Archived - Evaluation of the Crown Borrowing Program
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Kaufmann Financial Consulting
Approved by the Deputy Minister of Finance on the recommendation of the Audit and Evaluation Committee on May 27, 2013
Table of Contents
List of Acronyms
The Crown Borrowing Program (CBP) was introduced in Budget 2007 to facilitate the funding of three major Canadian Crown corporation borrowers: the Canada Mortgage and Housing Corporation (CMHC), the Business Development Bank of Canada (BDC), and Farm Credit Canada (FCC). The program is intended to increase the liquidity and efficiency of Crown corporation borrowings by lending directly from the Government of Canada (GoC) at prices consistent with its cost. The program is also intended to increase the liquidity and efficiency of the GoC bond market.
The CBP evaluation was done as a part of the Treasury Evaluation Program. Its objective was to evaluate the implementation, operation and performance of the CBP. The evaluation is intended to be useful for officials within the Department of Finance Canada (Finance Canada), participating Crown corporations, Public Works and Government Services Canada (PWGSC), the Bank of Canada (BoC), parliamentarians, and the public. The scope of this evaluation covers the activities of the CBP since its inception in 2008 until 2012, and was performed during the period from July 2012 to December 2012.
Based on the analysis of the information gathered, the following conclusions were reached.
The evaluation found that the objectives of the CBP were consistent with the GoC priorities and were aligned with the government’s roles and responsibilities. The CBP continues to be relevant as a liquid funding mechanism for Crown corporations that is aligned with the efficiency goals of Finance Canada.
The CBP was implemented largely as planned. There were systems enhancements made over the period to better meet the loan needs of the Crown corporations and to facilitate Finance Canada’s reporting tasks. The most significant difference was the use of the CBP framework to implement the Extraordinary Financing Framework (EFF), the Government’s fiscal response to the 2008 global financial crisis.
The CBP achieved its expected outcomes of Crown corporation funding flexibility, price efficiency, and enhancement of the function and liquidity of the GoC bond market. The program met its expected outcomes, while acting within its six guiding principles.
The evaluation also found that the CBP achieved its objectives efficiently, but that opportunities exist for operational improvements. While the CBP has a well-developed governance structure guiding its activities, some processes within the CBP could benefit from improvement. In particular, the program does not have a discrete account, making it difficult to perform managerial performance accounting or risk measurement.
The evaluation has resulted in eight recommendations. The most significant recommendation is for the creation of a CBP Fund account with full managerial accounting and risk management processes. A suggested structure and operational method for a CBP Fund account is given in Annex E.
- The Department of Finance should investigate the constraints, costs, and benefits, including the effect on liquidity holdings of Crown corporations, of changing the loan cut-off time. Given the findings, the CBP should optimize the loan cut-off time to meet the needs of all parties.
- The Department of Finance should consider the merits of establishing a distinct CBP Fund and implementing accounting controls and reporting for this account, with assigned responsibilities for management and oversight.
- The Department of Finance should assess the merits of introducing a comprehensive interest-rate risk measurement and management framework for the CBP, including the use of matched debt funding and interest-rate swaps to manage residual duration differences.
- The Department of Finance should upgrade the yield curve generator to allow Crown corporation users to request an immediate curve update outside of the scheduled quarter-hour system updates.
- The Department of Finance should consider ways to restructure and consolidate CBP operations to reduce the numbers of active groups and participants to the extent possible, given legislative and other structural requirements.
- The Department of Finance should allow Crown corporations to discontinue the provision of funding forecasts on a quarterly basis, as the ongoing biweekly and annual forecasts adequately meet the needs of all parties.
- The Department of Finance should create a process with Crown corporations to study and consider ways to net cash flows within the CBP.
- The Department of Finance should modify the Transaction Management System to more easily input amortizing loan structures.
This report presents the results of the evaluation of the Crown Borrowing Program (CBP) conducted during the period from July 2012 to December 2012 as part of the Treasury Evaluation Program of the Department of Finance Canada. The evaluation was performed by Kaufmann Financial Consulting—an external third-party firm—in an independent and objective manner. The objective of the evaluation was to assess the implementation, operation, and performance of the CBP since its inception in 2008.
1.2 Description of the Crown Borrowing Program
The CBP was introduced in Budget 2007 to provide cost-effective, flexible, and timely funding to participating Crown corporations and to increase the operating efficiency and liquidity of the Government of Canada (GoC) debt market. Under this program, Finance Canada extends loans directly to the participating Crown corporations: Farm Credit Canada (FCC), the Canada Mortgage and Housing Corporation (CMHC), and the Business Development Bank of Canada (BDC). Two other Crown corporations, Export Development Canada (EDC) and the Canada Deposit Insurance Corporation (CDIC), have standby funding agreements under the CBP.
For a number of years prior to the introduction of the CBP, an environment of declining federal government borrowing contributed to reduced liquidity for the GoC debt market. Negative effects resulting from decreased benchmark bond issue sizes and the market fragmentation caused by other entities issuing under the guarantee of the GoC reduced the efficiency of the GoC debt market as a whole. Finance Canada, through the debt management program of the GoC, partially managed these negative effects through buy-backs of older debt issues and the reduction of the number of debt tranches being issued. Meanwhile, at that time, the Crown corporations were funding themselves directly in the debt capital markets through sophisticated treasury units that were experienced in managing the risks involved. While the Crown corporations could fund themselves at reasonable yield levels on an absolute basis, their borrowing costs were greater than those of the federal government for debt of similar term and credit rating, and involved the payment of fees and commissions to investment dealers.
In 2004, KPMG was engaged to consider alternative borrowing frameworks that could reduce risk or cost to the GoC as a whole, while taking into account Crown corporation mandates and the need for good governance. In its final report, KPMG identified opportunities for increased efficiency in funding of the Crown corporations through the introduction of a centralized borrowing facility. Consequently, the CBP was developed and then introduced in Budget 2007 as the sole funding source for BDC, CMHC, and FCC. The program first began issuing loans on April 1, 2008. In the first month of the program, 38 loans were transacted for a total of $4.6 billion, a good indication of the need, acceptance, and operational abilities of the program from the onset.
