Results of FSRA Consultation on Proposed Updates to Ontario’s Liquidity Guidance for Credit Unions

• The burden and duplication that reporting on the Liquidity Coverage Ratio (LCR) on the 10th of each month may introduce, given that required reporting on the Monthly Information Return is required on the 21st.  It was suggested that the reporting dates be aligned.
• Whether FSRA’s supervision against the new requirements will be consistent with the principles-based approach described in the guidance.. 
• The potential loss to credit unions as a result of moving assets from Liquidity Reserve Deposits (LRD) with Central 1 to a new structure and whether FSRA will consider a delayed transition if the Mandatory Liquidity Pool (MLP) is in a loss position, similar to that offered by BCFSA. 
• Additional clarification was requested regarding:
• How often LCR results should be shared with management and the board. 
•  Any potential future reporting on additional liquidity metrics for credit unions with assets less than or equal to $500 million. 
• Further details on what constitutes an acceptable legal opinion and how often it should be updated
• Suggestions were provided to:
• Amend the LCR guidance to allow 0% for lines of credit from Central 1 or other financial institutions as cash inflows. 
• Proposed amendment replacing the term “third party liquidity manager” with “third party provider” to clarify that the structure within which the assets are held is required to be bankruptcy remote and creditor proof, when a credit union uses any third party (e.g., manager, custodian, etc), not the institution. 

We thank the CCUA for their submission and support for the amendments to FSRA’s liquidity guidance. 
FSRA will integrate the updated liquidity guidance into its supervisory framework and ensure that the supervisory process is aligned with FSRA’s commitment to be a principles-based regulator.  

FSRA will review the specific elements noted in the submission and consider changes, as appropriate. As part of this, FSRA will consider alignment of the monthly LCR reporting date with the Monthly Information Return (MIR) schedule (i.e., the 21st of each month).   
In addition, we agree with the CCUA that the definition of the term “third party liquidity manager” should be clarified, as it is intended to include other providers (e.g., custodians, trustees).  FSRA will consider the suggestion provided to adopt the term “third party provider”, in order to achieve greater clarity. 

As noted above, FSRA has committed to a principles-based supervisory approach.  Consistent with such an approach, our view is that it is the credit union’s responsibility to determine the frequency for sharing LCR results with its management and board.  Such frequency will vary depending on the credit union.  Credit unions should share results frequently enough to ensure that the board and management have the information required to be satisfied that adequate liquidity is being maintained. 
Similarly, FSRA does not intend to provide prescriptive requirements relating to the legal opinions that credit unions obtain to assure themselves that their structures within which their liquidity assets are held meets the conditions set out in the guidance.

Legal opinions obtained from law firms would serve to provide a credit union’s board and management with assurance that the structure in which the credit union’s liquidity assets are held is bankruptcy remote and creditor proof.  
It is also important to keep in mind that the amendments currently being proposed to the existing liquidity guidance are specifically for the purpose of promoting the safety of the assets that credit unions hold for liquidity purposes and not intended to achieve full modernization of the liquidity framework.

On November 5, 2020, the government introduced the Credit Unions and Caisses Populaires Act, 2020 and announced its intention to bring the new legislation into force in 2022.   The new legislation, once proclaimed, will provide FSRA will the authority to develop rules in a number of areas, including liquidity.  Over 2021, FSRA will work collaboratively with the sector to develop a new liquidity rule which will be principles-based and aim to modernize the liquidity framework for Ontario credit unions.  As part of that exercise, among other things, we will consider the CCUA’s suggestions regarding the treatment of lines of credit from Financial Institutions in the LCR calculation, as well as determine whether additional long-term liquidity reporting metrics for credit unions with under $500 million in assets should be developed.  
Finally, FSRA believes that it is important to ensure that the assets credit unions hold for liquidity purposes are held within a structure that ensures that they are safe, protected from creditors of third parties and available to credit unions on demand when needed.  Delaying the transfer of such assets to a structure that achieves these outcomes would not be prudent.  Further, we understand that, given the current positive position of Central 1’s LRD pool, it is unlikely to be in a loss position on the targeted date of transfer.  

There was general support for the proposed amendments.
It was proposed that FSRA enter into an agreement with Desjardins Group and other relevant regulators to coordinate and enhance supervision of Desjardins Ontario Credit Union (DOCU) by the Desjardins Financial Group.
The requirement that the structure within which liquidity assets are held be bankruptcy remote and creditor proof, should be viewed in the unique context of the Caisse Desjardins Ontario Credit Union (DOCU).  
Some technical amendments were proposed to various components of the LCR calculation, in particular certain elements of cash outflows, in order to better reflect the structure of DOCU. 

We thank the Desjardins Financial Group for their submission and support for the amendments to FSRA’s liquidity guidance. 
FSRA welcomes the opportunity to initiate a dialogue with DOCU to better understand its unique framework and the types of agreements that could be considered to improve its oversight.    
FSRA has committed to adopting a principles-based supervisory approach. Under a principles-based approach, it is the responsibility of the regulated institution to ensure that it achieves the desired outcomes in the manner most appropriate given the nature of their business.  In this context, it is the responsibility of the credit union’s management and board to ensure that they have assurance that the assets that they hold for liquidity purposes are safeguarded from claims by creditors of third parties, readily available, and accessible on demand.  Institutions should reach out to their Relationship Managers with any questions on whether the structures within which their liquidity assets are held adhere to the principles set out in the guidance.
FSRA will consider Desjardins’ recommendations on technical amendments to the LCR calculation, as we work collaboratively with them and other sector participants in the development of a new liquidity rule under the recently introduced Credit Unions and Caisses Populaires Act, 2020.   
 

