Memorandum of Understanding on Treasury and credit Risk Management between the Bank of Canada and the Department of Finance

1. Purpose

The purpose of this Memorandum of Understanding (MoU) is to set out the government's treasury and credit risk management policy framework and agreed roles and responsibilities of the Bank of Canada and the Department of Finance with respect to the implementation of the framework.

2. Policy and Principles

The Minister of Finance is responsible for managing the Government of Canada's financial assets and liabilities, which encompass a range of treasury activities that engender exposure by the Government to financial risks, including market, credit, operational and legal risks. The Minister has approved a policy with respect to treasury risk management entitled Government of Canada Guidelines on Treasury Risk Management (March 2000). The major principles set out within the government's risk management policy document are:

3. Focus of Treasury and credit Risk Management

Treasury and Credit Risk Management policy pertains to the risks inherent in the following activities of the federal government: Exchange Fund Account (EFA) investments and liabilities; foreign exchange and gold transactions; securities lending; interest rate and currency swaps; and the Receiver General cash management framework.

4. Roles and Responsibilities

The Department of Finance and the Bank of Canada work jointly to implement the government's risk management policy (outlined in the document entitled Government of Canada Guidelines on Treasury Risk Management), consistent with the principles specified within the policy document. To this end, the Bank of Canada and Department of Finance have agreed upon a Treasury Management Governance Framework (October 2008).

The Governance Framework establishes a Funds Management Committee (FMC) to advise the Minister on policy and strategy, to oversee the implementation of approved policy and plans and to receive reports on performance outcomes covering wholesale debt, cash management, reserves and risk control.

The FMC is supported by a Risk Committee (RC) in fulfilling its mandate with respect to the management of treasury risk. The RC is an advisory body, jointly chaired by the Bank of Canada and the Department of Finance. The RC is responsible for reviewing the risk management framework and recommending its approval by the FMC, reviewing reports on risk exposures, identifying risk issues the FMC should be aware of, advising on recommended measures to mitigate these risks and providing advice on the risk aspects of policy recommendations put before the FMC.

To support the work of the RC, the Bank and the Department of Finance agree through this MoU that a Financial Risk Office (FRO) will be maintained at the Bank of Canada that functions independently from funds management operations at the Bank. The Bank is responsible for ensuring appropriate staffing and resources are provided to support FRO in fulfilling its responsibilities.

With respect to treasury and credit risks identified in Section 3 of this document, FRO's responsibilities are to assess, measure, monitor and report on risk exposures in the EFA and RG domestic cash balances, to advise operational units on risk issues associated with policy initiatives, and to advise the RC on key risk issues related to proposals submitted to the FMC. In particular, with respect to assessing credit risk, the FRO will conduct fundamental credit analysis for purposes of determining the credit rating of trading and investment counterparties. The credit ratings will be determined by an internal and independent credit rating committee, using a methodology approved by the FMC. The internally-determined ratings will be used in setting eligibility requirements and credit limits, as part of the government’s risk management policy.

To ensure the effective use of resources, the RC will receive from FRO: (i) regular reports on risk exposures pertaining to the relevant treasury activities (see Section 3); (ii) FRO input into risk aspects of policy issues; and (iii) regular reports on decisions of the Credit Rating Committee. The Risk Committee will also review and approve FRO's work plan on RC-related issues. FRO is also responsible for preparing monthly risk management and reserves management reports for distribution to RC members and line managers.

FRO is also responsible for maintaining and providing information/data for the Public Accounts, the Department of Finance monthly official international reserves press release and selected sections of the Government's Annual Report on the Management of the Exchange Fund Account, and for reporting on the financial risk exposures of Crown corporations, as required.

In carrying out its day-to-day functions, FRO will work closely with the Bank's Foreign Reserves Management (FRM) team and the Department of Finance's Reserves and Risk Management (RRM) Section to ensure that transactions undertaken to fund and invest Canada's foreign exchange reserves adhere to predetermined risk tolerances, and that key risks associated with any new operations are identified ahead of time and prudently managed. Similarly, FRO will work closely with the Bank's Treasury and Settlement Systems team and Finance's Debt Management Policy Section to ensure that risks associated with domestic cash balances are prudently managed.

5. Period of Agreement

This MoU is effective as of April 1, 2013 and will remain in place until modified. Its terms should be reviewed on a triannual basis.

Jean Boivin
Associate Deputy Minister and G7/G20 & Financial Stability Board Deputy,
Department of Finance

Tiff Macklem
Senior Deputy Governor,
Bank of Canada