In response to the 2008 global financial crisis, the Minister of Finance introduced the Extraordinary Financing Framework (EFF), a program to make available up to $200 billion in financing through a variety of programs, as a means of expanding the availability of credit in Canada. The EFF involved the issuance of GoC debt to fund loans and purchase financial assets from Canadian businesses and banks, providing them with liquidity in order to roll over existing loans or to deleverage their balance sheets. Finance Canada managed the structure of GoC issuance, the Bank of Canada (BoC) managed the market operations of that issuance, and BDC and CMHC then used the funds to purchase assets and make loans. The CMHC operated two programs under the EFF. The Insured Mortgage Purchase Program purchased insured mortgages from Canadian banks. The Municipal Infrastructure Loan Program made loans for municipal infrastructure projects. BDC managed the Canadian Secured Credit Facility that purchased securities backed by business assets.
Also, as part of the 2009 Government response to the global liquidity crisis, the existing EFF was expanded to include the Business Credit Availability Plan, which resulted in greater lending activity by BDC.
When the CBP was first introduced, it was expected to lend about $15 billion per year. The introduction of the above programs greatly expanded the amounts involved. The table that appears below shows the amounts of loans outstanding at the end of each fiscal year. The actual amount of loans transacted was larger as many one-month and three-month loans rolled over during the period, such that a one-month loan rolled over for a year would result in 12 times as much loan issuance as the amount of loan outstanding.
The 2008 global financial crisis caused credit spreads to increase greatly in the debt capital markets. Longer-term, fixed-rate debt spreads in particular grew as investors demanded increased spreads in order to purchase these securities. For instance, Canada Mortgage Bonds (CMBs) are government- guaranteed bonds issued by the Canada Housing Trust (CHT) that are not funded by the CBP. Spreads on these bonds increased from about 15 basis points (bps) over GoCs to about 100 bps at the height of the crisis. The spreads subsequently decreased to 20 to 30 bps by 2012. The higher credit spreads experienced in the CMB market would have resulted in extra costs for the Crown corporations, had they not been funded through the CBP.
1.3 Legislative Authority and Governance
Development of the CBP included governance documents as well as operational systems and manuals. Governance documents were prepared to align with the Financial Administration Act (FAA) and the Crown corporations’ enabling legislations. The FAA defines the financial roles and responsibilities of federal entities, notably the reporting, internal control, and approval requirements, as well as borrowing authorities.
The enabling legislation of each participating Crown corporation authorizes the Minister of Finance to lend money out of the Consolidated Revenue Fund (CRF) to the Crown corporation on any terms and conditions that the Minister may fix (i.e., Farm Credit Canada Act (s. 12(2)), Canada Mortgage and Housing Corporation Act (s. 21(1)), Business Development Bank of Canada Act (s. 19)). Crown corporations are also governed by Part X of the FAA. In accordance with sections 122 and 127(1) of the FAA and related regulations, a Crown corporation must submit an annual Corporate Plan that includes an indication of its planned borrowing activities as estimated over a five-year horizon, and the responsible Minister must recommend approval of the Corporate Plan to the Governor in Council. Under section 127(3) of the FAA, the Minister of Finance is required to approve the time and terms and conditions of Crown corporation borrowings.
Reports of CBP borrowing activities are provided on a regular basis for oversight purposes to the Funds Management Committee (FMC), a senior management group that includes representatives from both Finance Canada and the BoC.
There are four main components to the governance and oversight of the CBP. These include the Crown Borrowing Framework, the Service Agreements for each participating Crown corporation, the Crown Borrowing Program Operations Manual, and the Oversight Committee. Issues concerning business procedures for times of disruption are addressed in the Business Continuity Plan.
Crown Borrowing Framework
The objective and principles of the CBP are set out in an established framework which was communicated to all participants through their individual service agreements. The Framework is based on the following general principles:
- The Borrowers will borrow Canadian dollars at the Government’s estimated cost of funds under flexible arrangements comparable to or more favorable than those available in the public market;
- The Framework should be consistent with the Borrowers’ corporate mandates and business objectives;
- Should the Borrowers’ corporate mandates change, the Framework must be responsive to the changing needs of the Borrowers;
- The Framework should be consistent with the Government’s debt strategy objectives, borrowing programs and cash management practices;
- Financial risks should be managed prudently by the Borrowers, in accordance with internal risk- management policies, and should be consistent with applicable Minister of Finance guidelines; and
- The Framework should operate transparently, be subject to regular review, with accountabilities clearly defined.
The Service Agreements signed by each of the participating Crown corporations establish the various roles and responsibilities of the Crown corporations and Finance Canada, and include dispute resolution processes and agreement amendment provisions. The agreements are meant to be consistent with the principles of the CBP Framework and are supported by the Crown Borrowing Program Operations Manual.
The Service Agreements also set out the administration cost formula which is used to determine the annual fees paid by the Crown corporations. The formula consists of a two-part pricing mechanism based on the calculation of a fixed component that includes ongoing support contracts with external parties, and a variable component that reflects staffing requirements.
The CBP Framework and Service Agreements set out the requirement for the Oversight Committee. The Oversight Committee meets at least annually to evaluate the operations of the program and to recommend improvements to any aspect of the CBP.
The Committee is chaired by the Director of the Financial Markets Division (Finance Canada), and includes the Treasurer of each Crown corporation, the Chief, Government Financing Section (Finance Canada), the Director and/or Manager, Public Debt (Finance Canada), as well as other Finance Canada and BoC participants of the CBP.
Crown Borrowing Program Operations Manual
The Crown Borrowing Program Operations Manual ensures the effective implementation of the CBP policies, processes, and procedures at the operational level. The manual identifies the roles and responsibilities of the Crown corporations, BoC, and Finance Canada, outlines the proper information flow and verification and confirmation processes, and describes troubleshooting procedures. Every two years, a formal review of the manual is to be undertaken to ensure effective performance of activities and operations.