The submission expressed the view that the majority of liquidity risk in Ontario’s credit union system is posed by larger institutions and, as such, questioned the utility of applying the proposed amendments to improve the safety and protection of liquidity for credit unions with assets equal to or less than $500 million. 
It was also suggested that requiring LCR reporting on the 10th of each month may be challenging given current IT constraints. 

We thank HMECU for their submission. 
It is important to recognize that, while potential liquidity issues with large credit unions could result in significant adverse sector-wide impacts, it is also important to ensure prudent liquidity management at a smaller credit unions, in order to promote confidence and the safety of member deposits. Regular and timely data reporting to FSRA will improve credit union decision making, as well as FSRA’s ability to effectively supervise and promote system stability.
FSRA will consider HMECU’s suggestion to adjust the timing for monthly LCR reporting.    
 

There was general support for the proposed amendments.
The submission expressed the view that the new Central 1 liquidity management structure and the proposed amendments to the liquidity guidance will improve certainty regarding the availability and accessibility of HQLA, but not improve the safety and protection of credit union liquidity.
It was recommended that FSRA reconsider the timing for monthly LCR reporting (due on the 10th of the month) and instead, align it with that of the MIR (due on the 21st of the month), in order to minimize any increase in burden. 
The submission supported the principles-based approach reflected in the proposed amendments, but stated the importance of ensuring that this is also reflected in the examination process.  Specifically, the submission noted that examiners should not necessarily default to the existing 6% HQLA requirement currently set by Central 1, but rather take a principles-based approach when assessing a credit union’s prudent level of liquidity.  

We thank the Kawartha Credit Union for their submission and support for the amendments to FSRA’s liquidity guidance. 
The proposed amendments to the liquidity guidance, including the requirement for a credit union’s liquidity management structure to be bankruptcy remote and protected from creditors of third parties, aim to ensure that credit unions have unfettered access to the assets that they hold for liquidity purposes, so that they are available on demand, as needed.  This is a key characteristic of prudent liquidity management, which in turn, is important in promoting the stability of, and confidence in, Ontario’s credit union system.   
FSRA will consider adjusting the timing for monthly LCR reporting so that it aligns with that for the MIR, as recommended. 
FSRA has committed to being a principles-based regulator and this will be reflected in its supervisory approach.  Consistent with principles-based regulation, it is the responsibility of the credit union to have prudent liquidity policies in place, which enable it to effectively identify risks and ensure that an adequate amount of liquidity is being held.  FSRA does not intend to set a prescriptive liquidity reserve requirement, but credit unions will need to demonstrate that they are adhering to the principles in the guidance, including holding an adequate amount of liquidity, during the supervisory process.  The amount of liquidity that would be considered to be adequate may vary among institutions.  
 

The submission was highly supportive of the proposed amendments to the liquidity guidance, including the measures aimed at improving the accessibility and availability of credit union liquidity, as well as the new proposed frequency of reporting.  
It was recommended that FSRA reconsider the timing for monthly LCR reporting (due on the 10th of the month) and instead, align it with OSFI’s requirements for such reporting (due on the 14th of the month).

We thank Meridian Credit Union for their submission and support for the amendments to FSRA’s liquidity guidance. 
FSRA will consider adjusting the timing for monthly LCR reporting, based on the feedback received through the consultation process. 
 

The submission indicated agreement with the amendments proposed in the consultation document.
One concern was raised in the submission, regarding the proposed timing for monthly LCR reporting.  It was suggested that the timing for monthly LCR reporting (proposed to be due on the 10th of each month), should be aligned with the timing for the MIR (due on the 21st of each month).  
 

We thank Northern Birch Credit Union for their submission and support for the amendments to FSRA’s liquidity guidance. 
FSRA will consider adjusting the timing for monthly LCR reporting so that it aligns with that for the MIR, as recommended.
 

There was general support for the proposed amendments and agreement that they would promote the safety and protection of credit union liquidity.
It was noted that the new proposed LCR reporting requirements will require changes to their internal processes for calculating liquidity ratios.
Specifically, concern was expressed regarding the proposed timing for monthly LCR reporting.  The submissions requests that, instead of such reporting being required on the 10th of each month, FSRA consider requiring it within 10 business days of month end.   
The submission also asked for clarification on the following points:

• Whether an external legal opinion would be necessary to ensure that a credit union’s liquidity management structure meets the criteria set out in the guidance, in cases where liquidity assets are held at institutions connected to a big bank. 
• Whether the previous 6% liquidity measure would still be considered to be a minimum/ target, or would credit unions be permitted to hold a different level of liquidity.  
   

We thank Tandia Financial Credit Union for their submission and support for the amendments to FSRA’s liquidity guidance. 
FSRA will consider adjusting the timing for monthly LCR reporting, based on the feedback received through the consultation process. 
In order to ensure prudent liquidity management, it is important for a credit union’s management and board to have assurance that the credit union’s liquidity is held in a structure that protects the assets from claims of creditors of third parties. If the use of a third-party service provider may create a risk to the credit union’s liquidity assets, the credit union’s board and management should act prudently to mitigate such risk. A legal opinion can provide such assurances.  Even in cases where a credit union’s liquidity is managed by parties connected to a big bank, or another type of regulated financial institution, a credit union’s management and board should ensure that they are satisfied that the institution’s liquidity is subject to such protections.  
The proposed amendments to the guidance support a principles-based supervisory approach.  Under such an approach, it is the credit union’s responsibility to ensure that it has prudent liquidity policies in place and that it is holding an adequate amount of liquidity.  FSRA does not intend to set a prescriptive liquidity reserve requirement.  However, credit unions will need to demonstrate that they are adhering to the principles in the guidance, including holding an adequate amount of liquidity, during the supervisory process.  The amount of liquidity that would be considered to be adequate may vary among institutions.