Q: Under Section #18 of the Capital Adequacy Rule, if CU has capital shortfall and must suspend new lending and investments, does this extend to new distributions from pre-existing lines of credit that have not been fully drawn up to this point?
A: Existing irrevocable committed lines of credit are not captured in section 18(1)(i)(b). Therefore, the wording in section 18 means that the credit union cannot enter into any new loans or investments when they are below the minimum capital level outlined in section 77 of the CUCPA, 2020. As part of the report to the CEO of FSRA, the credit union must detail the extent of the committed undrawn amounts and incorporate these amounts in the plan to return to compliance with the capital requirements.
Q: If there is a moderate deficiency to CCB and distribution of earnings must be constrained, would that extend to issue of Investment shares as payment of dividends on pre-existing series/class of Investment Shares (such distribution should contribute to Tier 1 capital and thus also CCB if such Investment Shares series was already qualifying as Tier 1)?
A: As outlined in section 14, when the Capital Conservation Buffer is less than the 2.5% minimum level, credit unions must limit distributions as per the table in section 14(3) until such time as they have built the buffer back up above the 2.5% level. Distributions include dividends and share buybacks but exclude non-cash dividends paid on membership shares that do not result in a reduction of Tier 1 capital.
Q: In the template the entirety of AOCI is being deducted from Tier 1, but then AOCI related to DB pension losses is also deducted from Tier 2, so total capital is negatively impacted twice by the AOCI losses on our pension plan. I think the pension AOCI losses should be removed from Tier 1 as they are specifically included in Tier 2. We note this is consistent with the capital rules filed with the Ministry – the pension AOCI losses were always deducted in Tier 2, however, need to be specifically scoped out of Tier 1.
A: Section 5(2)(vi) of the Capital Rule states that accumulated other comprehensive income (AOCI) is to be included in the amount of Tier 1 capital. This amount excludes the amount of "accumulated actuarial losses for any defined benefit pension fund liability included on the balance sheet of the credit union where the losses have been accounted for through other comprehensive income and disclosed reserves" outlined in section 6(3)(i), which is to be deducted from Tier 2 capital. The template will be amended to reflect this clarification.
Q: Please provide clarification as to whether the unrealized market fluctuations (gains and losses) on High Quality Liquid Assets (HQLA) should be excluded from Accumulated Other Comprehensive Income (AOCI) as part of the calculation of Tier 1 capital.
A:Thank you for your question about the treatment of gains and losses on HQLA assets in the calculation of capital.
Current accounting standards (International Financial Reporting Standards or IFRS) require that investments held within the credit union’s portfolio are subject to a mark to market valuation at each reporting period with the resulting gain or loss being reflected under AOCI. FSRA is clarifying that these gains and/or losses should not be excluded from the calculation of AOCI in determination of the total Tier 1 capital as per the Capital Adequacy Rule. This clarification is aligned with the Basel framework, OSFI and other provincial regulators.
Q: The inclusion of "accumulated other comprehensive income' as part of Tier 1 Capital in section 5(2) of the CAR does not specifically mention the treatment of "cash flow hedge reserves". Cash flow hedge reserve was included as a regulatory adjustment to CET1 Capital (Section 2.3.1 par 61). OSFI states: “this treatment specifically identifies the element of the cash flow hedge reserve that is to be derecognized for prudential purposes. It removes the element that gives rise to artificial volatility in common equity, as in this case the reserve only reflects one half of the picture (the fair value of the derivative, but not the changes in fair value of the hedged future cash flow)”.
A: FSRA agrees that the inclusion of AOCI in the amount of Tier 1 capital needs to be adjusted to reflect the treatment of cash flow hedge reserves. To align with Basel and OSFI requirements, for the determination of the amount of AOCI in section 5(2)(vi), the amount of cash flow hedge reserve that relates to the hedging of items that are not fair valued on the balance sheet (including projected cash flows) should be derecognized in the calculation of Tier 1. Therefore all gains or losses from cash flow hedging are to be excluded from AOCI for the calculation of Tier 1 capital.
Q: CEBA loans are not currently reported in our assets. Do we now add them back and subtract them, or just leave this section blank?
A: Credit unions should be reporting these loans as part of their reporting to FSRA.
Q: Can you please clarify if Contributed surplus is included in the retained earnings ratio? Contributed surplus represents the retained earnings from all predecessor credit unions.
A: For the purposes of calculating the "Retained Earnings capital ratio", the amount to be used in the numerator of the ratio includes both “retained earnings” and “retained surpluses including contributed surplus” amounts in the calculation.
Q: Which assets can be included item (i) of “Table 2 – Asset Risk Weightings” of the Capital Adequacy Requirements Rule?
A: The purpose of item (i) in Table 2 of the Capital Rule is to capture investments in corporations (corporate entities) that are excluded from the requirement to be included on a consolidated basis for capital reporting as outlined in Section 2(2) of the Rule. All other credit union investments are to be risk weighted based on the nature of the investment as per the appropriate line item in Table 2 of the Capital Rule. During the next review of the Capital Rule, FSRA will consider whether a clarification in this regard would be beneficial.