1.4 Loan Processing Overview
The CBP lending facility is managed by a Lending Desk within the Department of Finance. In order to transact loans, the Lending Desk uses a web-based, straight-through processing system called the Transaction Management System (TMS). To obtain a loan, a Crown corporation contacts the Lending Desk and submits the details of the loan it seeks. The Lending Desk then confirms that the proposed loan is within the Crown corporation’s weekly borrowing limit and the loan policies as established by the CBP Framework and the Service Agreement with the Crown corporation. The Lending Desk then prepares a loan ticket that is reviewed by the Crown corporation for its approval. The Lending Desk uses the loan pricing program called CYCLiC (Canada Yield Curve Live Calculator) to set the price of the loan that is described in the loan ticket. Once the Crown corporation approves the loan ticket, the Lending Desk provides a final approval before submitting the loan for processing.
CYCLiC was developed and is maintained by a partnership of Andrew Kalotay Associates Inc. and Gmarkets Inc. The program was procured through a competitive RFP process after consulting with the participating Crown corporations. CYCLiC uses market price inputs from the Canada debt market for securities that range from 1 day to 30 years in maturity to calculate a pricing curve for all loan maturities from 1 day to 30 years. The program is supplied with market prices by Gmarkets and relies upon analytics provided by Kalotay Associates to calculate the pricing curve and specific loan prices off that curve.
Once the Lending Desk submits an approved loan ticket, the Corporate Services Branch (Finance Canada) is automatically contacted via email to initiate processing of the loan. The Branch sends details of the loan to Public Works and Government Services Canada (PWGSC) for their approval. PWGSC then authorizes payments out of the CRF and provides instructions to Payment and Settlement Operations at the BoC. Payment and Settlement Operations will then, upon instruction from PWGSC, make payment using the Large Value Transfer System (LVTS) out of the CRF and into the Crown corporation account.
The money in the CRF used to fund the CBP is raised through issuance of GoC debt. Each year Crown corporations provide Finance with forecasts of their anticipated funding needs. Finance Canada uses these forecasts in preparing its Debt Management Strategy report for the year as part of the annual Budget process. The Department then manages GoC debt issuance throughout the year to ensure that the necessary funds are available in the CRF for lending to the Crown corporations.
Finance Canada structures the issuance of GoC debt to match the anticipated amount and maturity of funding needed by the CBP. CBP loans can range from 1 day to 30 years in maturity but they largely consist of short-term loans of either 30 or 90 days or of fixed-term loans of 5 to 20 years. These have typically been funded through a mix of three-month, six-month and one-year GoC treasury bills.
The CBP makes use of the CRF to provide loans to Crown corporations. There is no discrete account for the CBP in which all Crown corporation loans and associated GoC funding activities are consolidated. In contrast, the Exchange Fund Account, an actively managed portfolio used to aid in the control and protection of the external value of the Canadian dollar that totaled approximately US$65 billion as at March 2012, exists as a distinct account, in which all assets and liabilities of that program are managed and accounted for.
2. Evaluation Context and Design
2.1 Evaluation Objective and Scope
This evaluation was done as a part of the Treasury Evaluation Program, which manages third-party reviews of policies and operational programs in treasury management. The objective of this evaluation is to assess the implementation, operation, and performance of the CBP. The evaluation is intended to be useful for officials within the Department of Finance, participating Crown corporations, PWGSC, the BoC, parliamentarians, and the public. The scope of this evaluation covers the activities of the CBP since its inception in April 2008 until August 2012, and was performed during the period from July 2012 to December 2012.
2.2 Evaluation Methodology
The evaluation addressed six issues as follows:
|Evaluation Issue||Questions to Address Issue|
|1. Alignment of the CBP with the roles and responsibilities of the federal government||In what ways and to what extent is the CBP consistent with federal government roles and responsibilities?|
|2. Alignment of the CBP with the priorities of the federal government||In what ways and to what extent is the CBP consistent with federal government priorities?|
|3. Implementation Method||Has the CBP been implemented as originally planned?|
|4. Achievement of Objectives and Expected Outcomes||To what extent has the CBP achieved its objectives and expected outcomes? Are adjustments needed to improve the effectiveness of the program?|
|5. Demonstration of Economic Efficiency and Opportunities for Improvement||Has the CBP been implemented in an economically efficient manner? Are there ways to improve its efficiency?|
|6. Continued Relevance||To what extent is the CBP still relevant?|
Data Collection Methods
Data and information used in answering the evaluation questions were collected from independent sources, including results from interviews across organizations, reports, and documents.
Interviews were held with personnel from Crown corporations, PWGSC, Finance Canada, external data providers, and the BoC, who are directly involved in the management of the CBP. The interviews were structured around a set of questions tailored to the roles of the groups being interviewed. The questions were vetted by the Internal Audit and Evaluation group of the Department of Finance.
Documents related to the governance and operations of the CBP were reviewed, as were financial reports of Crown corporations for the period from 2007 to the latest available fiscal year. A full list of the documents reviewed is given in Annex B.
CBP loan data of the entire loan portfolio since inception of the program was obtained as a spreadsheet. This data was used in combination with historic GoC rate data from the BoC to prepare estimated performance results for the CBP.
Specific loan, balance sheet, and rate data sources are:
- An Excel download, CSExport.xls, of the TMS CBP loan portfolio, as at August 23, 2012;
- The Annual Reports of BDC, CMHC, and FCC from 2007 to the latest available fiscal year;
- GoC interest rate data from the BoC website;
- Performance data from the 2005 KPMG Review of Borrowing Framework of Major Federal Government-Backed Entities; and
- CMB spread data.
2.3 Evaluation Limitations
The main limitation of this evaluation concerns the performance estimates for both the spread savings and overall profitability of the CBP. The estimates were prepared using loan data from the TMS and rate data from the BoC since 2008. As managerial performance accounting relative to profitability is not done for the CBP, there is no independent source to compare and validate the estimates. This limitation means that the performance estimate can only serve as a general indication of performance. There is little to no comparable data available concerning Crown corporation spreads on short-term debt following the introduction of the CBP, so efficiency savings estimates are based upon historic spread levels prior to 2008. The interest-rate risk sensitivity of the CBP was calculated using the assumption of a mix of GoC debt instruments used to fund Crown corporation loans. This limitation means that the market-risk estimate can only serve as a general indication of risks in the CBP.
