanismtoadjusttheminimumcapitalrequirementsbasedonascalethatreflectsdifferentriskprofileswithintheassetbase.Alternatively,OSFIcouldestablishcriteriathatwouldallowanSMSBtofallwithinCategoryIIwhenCategoryIIIdoesnotsufficientlyreflecttheinstitution’sriskcharacteristics.StakeholdersalsonotedthatwhilethedraftGuidelineallowsOSFIthediscretiontomoveaninstitutionfromonecategorytoanotheriftherequirementsarenotappropriate,theuncertaintysurroundingwhatactionsOSFImaytakemakeitdifficultforinstitutionstoplaneffectively.OSFIhasincludedadditionalcriteriainthefinalversionoftheSMSBCapitalandLiquidityRequirementsGuidelinetomoreclearlydifferentiatebetweenCategoryIIandCategoryIIISMSBs.Thenewcriteriarelatetothelevelofinterestrateorforeignexchangederivatives,exposurestootherderivativeproducts,andthelevelofexposuretocertainotheroff-balancesheetitems.Aswell,thefinalversionoftheGuidelineallowsSMSBsthatotherwisemeetthecriteriaforCategoryIIItomakeaone-timerequestpriortoimplementationtomovetoCategoryIIiftheybelievetheCategoryIIIrequirementsarenotappropriategiventheiractivities.Stakeholdersalsoprovidedcommentsrelatedto SMSBCapitalandLiquidityRequirementsGuidelineaspartofconsultationfeedbackprovidedonthedraftCARandLARguidelines.Wheresimilarcommentswerereceived,aresponsecanbefoundinthesummaryofcommentsfortheCARandLARguidelines.WhereSMSB-specificcommentswereonlyreceivedaspartoffeedbackonthe SMSBCapitalandLiquidityRequirementsGuideline,aresponsetothesecommentsisprovidedbelow.MarketRiskStakeholdersaskedOSFItoprovidemoreguidanceonwhenorwhyitwouldrequireanSMSBtouseinternalmodelsformarketrisk.AsmentionedinthecurrentCARChapter9,stakeholders’viewisthatinternalmodelsformarketriskareapplicabletoeitherD-SIBorinternationallyactiveinstitutions.ThereisnoformalOSFIrequirementtoapplyforapprovaltouseinternalmodelsformarketrisk.Chapter9oftheCARGuidelinehasbeenupdatedtoreflectthis.CreditRiskStakeholdersrecommendedOSFIlowertherequiredproportionofexposuresandRWAcoveredbyaninternalmodel(e.g.,lessthan80%/20%)toapprovetheimplementationoftheIRBapproachforSMSBs.Thissuggestedmeasurewouldpromotefinancialstabilityacrossthesector,allowingforhigherrisksensitivity,betterriskmanagementandimprovedoverallcompetitiveness.ThethresholdissettoensurethatinstitutionsapplyingfortheuseoftheIRBapproacharedoingsoforthegreaterriskmanagementbenefitsthatcomealongwiththeIRB.StakeholdersassertedthattherecognitionofvarioustypesofcollateralinreducingtheriskassociatedtocorporateexposureswouldbeinlinewiththeguidingprinciplessetforthbyOSFIinitsreviewofthecapitalandliquidityframeworksforSMSBs.ExternalratingsusedinassigningriskweightsintheStandardizedApproach(SA)alreadyreflectsomedegreeofcreditriskmitigationfromcollateral.UnratedexposuresundertheSAexposureswillbeeligibletoreceiveapreferential65%riskweightiftheyareidentifiedasbeinginvestment-gradebasedonaninstitution’sowninternalcreditgradingsystem,whichmayincorporaterecognitionofphysicalcollateral.Inaddition,theSAwillalsoallowinstitutionstoassignan85%riskweighttounratedexposurestoSmallandMediumSizeEnterprises.Thereductionincapitalrequirementsforunratedcorporateexposureseligibleforthepreferential65%and85%risk-weightsintherevisedSAissimilartothatfromtherecognitionofphysicalcollateralintheFIRBapproach.Stakeholdersindicatedthatthesimplifiedapproachforexposurestofinancialinstitutionsseemspunitiveforsmallerinstitutionsgivenmostinvestmentsareconservativelyinvestedandqualifyforlowerriskweights.Thecurrentapproachdoesnotencouragebankstoadoptthesimplifiedapproach.OSFIconfirmedthe40%flatrisk-weightisderivedfromtherisk-sensitiveCARGuidelinemethodology,withthe40%derivedfromthebaseriskweightforunratedGradeAexposures.StakeholdersnotedthattheCARGuidelinerisk-weightsrangefrom40%-150%dependingontypeofexposurecausingbankswithhighly-ratedinvestmentstobedisadvantaged.Theflat40%risk-weightundertheSimplifiedSA(SSA)isbasedontheSCRAtreatmentincludedintheBaselIIIreformswhichappliestoallbanks.Similarly,the40%SSAriskweightismeanttobeapplicableacrossbanksofasimilarlybroadscopeandspectrumofrisks.Inaddition,banksutilizingtheSSAwouldalsobeabletoapplya20%risk-weightontheirshorter-termbankexposures(e.g.,overnightdepositswithotherbanks).Annex5-SummaryofComments-Pillar3GuidelineforD-SIBsItemandStakeholderFeedbackOSFIFinalPolicyPositionAnnex2–ExistingPillar3Tables/TemplatestoContinueDisclosing–updatedversionstobeimplementedQ22023StakeholdersrequestedthatOSFIprovidetheD-SIBswithmock-upsoftheeightexistingdisclosuretemplatesreflectingupdatedrowsandcolumnstoensureclarityon2023disclosurerequirements.OSFIprovidedupdatedmocked-upversionsoftheeighttemplatesrequestedintheNovember29,2021 