Q: Are we to include “Deposit Notes and Bearer Deposit Notes” under item “v) Commercial paper, bankers’ acceptances, bankers’ demand notes and similar instruments…” of Table 4 of the Capital Rule?
A: Yes, a 20% risk weighting is appropriate for Bank Deposit Notes. Credit unions should report these assets under item “v) Commercial paper, bankers’ acceptances, bankers’ demand notes and similar instruments guaranteed by a bank or authorized foreign bank within the meaning of section 2 of the Bank Act (Canada), a corporation registered under the Loan and Trust Companies Act (Canada) or similar legislation of another province or territory of Canada applies”, as outlined in “Table 4 – Asset Risk Weightings” in section 11 of the Capital Rule.
Q: How are Covered Bonds to be risk weighted as per the Capital Adequacy Rule?
A: Credit unions should include Covered Bond investments as part of the reporting of item “yyy) Corporate bonds and short-term commercial paper if the borrower has a credit rating specified in Table 5” as outlined in “Table 4 – Asset Risk Weightings” in section 11 of the Capital Rule.
Q: How are rated Asset Based Securities (ABS) to be risk weighted as per the Capital Adequacy Rule?
A: Credit unions should include investments in ABS as part of the reporting of item “yyy) Corporate bonds and short-term commercial paper if the borrower has a credit rating specified in Table 5” as outlined in “Table 4 – Asset Risk Weightings” in section 11 of the Capital Rule.
Q: Timelines are very tight for us to update the MiR and also work with subsidiaries, are these timelines presented final? These timelines are really not reasonable. OSFI has given more then a year to make BCAR changes, would have thought FSRA would do similar.
A: The timeline was determined by balancing the need to provide credit unions with time to organize the data needed to complete the calculations of the new capital ratios as per the requirements in the Capital Adequacy Rule (CAR) and the requirement for FSRA to understand the capital positions of credit unions in a timely manner. With the come into force of the CUCPA, 2020 and the CAR on March 1, 2022, credit unions must now be able to demonstrate that they are meeting the minimum capital requirements. Therefore, May 2022 was determined to be the appropriate timing to request the first submission of the capital ratios under the new capital requirements.
Q: When will we get the updated MiR cells and layout or is it June that you expect it to be ready? If not ready until June, then what is the first month that we need to file with it? It will take us significant time to update all these changes in our MiR upload files.
A: The revised MIR with unconsolidated schedules is expected to be ready by June 1st 2022 and we plan to release this update as a test system a few weeks earlier. All CUs are required to report the monthly data from June 1st onwards. A second update to MIR will accommodate filing consolidated capital schedules; this update will be operational by September 1, 2022. The cell references shown in the Capital Adequacy Calculation template align with the new fields that will be added to the MIR efiling template.
Q: Could you please confirm that the current MiR will be decommissioned in June?
A: The current taxonomy of the MIR will be decommissioned in June when a new taxonomy (update) will be put into production. Only the capital aspects of the MiR will be changed. The MIR itself is not being decommissioned but new fields are being added to accomodate the requirements of the new Capital Rule. The revised MIR with unconsolidated schedules is expected to be ready by June 1st 2022 and we plan to release this update as a test system a few weeks earlier.
Q: Could you please clarify whether the filing of the new template should be done in the same way as the LCR disclosure template?
A: As discussed in the Technical Briefing, credit unions do not have to file the Capital Adequacy Calculation template, but only the calculated 6 Key Capital Metrics in May 2022. Starting June 2022 the updated MIR will be ready for deployment and will automatically calculate the capital ratios. A second update to MIR will accommodate filing consolidated capital schedules; this update will be operational by September 1, 2022. For more information, please refer to the Technical Briefing presentation deck which was shared with all the credit unions.
Q: Two technical questions:
- C54.1 Gains and losses in financial liabilities: would it be possible to have more details on what is expected for this indicator which is found in the Retained earnings reconciliation?
- Would it be possible to get concrete examples of what this indicator represents? (Image does not copy. Indicator is in the placement section: "unrealized gains and accrued receivables related to off balance sheet items... A28.3)
A: Credit unions should be reporting these amounts as per their prepared financial statements that are aligned with the IFRS.
Q: Does the HQLA fall into investments A10 and A11 when HQLA investments held in only level 1 assets
A: Not all HQLA investments need to be reported in A10 and A11. In MIR, investments in Canadian federal government securities should be reported in cell A10 and the amount of Canadian federal government securities held for liqudity purposes should be reported in cell A11. Similar to the current MIR requirement, all investments of the credit union, irrespective of the fact whether they are HQLA or not, should be reported in the fields corresponding to such investments.
Q: Is it possible for you to release an unprotected version of the template so we may incorporate our own data feeds into the file?
A: To ensure the integrity of the calculations within the template, FSRA will not be providing an unprotected version of the template. The template provides the ability for CUs to see the underlying calculations to understand how the formulas are calculating the capital ratios.
Q: For any further questions please confirm, do we reach out to our Relationship Manager?
A: Yes, credit unions should reach out to their Relationship Manager for any additional questions.