3. Evaluation Findings
Issue 1: Alignment of the CBP with the roles and responsibilities of the federal government
The evaluation evidence has shown that the CBP is aligned with the roles and responsibilities of the federal government.
As indicated above, the CBP was created in 2008 to facilitate the borrowing needs of several major Canadian Crown corporations. The debt obligations of these Crown corporations, as Agents of Her Majesty in Right of Canada, are effectively obligations of the GoC, since Her Majesty in Right of Canada is ultimately responsible in the event that the Crown corporations are unable to satisfy those obligations. The FAA that defines the federal government’s financial roles and responsibilities rests the authority for Crown corporation borrowings with the Minister of Finance. In particular, paragraph 3 of Section 127 of the FAA specifies that “No Crown corporation shall enter into any particular transaction to borrow money without the approval of the Minister of Finance […].”
In addition, as mentioned before, the enabling legislation of each participating Crown corporation authorizes the Minister of Finance to lend money out of the CRF to the Crown corporation on any terms and conditions that the Minister may fix (i.e., Farm Credit Canada Act (s. 12(2)), Canada Mortgage and Housing Corporation Act (s. 21(1)), Business Development Bank of Canada Act (s. 19)). Part III of the FAA is concerned with public disbursements, and Sections 33 and 34 detail requirements concerning delegated authorities and internal controls concerning CBP payments out of the CRF. Section 34 states that no payments will be made out of the CRF unless the Minister of Finance, or another authorized person, certifies that the payee is eligible for or entitled to the payment. As part of the Section 34 approval process, at the end of each week, the Lending Desk establishes a borrowing ceiling for each Crown corporation for the upcoming week, based on the forecasted borrowing information received from Crown corporations. The borrowing ceiling is approved by the Director, Financial Markets Division, prior to any loan disbursements being made and communicated through TMS. The ceiling limit is an internal limit used for Section 34 approval and can be adjusted, based on the needs of the Crown corporation and subject to further approval by the Director, Financial Markets Division. Accordingly, under the Crown Borrowing Program Operations Manual, Roles and Responsibilities, Finance Canada is required to approve borrowing transaction tickets that comply with the weekly borrowing ceiling.
Finally, when they were interviewed, all managers stated that, in their view, the CBP was in alignment with government roles and responsibilities.
Issue 2: Alignment of the CBP with the priorities of the federal government
The evidence from both document reviews and interviews has shown that the CBP is aligned with the priorities of the federal government.
The CBP was introduced in the section entitled “Deeper and Broader Domestic Markets” of Budget 2007. In 2007, the priorities of the federal government included:
- Minimizing total debt costs;
- Maintaining a liquid and well-functioning GoC bond market;
- Providing an effective administrative framework.
Government priorities since then have continued to include these or similar priorities. The Debt Management Strategy for 2012-2013 has objectives of raising stable and low-cost funding and maintaining a well-functioning GoC securities market. Similarly, one of the organizational priorities of Finance Canada is “Sound fiscal management” by ensuring that there is “sufficient funding for government debt management operations while providing appropriate flexibility to adapt to changing circumstances, and timely, cost-effective, and well-managed funding for Crown corporations (Department of Finance Canada, 2012-13 Report on Plans and Priorities, page 6).”
An analytic review of the lending operations of the CBP since 2008, using loan data from TMS and rate data from the BoC, shows that spread costs have been reduced and the net CBP lending and funding operation has been profitable.
The analysis detailed in Annex C results in estimated spread savings of $93 million for the period April 2008 to December 2011 (i.e., 3.5 years). Due to market conditions, this is larger than the $90 million over five years discussed in Budget 2007. Part of the additional savings can be attributed to the global financial crisis of 2008 and 2009, which resulted in increased estimated spreads for Crown corporation long-term debt. Also, Crown corporations increased their business during that time of illiquidity as business and agricultural borrowers relied upon Crown corporations for increased lending.
The analysis in Annex C also provides an estimate for the total performance of the CBP that shows that net accrual income of the loan assets and implied GoC funding liabilities was a small negative number that was not different from zero considering the error bounds of the calculation method. There is also a mark-to-market gain arising from longer-term fixed loans that are funded with decreasing, shorter-term funding rates. The combination of neutral net accruals and mark-to-market gains results in profitable operations for the CBP.
The CBP resulted in a shift from Crown corporation debt issuance to GoC debt issuance. This led to an increase of about $34 billion of GoC debt by 2011, consistent with debt management objectives. The 2008 economic downturn also resulted in increased issuance of debt by the government, which was met by strong global demand for GoC debt and was easily absorbed by investors.
The governance documents and operational procedures in place for the CBP have provided for an effective administrative framework for the CBP. The Crown Borrowing Program Operations Manual delineates the roles and responsibilities of the organizational groups involved in the program. The manual also defines loan transaction rules that ensure loans are priced fairly, executed promptly, and are sized appropriately for the business needs of Crown corporations. The TMS provides for straight-through processing from loan ticket to payment and accounting, thereby ensuring CBP operational efficiency and accuracy.
The above analytical review of the loan portfolio and of the Crown Borrowing Program Operations Manual shows that the CBP activities and objectives are aligned with government priorities as they are established to provide cost-effective, flexible, and timely funding to participating Crown corporations and to increase the operating efficiency and liquidity of the GoC debt market.
Issue 3: The manner in which the CBP has been implemented relative to the original plan
The CBP has been implemented largely as outlined in the original plan.
The Crown Borrowing Program Operations Manual defines operational methods and procedures. Discussions with managers and reviews of the systems, including TMS and CYCLiC, showed that operations were consistent with the original document.
Changes were made over time to enhance TMS functionality in order to reduce manual processes and to manage increased loan diversity. These changes included functionality for administrative forecasting, error correction, audit, internal FAA controls, and reporting.
