Canada: Provincial Money Market Purchase Program

On March 24, 2020, the BoC announced the establishment of the Provincial Money Market Purchase Program (PMMPP), a facility designed to promote the smooth flow of credit to provincial government funding markets. The PMMPP complemented the Provincial Bond Purchase Program and special term repurchase operations intended to support provincial governments. 

Considering the global volatility, abrupt drop in oil prices, and potential for “permanent damage to the structure of the economy” related to the outbreak of COVID-19 in Canada, the central bank instituted a large package of support measures equal to about 12% of GDP (BoC 2020i). Large-scale asset purchases of Canada Mortgage Bonds, bankers’ acceptances, commercial paper, corporate bonds, and provincial and federal government debt allowed the BoC to support market functioning, while an expansion of term repo facilities addressed credit availability for businesses and municipalities. Additionally, on March 27, 2020, the BoC lowered the overnight target rate to its effective lower bound of 25 bps, down from 75 bps just two weeks prior.

Subsection 18(c) of the Act allows the BoC to “buy and sell securities issued or guaranteed by Canada or any province” (Bank of Canada Act 1985b, c. B-2:11).

Section 28 of the Bank of Canada Act enables the Minister of Finance to appoint auditors of the BoC and to require that those auditors report on bank affairs to the Minister “from time to time” (Bank of Canada Act 1985b).

The BoC purchased securities directly from issuing provincial governments. Because of the existing legal provisions in the Bank of Canada Act, the BoC was able to implement the program immediately. The BoC managed the PMMPP internally and did not contract other government agencies or private entities in the establishment or operation of the PMMPP.

In announcing its intent to establish numerous programs to support the financial system, the BoC emphasized the importance of returning the economy to a state of normalcy. The Governing Council of the BoC also committed to adjusting its measures and taking further action “as required” in response to the evolving situation (BoC 2020i, 1). Furthermore, in his opening statement before the House Commons Standing Committee on Finance, Governor Stephen Poloz emphasized that the BoC “[stood] ready to augment the scale of any of its programs should market conditions warrant it” (Poloz 2020, 1).

The BoC reported aggregate holdings of provincial money market securities acquired through the PMMPP every Friday on the bank’s weekly balance sheet; the first results were published on March 25, 2020.

This reporting appears to go beyond what was required in Section 29 of the Bank of Canada Act. Subsection 29(1) required the BoC to post aggregate information about its assets and liabilities on its website each Friday. Subsection 29(2) required the BoC to report monthly on investments and securities issued or guaranteed by the government of Canada (Bank of Canada Act 1985b, c. B-2:21).

The Governor of the Bank or the Minister of Finance could compel the BoC to submit a summary or report along with these financial statements for publication in the Canada Gazette. The Minister of Finance would then present such documents to Parliament within three weeks (Bank of Canada Act 1985a, c. B-2:22).

The BoC upheld its stated commitment to transparency in releasing transaction-level data for its discontinued asset purchase programs introduced during the COVID-19 pandemic. Although not required to explicitly by law, the BoC announced upon termination of the programs that it would disclose the names of individual issuers and amounts of provincial money market securities purchased over the course of the program (BoC 2021c). On June 29, 2021, the BoC published on its website transaction-level data for its emergency asset purchase programs, including the PMMPP.

The BoC purchased securities directly from eligible issuers.

The size of the facility was effectively limited by the aggregate amount of money market securities issued by provinces.

The BoC could purchase up to 40% of one specific bill or across all bills, at times purchasing the entire 40% of each offering; the decision depended on the maturity of the bill and the underlying issuer. Citing improved conditions in short-term funding markets, the BoC announced on July 21, 2020, that it would reduce the purchase limit from 40% to 20% (BoC 2020p). It again reduced the threshold from 20% to 10%, stating in a press release on September 15, 2020, that the short-term provincial borrowing market had shown “significant” signs of recovery (BoC 2020q, 1).

As seen in Figure 2, program utilization peaked at CAD 7.6 billion in provincial money market securities held by the BoC the week of July 1, 2020.

Source: BoC 1981–2021.

In an explanatory note on the BoC’s use of reserves for emergency purposes, Deputy Governor Paul Beaudry analogized settlement balances—deposits to the facility’s account with the central bank—with loans from institutions to the central bank. The BoC credited issuers upon purchase with a deposit of settlement balances, paying interest at the policy rate of 25 bps (Beaudry 2020). This policy derived from the BoC’s existing “Statement of Policy Governing the Acquisition and Management of Financial Assets for the Bank of Canada’s Balance Sheet.”

The BoC also entered into independent financial guarantee contracts with the government of Canada that indemnified the central bank in the case that it incurred credit losses on assets purchased under the PMMPP. In accordance with International Accounting Standard 37, these agreements stipulated that assets would be recognized only if an issuer were in default and the BoC had filed a claim of reimbursement with the government (BoC 2021a). The BoC reported that it had incurred no credit losses under the PMMPP during the first quarter of 2020 (BoC 2020w).

According to the BoC, the purchases of bankers’ acceptances and provincial money market securities together resulted in a “significant” rise in deposits (BoC 2020w, 4). Compared with other programs enacted in response to COVID-19, however, the PMMPP made only a minor contribution to the substantial increase in the BoC’s balance sheet. Purchasing operations conducted under the PMMPP resulted in a balance of CAD 569.7 million (at amortized cost) as of March 31, 2020 (BoC 2020w). Figures 3 and 4 illustrate the relatively small impact of provincial money market securities on the BoC’s total asset holdings.

Source: BoC 2020aa, 4.

Source: BoC 2021g, 24.

There do not appear to have been any further restrictions on eligibility.

The BoC purchased eligible assets upon each accepted offering.

The BoC carried out purchases following direct offerings of provincial money market securities.

Eligible assets included treasury bills and short-term promissory notes directly issued by any Canadian province.

The BoC purchased eligible assets through the primary market using “market prices derived from observable inputs,” as specified by Level 2 of the fair value hierarchy (BoC 2020w, 26–27).^FNThe BoC designed the fair value hierarchy to reflect the “significance of the inputs” used to determine the following measurements:
“Level 1: Unadjusted quoted prices in active markets for identical assets or liabilities, which represent actual and regularly occurring arm’s-length market transactions.
“Level 2: Inputs other than quoted prices included in Level 1, which are observable for the assets or liabilities either directly (e.g., prices for similar instruments, prices from inactive markets) or indirectly (e.g., interest rates, credit spreads).
“Level 3: Unobservable inputs for the assets or liabilities that are not based on observable market data due to inactive markets (e.g., market participant assumptions)” (BoC 2020w, 26).
Fair value measurements classified financial instruments at the lowest level of the hierarchy “for which a significant input has been considered” (BoC 2020w, 26). These prices are derived either directly (e.g., from prices for similar instruments or inactive markets) or indirectly (e.g., from interest rates or credit spreads) (BoC 2020w).

Haircuts apply only to programs that involve lending to counterparties.

Interest rates apply only to programs that involve lending to counterparties.

Sources consulted did not specify any participation fees related to use of the program.

This refers to the loan maturity and applies only to programs that involve lending to counterparties.

Sources consulted do not indicate the imposition of restrictions on PMMPP participants.

Sources consulted do not indicate the existence of regulatory concessions.

Sources consulted do not indicate that the BoC consulted with international parties.

According to documents consulted, the BoC did not initially establish an end date for the PMMPP. It announced in early November that it would terminate the PMMPP on November 16, 2020, following the program’s last operation on November 13, 2020. The BoC pointed to “continued improvement in the functioning of short-term funding markets and financial markets more generally” in making its decision (BoC 2020r, 1).