IndustryLetter.Allrequiredtablesandtemplates,includingtheeightexistingtemplatestobeupdatedforQ22023,areincludedinthefinalPillar3DisclosureGuidelineforD-SIBs.Annex3–NewPillar3Tables/TemplatesfromPhasesIIandIII–tobeimplementedQ42023TemplateENC:StakeholdersrequestedthatOSFIallowD-SIBstoincludeoff-balancefiguresaswellon-balancesheetassets.StakeholdersrecommendedthatOSFIpermitsignpostingtocurrentassetencumbrancedisclosuresdevelopedthroughtheEnhancedDisclosureTaskForce(EDTF)whichtypicallyresideintheLiquidityRisksectionsofbanks’MD&As,andwhichofferenhanceddetailoverthePillarIIIdisclosure.InthefinalPillar3DisclosureGuidelineforD-SIBs,TemplateENCaccommodatesoff-balancesheetamounts.D-SIBsmaysignposttotheircurrentassetencumbrancedisclosuresdevelopedthroughEDTFinplaceofTemplateENC.StakeholdersrequestedthatOSFIconsiderpermittingsignpostingtotheshareholderproxycircularinplaceofdisclosingTableREMAandTemplatesREM1-3.Thetimingoftheshareholderproxycircular’srelease,afterthereportingofthefinancialfiscalyearendingOctober31,wouldprovideuserswithmorerelevant,clear,andmeaningfulinformation.D-SIBswillbeexpectedtodiscloseTableREMAandTemplatesREM1-3tofacilitatecomprehensiveandcomparabledisclosureamongtheD-SIBs.Regardingtimingofdisclosure,year-endfiguresareexpectedtobereportedatQ2.Regardinglocationofdisclosure,OSFIwillallowforflexibilityonthelocationofRemunerationdisclosures(eitherQ2Pillar3ReportorShareholderProxyCircular,withreference(link)fromQ2Pillar3Report).Annex6-SummaryofComments-Pillar3GuidelineforSMSBsItemandStakeholderFeedbackOSFIFinalPolicyPositionI.DisclosureRequirementsforSMSBs,bySegmentationCategoryReferencingOSFI’s“FinancialDataforBanks”website:StakeholdersrequestedthatOSFIpermitCategoryIISMSBstoreferenceOSFI’s“FinancialDataforBanks”websiteinplaceofcompletingTemplatesKM1andLR2.AlthoughsomeoftheinformationinTemplateKM1canbefoundinotherdisclosures,OSFIexpectsSMSBstodiscloseTemplateKM1asitcomprisesasummaryofkeymetricsallinoneplace,facilitatingclearerdisclosureforusers.MuchoftheinformationinTemplateLR2cannotbefoundinotherdisclosures.Accordingly,OSFIexpectsSMSBstodiscloseTemplateLR2.II.FrequencyofReportingFrequencyofexistingdisclosuresincreasingfromannualtoquarterly:ForinstitutionsthatonlyprovidePillar3disclosuresonanannualbasis,stakeholdersrequestedtheoptiontodisclosethetemplatesforKeymetrics(KM1),CompositionofCapital(CC1)andLeverageRatio(LR2)onlyonanannualbasis.OSFIexpectsSMSBstoimplementquarterlyreportingforTemplateKM1andtofollowthenewquarterlyfrequencyofreportingforTemplatesCC1andLR2becausemetricscanchangesignificantlyduringtheyearandusersdeservetransparencyofthemeasures.Annex1–MinimumMandatoryDisclosureRequirementsforSMSBsStakeholdersquestionedwhetherAnnex1coveredallPillar3publicdisclosurerequirements(e.g.liquidityrisk,interestraterisk,operationalrisk),orifinstitutionsneedtoreviewdisclosurerequirementsinotherguidelinesseparately. GuidelineB-6 LiquidityPrinciplesdisclosurerequirementswillremainapplicableforSMSBsupontheimplementationofPillar3DisclosureRequirementsforSMSBs.OSFIwillensurethefinalPillar3DisclosureGuidelineforSMSBswillreferenceGuidelineB-6.IntheFinalPillar3DisclosureGuidelineforSMSBs,IRRBB-relateddisclosurerequirementsapplyonlytoCategory1SMSBs.The GuidelineB-12 InterestRateRiskManagementscopeofapplicationforPublicDisclosureforSMSBswillbeamendedinthefuturetoalignwiththeFinalPillar3DisclosureGuidelineforSMSBs. Footnotes Footnote1February1,2023forinstitutionswithanOctober31styearendandApril1,2023forinstitutionswithaDecember31styearend. Returntofootnote1Footnote2November1,2023forinstitutionswithanOctober31styearendandJanuary1,2024forinstitutionswithaDecember31styearend. 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