Other differences occurred due to the introduction of the EFF, which used the operational framework of the CBP to manage loans to the CMHC and BDC during the global liquidity crisis period of 2008-2009. EFF loans had loan terms that were not part of the original CBP loan terms. Loan amounts to Crown corporations for the CBP were also larger than originally planned due to the effects of the Business Credit Availability Plan. As a result of these two factors, loan amounts and numbers managed by the TMS of the CBP were larger than originally planned, as shown in Table 1.
The following topics were investigated concerning CBP implementation.
3.1 Crown Corporation Treasury Management
At initiation of the CBP, it was expected that Crown corporations would be able to reduce cash balances over time. Indeed, as shown in the table below, cash balances at Crown corporations decreased significantly as the CBP was implemented from 2008 to 2009; this was followed by only slight decreases in subsequent years. Cash balances did not decrease further, and Crown corporations have given a number of reasons for holding cash balances. Crown corporations, Finance Canada, and the BoC all wanted the liquidity buffer that cash balances provide against liquidity shocks. Crown corporations also stated they could invest cash balances on a daily basis at a slight profit. Finally, the early cut-off time of 9:30 a.m. for same-day loans (up to $100 million) was mentioned as a contributing factor in keeping cash balances, but no defined relationship between the loan cut-off time and the ability of Crown corporations to reduce cash balances was given. Crown corporations questioned the need for the early cut-off time and requested that the time be moved to the afternoon to allow flexibility to deal with their funding flows. The BoC stated they required a 12:00 a.m. cut-off time in order to meet financial market constraints. Finance Canada has indicated they require a 9:30 a.m. cut-off time to meet their own constraints, which work back from the BoC limit.
Recommendation 1: The Department of Finance should investigate the constraints, costs, and benefits, including the effect on liquidity holdings of Crown corporations, of changing the loan cut-off time. Given the findings, the CBP should optimize the loan cut-off time to meet the needs of all parties.
3.2 Extraordinary Financing Framework Loans
As a result of the global financial crisis, the federal government announced the EFF in Budget 2009 as a means to make available up to $200 billion of funding. The EFF provided the means to leverage the operational infrastructure of the CBP to lend money to Crown corporations in extremely large amounts and with little notice. The EFF relied upon CMHC and BDC to originate loans and purchase assets in their areas of banking expertise, upon Finance Canada to manage the debt structure used to fund the EFF, and upon the BoC to issue the debt. The EFF resulted in increased loan-processing activity for CBP operations as about $78 billion in loans were made to the BDC and CMHC. The EFF, therefore, made efficient use of the resources and areas of expertise already in place, and the operational ability of the CBP functioned seamlessly in facilitating the cash flows arising out of the EFF.
Issue 4: The degree to which the CBP has achieved its objectives and expected outcomes
The CBP has achieved its objectives and expected outcomes.
There were three objectives established for the CBP in Budget 2007, and six guiding principles were later adopted for the expected outcomes of the program.
The first objective of the CBP, as per Budget 2007 and as stated in the Crown Borrowing Program Operations Manual, was:
to provide funding on a flexible and timely basis to meet the business needs of the participating Crown corporations.
According to the loan data provided by TMS, there have been over 5,600 loans transacted for a total loan amount of $423 billion from inception on April 1, 2008 to August 23, 2012. This is strong evidence that the CBP has provided funding to meet the business needs of Crown corporations.
The Crown Borrowing Program Operations Manual details the terms under which loans can be made. For instance, loans of up to $100 million can be arranged on a same-day settlement basis, and loans of over $1 billion can be arranged for a settlement notice period of four days or more. These terms are adequate to meet the business requirements of Crown corporations, given their past borrowing patterns and ongoing business needs. The larger loan amounts, which are available after four days, are more flexible than those that can be obtained from the debt capital markets, due to the ability to know with certainty today that a loan will be available with GoC market pricing.
Loans can be structured on a fixed-rate or floating-rate basis, and with full principal repayment at maturity or on an amortizing principal basis. Once again, this adequately meets the business needs of Crown corporations, and is more flexible in structure than the offerings of debt capital markets.
Loan data evidence reveals that the transacted loans have made use of the above flexibilities. Further, during interviews with Crown corporations, Finance Canada, BoC, and PWGSC, managers discussed amortizing loan structures and fixed-rate versus floating-rate loans, and stated that, in their opinion, this objective has been met.
The second CBP objective was to consolidate the issuance of government-guaranteed Crown corporation debt into direct GoC issuance in order to add liquidity to the bond market and to ensure that the market functioned well. Table 1 on page 2 shows the total loans outstanding at various year-ends. All of these loans, of which roughly $34 billion were outstanding at the end of 2010 for the CBP, were funded through the issuance of GoC treasury bills. This treasury-bill issuance was well received by investors and supported the proper functioning and liquidity of the GoC debt market. Interviews with Finance officials have shown that the CBP has resulted in increased debt issuance.
The third CBP objective was to have an effective administrative framework. Reviews of the governance and operational documents as discussed earlier, as well as interviews with managers, have shown that this objective was met.
There were six principles established to guide the CBP framework, as contained in the Crown Borrowing Program Operations Manual. These principles were all followed in CBP operations as discussed below.
- Provide loans at the Government’s estimated cost of funds under arrangements comparable to or more favourable than those available in the public market;
Finding: Loans were priced off the GoC curve using CYCLiC, at more favourable levels than what would have been available to Crown corporations in public markets, given Crown agency spreads.
- Be consistent with the Borrowers’ corporate mandates and business objectives;
Finding: Governance was consistent with the FAA, and loans were structured in a manner consistent with Crown corporation mandates and objectives.
- Be responsive to the changing needs of the Borrowers;
Finding: Loan-making ability was adapted to market needs. For instance, the EFF and some minor operational program changes were implemented as requested by Crown corporations, giving evidence of responsive actions to changing borrower needs.
