Canada: Regulations Issued Under The Payment Clearing And Settlement Act Setting Out Resolution Framework For Financial Market Infrastructures

On July 10, 2019, the Payment Clearing and Settlement Regulations (the "Regulations") were issued under the Payment Clearing and Settlement Act (the "PCSA"). The Regulations are intended to come into force, on a day to be fixed by order of the Governor in Council, concurrently with earlier amendments made to the PCSA pursuant to the 2018 federal budget (the "PCSA Amendments").

The PCSA Amendments, along with the Regulations, set out Canada's financial market infrastructure ("FMI") resolution framework. Following the 2008 financial crisis, the G20 initiated a comprehensive program of regulatory reforms to address the underlying causes of the financial crisis. The creation of a FMI resolution framework aligns with Canada's G20 commitment to establish effective resolution regimes for systemically important institutions such as banks, insurance companies and FMIs.


FMIs are systems that facilitate the clearing, settling and recording of payments, securities and other financial transactions among participating entities. A FMI may be referred to as a "clearing and settlement system" or a "clearing house" when referring to a company which operates the clearing and settlement system. FMIs are the backbone of the financial system and provide the infrastructure through which consumers and businesses safely and efficiently purchase goods and services and carry out financial transactions. Certain FMIs are critical to the stability of the Canadian financial system and the most critical FMIs (such as the Large Value Transfer System (LVTS), CDSX, the Canadian Derivatives Clearing Service (CDCS), CLS Bank and SwapClear) are designated as systemically important by the Governor of the Bank of Canada.

The main policy objectives of the FMI resolution framework is to maintain the availability of critical services of a FMI, promote financial stability and minimize the potential exposure of public funds to a loss. Adoption of the Regulations is required for the full implementation of the resolution regime.

Description of Framework

The Regulations elaborate on the FMI resolution regime implemented in the PCSA with regards to limited clearing members, conflicts of interest, resolution plans, cost recovery, compensation and oversight information.

Resolution Plans

Under the PCSA Amendments, the Bank of Canada is required to maintain and develop resolution plans in accordance with the Regulations. Under the Regulations, the Governor of the Bank of Canada is responsible for approving resolution plans and a statement of the Governor's approval needs to included in an approved plan. The Governor is required to also review and revise plans, as required, on an annual basis and after a significant change to a FMI occurs.

The Regulations outline the key elements to be included in the resolution plans:

  • Risk profile of the system: The risk profile should describe the FMI, including its design, corporate governance and organizational structure, intercorporate relationships, critical functions performed by the FMI, critical third-party services provided to the FMI, critical operational resources, and any interoperability arrangements and links with other FMIs.
  • Resolution strategy: Various scenarios should be included in the strategy, such as the default of a participant or non-default scenarios resulting in a declaration of non-viability. The strategy should also set out measures to be taken to resolve a FMI.
  • Assessment of the adequacy of the resources: All the resources that may be available to implement the resolution strategy should be counted in the assessment.
  • Operational plan: The plan should set out what actions need to be taken to implement the resolution strategy and identify barriers to the plan's implementation.

Limited Clearing Member

The Regulations introduce the defined term "limited clearing member" (LCM). LCMs are participants in FMIs that are subject to modified risk controls for default management and recovery. The Regulations specify that LCMs are participants in a designated clearing and settlement system that have opted into an alternative risk control arrangement which does not require the participant to contribute to a default fund and to absorb losses arising from the default of another participant. As a result, LCMs are subject to additional margin requirements compared to non-LCM participants.

Cost Recovery

The PCSA Amendments enable the Bank of Canada to recover the costs associated with operationalizing the resolution of a FMI. While public money may be required in the short term, the FMI resolution framework is designed to ensure cost recovery in the long term. The Regulations set out which costs can be recovered and who may be subject to cost recovery.

The Regulations specify that (i) the Bank of Canada may recover costs from clearing houses and participants, specifically: a clearing house and a clearing house of a clearing and settlement system that has been declared non-viable, and (ii) any party who was a participant in a clearing and settlement system when it was declared non-viable or when its clearing house was declared non-viable or a participant that subsequently joins the system.

The Regulations state that the Bank of Canada may generally recover the costs required to: address financial losses and liquidity shortfalls of the clearing house, maintain the pre-funded financial resources at the level provided for in the rules governing the FMI, operate the FMI, meet a participant's financial obligations to the FMI, and administer the compensation process.

An exception for LCMs limits the costs which can be recovered from them to the costs of operating the FMI, administering the compensation process, and any obligations of the LCM to the FMI covered by the Bank.


The PCSA Amendments set out a process for providing compensation following a resolution process for a FMI. The Regulations prescribe the entities eligible to access compensation, including creditors, participants, shareholders and owners of the FMI, with certain exceptions.

The resolution framework is designed such that recipients of compensation are left no worse off in a resolution than if the FMI had been liquidated under applicable insolvency laws. In order to reduce potential speculation in the compensation process, the right to receive compensation is a personal right and not transferable.

  • The compensation to which a creditor is entitled is the amount still owing under the terms and conditions of their contract.
  • The compensation to which a participant is entitled is the estimated value of net losses to the participant that result from an order under subsection 11.11(1) of the PCSA, which allows the Governor of the Bank of Canada to use additional powers that go beyond the FMI rules and other arrangements for loss allocation agreed to by participants. In estimating the value of the losses, the Bank of Canada is required to assume that no financial assistance is forthcoming from a federal or provincial government.
  • The compensation to which shareholders or owners of a clearing house are entitled is determined by comparing the estimated value of the person's ownership interest in liquidation with its estimated value in resolution. In estimating the liquidation value, the Bank of Canada is required to assume that no declaration of non-viability was made, the FMI rules and other arrangements for loss allocation have been fully executed and no financial assistance is forthcoming from a federal or provincial government.

Following the completion of the resolution process, the Bank of Canada would provide notice to prescribed parties with an offer of compensation and the parties would have 45 days to notify the Bank of Canada of their acceptance or rejection of the offer. The Bank of Canada would be required to pay compensation to entitled parties within 90 days of the expiry of the offer of compensation.

Conflict of Interest Provisions

The PCSA Amendments establish a FMI resolution committee, which is subject to conflict of interest rules. In particular, the Regulations require that members of the FMI resolution committee not beneficially own, directly or indirectly, any shares of a clearing house or parent company of a clearing house if the clearing house is the clearing house of a designated system.

Disclosure of Oversight Information

The PCSA Amendments require that a clearing house not disclose certain types of information defined as "oversight information". The Regulations define "oversight information" as:

  • any directive made in respect of the FMI under Section 6 of the PCSA;
  • any report prepared by or at the request of the Bank of Canada or any recommendation made by the Bank of Canada as a result of an audit, inspection or other oversight review of a FMI, including any related correspondence to or from the directors or officers of the FMI;
  • any resolution plan for a FMI; and
  • any document prepared for the purpose of advising the Governor of the Bank of Canada on whether to make a declaration of non-viability.

Disclosure of oversight information is allowed by a FMI to certain insiders such as employees, auditors and legal advisors on the condition that they continue to treat the information as confidential. Disclosure by FMIs is also allowed to certain government authorities or regulatory bodies.

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