- Be consistent with the Government’s debt strategy objectives, borrowing programs and cash management practices;
Finding: Increased issuance of GoC debt at reduced spread costs was consistent with the Government’s debt strategy objectives. Crown corporation funding forecasts were prepared and forwarded to the Department of Finance as required by the Crown Borrowing Program Operations Manual. Loans were transacted in a manner consistent with the procedures stated in the Crown Borrowing Program Operations Manual.
- Require that Borrowers practice prudent financial-risk management in accordance with internal risk management policies and comply with applicable Minister of Finance guidelines;
Finding: Discussions with Crown corporation borrowers showed that the funds they borrowed were consistent in amount and structure with their business lending needs. Crown corporations indicated that they practiced prudent financial-risk management, as required by Minister of Finance guidelines.
- Operate transparently, be subject to regular review, and have accountabilities clearly defined;
Finding: CBP governance and operations documents contained clearly defined accountabilities and roles for Crown corporations, Finance Canada, BoC, and PWGSC. Financial statements of Crown corporations and reviews of these provided transparency. The program was periodically reviewed at a high level by the cross-divisional Oversight Committee, and borrowing activities were reported on a regular basis to the FMC. Accounting information under the CBP is also regularly audited by the Office of the Auditor General and included each year in the Public Accounts of Canada.
The following topics were studied concerning CBP objectives and expected outcomes.
3.3 Interest Rate Spreads
Crown corporations have benefitted from reduced borrowing spreads by an estimated $93 million from mid-2008 to the end of 2011, as detailed in Annex C. Crown corporations also increased their loan issuance above what was originally planned. The CBP was instrumental in providing the added funding required for Crown corporations to operate during the 2008-09 liquidity crisis, and thus, supported Canadian companies and helped save jobs as commercial lines of funding disappeared.
3.4 Balance Sheet Simplification
The assets and liabilities on Crown corporation balance sheets are significantly simpler now that they are no longer raising funds in the structured note market. The liquidity of the structured note market decreased sharply following the global financial crisis, resulting in decreased issuance and increased counterparty risks, so that this funding option was not a viable funding alternative for Crown corporations. According to the 2012 Q3 Global Structured Notes League Table report issued by Bloomberg, structured note issuance peaked in 2008 at about $60 billion per quarter before falling to about $20 billion per quarter in 2009, where it still remains at Q3 2012. Balance sheet simplification has allowed Crown corporations to reduce personnel at high managerial levels, reduce operating costs, and refocus senior managerial efforts on other aspects of their businesses.
There has been a simplification of treasury positions as complex funding structures have disappeared following the CBP introduction. As a result of this, skills are being lost due to lack of activity, and the work content has become less intellectually challenging. Also, the reduction of Crown corporations’ workforces, while only amounting to about 1 to 2 employees each, has decreased the number of employees with higher skill sets and abilities. These negatives are offset by the cost savings achieved as a result of reduced personnel requirements.
Issue 5: The economic efficiency of the CBP and opportunities for improvement
The CBP has increased economic efficiencies of debt management of Crown corporations and the GoC.
The CBP has centralized funding activity for Crown corporations. It uses flow-through loan data processing from front to back office, minimizing personnel and operating costs. It has appropriate governance and operational documents that establish clear roles and responsibilities for Crown corporation borrowers, lending officers, loan accounting, loan payment processes, and loan activity approval and oversight.
The efficiency increases, many of which have been discussed previously, include:
- Decreased relative costs for Crown corporation funding;
- Increased flexibility and timeliness for Crown corporation funding;
- Loan pricing set at the GoC level, which resulted in setting fair transfer pricing levels;
- Increased issuance of GoC debt, which supported debt management objectives;
- Simplification of Crown corporation balance sheets, causing a reduction in swap credit risk for structured notes and reduced operational costs for Crown corporations;
- Reduced staffing needs for Crown corporations, with no increase in staffing at Finance Canada or the BoC;
- Ability to utilize CBP operations for implementation of the EFF;
- Moderate and appropriate cost of managing the CBP, as estimated by the chargeback calculation and as paid for by Crown corporations.
The following topics were investigated concerning CBP efficiency and improvement opportunities.
3.5 Distinct CBP Fund Account
Currently, rigorous accounting for the CBP is done within the Department of Finance for Crown corporation loans, as required by the FAA. A more comprehensive management accounting for the full asset and liability structure of the CBP is not performed. Best practice in industry and finance, as recommended by regulatory bodies, is for organizations to have full understanding of the risks of their business activities. For instance, the regulator for private-sector banks, the Office of the Superintendent of Financial Institutions Canada, states on page 11 of its Corporate Governance Guideline, August 2012 Draft, that:
To manage risks effectively, FRFI [Federally Regulated Financial Institutions] Boards and Senior Management need to have a full understanding of the risks attendant to the FRFI’s business model including each business line and product, and how they relate to the FRFI’s strategy and Risk Appetite Framework.
The lack of a distinct CBP account increases the difficulty in obtaining a full understanding of total portfolio performance and risk, and in assigning management responsibility for these.
Establishing and managing the accounting process for a CBP fund account would result in added costs, as two to three employees would be required to perform the function. This cost is likely less than $500,000 per annum, which is much less than the $18 million of targeted spread savings. Further, Crown corporations have already reduced their headcounts and expenses by numbers greater than these, so adding the function does not imperil the overall savings of the CBP. A suggested structure of the CBP Fund account is presented in Annex E; Finance Canada may, however, wish to consider other structures.
Recommendation 2: The Department of Finance should consider the merits of establishing a distinct CBP Fund Account and implementing accounting controls and reporting for this account, with assigned responsibilities for management and oversight.
3.6 Interest-Rate Risk Management
The 2005 KPMG Review of Borrowing Framework of Major Federal Government-Backed Entities (page 19) stated:
Currently each individual [Crown corporation] Borrower has appropriate financial risk management practices in place. Centralization would not change the need to maintain such practices, but would ease the capability to aggregate reporting and understanding of financial risks.
The appropriate risk management practices that Crown corporations had in place prior to the introduction of the CBP have continued to be followed by them. Crown corporations are now able to very closely match the terms of their CBP funding loans with the terms of their customer loans. The result is that Crown corporations are able to better manage duration risks within Board-approved risk tolerance levels. This is consistent with the requirements for prudent risk management contained in Crown corporation lending agreements and in the FAA. The implementation of the CBP has effectively transferred duration risks from the balance sheets of Crown corporations and consolidated those risks within the CBP. The CBP, as a standalone entity, should now also employ appropriate risk management commensurate with its cost-saving objectives and risk tolerance levels to better ensure it achieves its cost-saving objectives.
CBP loans to Crown corporations are funded by issuance in the GoC debt market. Although Finance Canada does target a broad asset/liability structure for the CBP, some degree of duration mismatch typically remains between the loan assets to Crown corporations and the corresponding GoC debt liabilities. The Department of Finance structures the issuance of GoC debt to broadly match the expected amount and maturity of funding needed by the CBP. CBP loans can range from 1 day to 30 years in maturity but they largely consist of short-term loans of either 30 or 90 days or of fixed-term loans of 5 years. To fund these, Finance Canada issues a mix of three-month, six-month, and one-year GoC treasury bills. The result is often a mismatch in duration between each specific loan and the corresponding funding. Further, there is a basis risk created between the cost of funding and the loan revenue. Table 4 provides an estimate of the duration mismatch at August 23, 2012. The estimate is based on a high-level approximation of the maturity profile of the loans used to fund the CBP operations. The table shows the exposure in dollars for a given maturity point to a decrease in rate of 1 bp. The table shows that loans and assets do not align on maturity points, resulting in basis and yield curve shape risk. It also shows that the total estimated duration of the portfolio is non-zero, such that an increase in interest rates of 1 bp would result in a loss of about $1,357,000.
While the risks within the CBP are small relative to the overall risk in the $600 billion GoC debt, this is not the standard by which CBP duration risk should be measured. The CBP was expected to result in spread-cost savings in the order of $90 million over five years or about $18 million per annum, and the interest-rate market risks inherent in the CBP should be consistent with this objective. Assuming a duration risk of about $1.4 million, it would take an interest-rate increase of only 13 bps to incur mark-to-market losses equal to or greater than the expected annual spread savings. This level of rate increase is about 25% of the annual standard deviation of interest-rate movements, and therefore, has about a 40% probability of occurring during any particular year. Greater rate increases would result in losses greater than the anticipated savings.
There is also a significant basis risk. If one-month or three-month loans are funded using a mix of three-month, six-month and one-year treasury bills, then the funding cost of these loans will exceed the loan revenue, leading to losses whenever longer-dated rates are greater than shorter-dated rates. This is discussed in Annex C below. More closely aligning funding and loan maturities by issuing one-month or three-month treasury bills to fund one-month or three-month loans respectively would address this issue.
Recommendation 3: The Department of Finance should assess the merits of introducing a comprehensive interest-rate risk measurement and management framework for the CBP, including the use of matched debt funding and interest-rate swaps to manage residual duration differences.
3.7 Yield Curve Process
CYCLiC, the yield curve and loan-rate calculator, is used to produce rates for loans of 1 day to 30 years. The program has worked very reliably for loans that are one day to three months in maturity, which comprise the vast majority of loans. According to Crown corporations, CYCLiC sometimes produces long-term rates that are inconsistent with current market. Only a very few loans are fixed-rate loans of 5 to 20 years, but these loans tend to be large and of great economic sensitivity due to their duration. They are also largely concentrated within the activities of one Crown corporation, so even a few erroneous quotes could have a meaningful impact on that Crown corporation’s funding activities. Finance Canada believes that such discrepancies are the result of differences between market data suppliers. They occur when a Crown corporation compares CanPX rates (i.e., the source used by CYCLiC for long-term bonds) with a different market data source (e.g., Bloomberg).
On those occasions when a Crown corporation encounters rate quote discrepancies, the only course of action available is to wait for 15 minutes and hope the yield curve adjusts by the next quotation window. This is a concern if there are only one or two windows left in the day in which to agree to loan rates, i.e., if the 9:15 a.m. curve is in dispute.
Recommendation 4: The Department of Finance should upgrade the yield curve generator to allow Crown corporation users to request an immediate curve update outside of the scheduled quarter-hour system updates.
3.8 Number of Groups and Persons Involved
As a program that requires a coordinated effort involving people and systems on an ongoing basis, the CBP presents significant operational risk. Inaccessibility of requested funds could potentially result in a liquidity issue at the participating Crown corporations and must be avoided.
To minimize operational risk incidents, all processes are handled electronically through the TMS, including FAA-prescribed controls and electronic approvals. In addition, processes and procedures are regularly reviewed, and systems are tested on a daily basis to ensure accuracy. In the interviews with Finance Canada, PWGSC, and the BoC officials, there was a focus placed on operational details of the CBP and the need for error-free operations. Topics within this focus included rate confirmation, loan detail confirmation, and loan authority and approval.
A method to further decrease operational risk is by reducing the number of groups and people involved in daily operations. That said, a number of groups have to be involved, given requirements for the Department of Finance to approve transactions and PWGSC to manage payments. One option might be to remove all loan desk functions from Finance Canada, given the policy mandate of the officers responsible for front-office lending desk operations. Some oversight and approval responsibilities would need to remain with Finance Canada, however, as required by the FAA.
Recommendation 5: The Department of Finance should consider ways to restructure and consolidate CBP operations to reduce the numbers of active groups and participants to the extent possible, given legislative and other structural requirements.
3.9 Quality of Funding Forecasts
Crown corporations provide three different funding forecasts to Finance Canada. They provide a weekly forecast of the funds needed for the coming two weeks, on a quarterly basis they provide a forecast for the coming quarter and year, and on an annual basis they provide a forecast of their funding needs for the coming year. The latter forecast is a requirement of the FAA.
Discussions with Crown corporations and Finance revealed that forecasts were prepared as required and that the weekly forecasts for the following two-week period were the most practical. All Crown corporations and Finance agreed that the biweekly forecasts were sufficiently accurate. It was felt that the longer-term forecasts decreased in accuracy, and therefore, were less useful for business-planning purposes.
Crown corporations felt that providing a quarterly update to their funding forecast was not a productive use of their time as they did not use them internally, and actual results varied from forecasted results depending on market conditions. Only one person mentioned ever using the quarterly forecasts for report purposes.
Recommendation 6: The Department of Finance should allow Crown corporations to discontinue the provision of funding forecasts on a quarterly basis, as the ongoing biweekly and annual forecasts adequately meet the needs of all parties.
3.10 Netting of Loan Cash Flows
Netting of cash flows at the Crown corporation level would reduce the numbers and amounts of cash flows that occur each day. Netting would reduce operational risk by both lowering the number of settlements and decreasing the amount of cash by which a Crown corporation could be short. As it stands, if a Crown corporation expects to repay $200 million of loans but then to require $200 million of new loans, there is a risk that the Crown corporation repays the first $200 million, but does not receive the new $200 million loan. Netting would offset these cash flows at the Crown corporation level, eliminating this operation risk. Netting of cash flows may reduce the need by Crown corporations to hold large cash balances and investment accounts, thereby reducing the amount of debt issuance by GoC.
Finance Canada has indicated that netting would be difficult to achieve for same-day settlements within existing systems, in particular due to constraints related to cut-off times for same-day transactions with the Receiver General (RG) and the BoC. As a result, either same-day transactions would need to cease or a separate system would need to be used for same-day and other transactions, creating overlap and potential for error.
Netting would require development work on accounting systems and programs at Crown corporations and the Department of Finance. This work has been estimated to take two to four weeks for the accounting and IT groups at one Crown corporation.
Recommendation 7: The Department of Finance should create a process with Crown corporations to study and consider ways to net cash flows within the CBP.
3.11 Standby Funding Arrangements
Standby arrangements were established to provide financial liquidity to the CDIC and EDC. Participants felt that the terms of the standby facility placed no greater liquidity demands or operational risks on the CBP. The arrangements had little effect on the Crown corporations in question as they did not force them to alter their management of cash or of liquidity.
3.12 USD Capabilities
Crown corporations raise only a limited amount, about $200 million, in USD funding, primarily in the commercial paper (CP) market. PWGSC felt that they had modest currency needs outside of the CBP, including non-USD currencies that are best served by a commercial bank. The BoC had limited interest in providing USD funding as it fell outside of its main area of activity. While the EDC does have need for USD, the benefits of raising USD funding in the EDC name include increased name exposure to global investors and regulators, as well as increased expertise of its treasury staff. This has ancillary benefits when raising funds in other currencies, which comprise about 15% of its debt. Given the limited need by Crown corporations for USD funds and the probability that program changes would not improve USD funding levels, there is no strong need to implement a USD option for the CBP.
3.13 Amortizing Loans
Some Crown corporations have a business need to structure client loans on an amortizing basis. Although amortizing options exist under the CBP, Crown corporations find they are not able to easily and quickly structure these loans in the TMS and there are resulting asset/liability mismatches on their balance sheets.
Recommendation 8: The Department of Finance should modify TMS to more easily input amortizing loan structures.
3.14 GoC Issuance
One of the objectives in establishing the CBP was to improve the liquidity of GoC debt markets at a time when there was reduced need to issue debt for other government purposes. Increased issuance was needed to ensure regular auctions of the benchmark treasury bills and 2-, 5-, 10-, and 30-year bonds, thereby providing for a well-functioning and efficient debt market. Shifting about $34 billion of Crown corporation debt issuance to GoCs allowed this objective to be met bybolstering regular auctions of the benchmark treasury bills and 2-, 5-, 10-, and 30-year bonds.
3.15 Fairness of Loan Rates
The CBP uses CYCLiC to establish loan rates based upon current debt-market conditions. The procedures concerning loan dealing prevent either Finance Canada or Crown corporations from gaming the rate-set process. In consequence, any bias of loan rates would have to arise from debt-market characteristics. In Annex D, a discussion is presented concerning the dynamics of interest-rate movements and debt auctions. In that discussion, the conclusion is that there may be a bias created to the extent that there is any tendency for government-debt securities to increase in yield at the time of market auctions.
3.16 Fairness of CBP Chargeback
As per the CBP service agreements, Crown corporation users of the CBP are responsible for contributing to the costs of administering the CBP in accordance with an administrative cost formula. In total, the participating Crown corporations were charged about $430,000 for the program during 2011-12. The chargeback is compared to private market levels and on a cost-per-asset basis in the following analysis.
The CBP uses resources, internally from Finance Canada and the BoC and externally from Kalotay and Gmarkets, in order to operate. The cost of these resources is shared by Crown corporations, with fixed costs divided equally amongst the three, while variable costs are prorated based upon the number of loan transactions done.
The total costs of the CBP are estimated to be about $430,000 per annum. This figure is an estimate as some costs, such as total staff time required, are estimations in themselves. Of the total cost, about $100,000 is paid externally, and the balance of $330,000 is for internal charges.
This amount could be compared to the charges for desk space at a market dealer. A rule of thumb for dealers is that a market desk costs about $500,000 to operate per year. With a fully dedicated trader and a supervisor, this cost could rise up to $1,000,000 per year. The CBP does not require full-time dedication, rather about ¼ to ½ of that, so the range of expenses should be from $250,000 to $500,000 per year. Adding in the external fees gives a total range of $350,000 to $600,000 of reasonable costs. As $430,000 is within that range, the chargeback fee appears appropriate.
This total charge could also be expressed as a ratio of the loan issuance. The CBP acts as bond issuer and credit line provider for Crown corporations; these are services for which they had paid fees in the past. Currently, annual CBP issuance is about $6 billion; the costs are therefore about 0.72 bps (100 bps = 1%). This is an exceedingly small ratio, much less than the aggregate fees Crown corporations had been paying for bond issuance fees and commercial bank lines of credit. By this measure, the chargeback fee appears appropriate.
3.17 Backup Plans
Business continuity plans were prepared as part of the CBP operations framework and the details of the plans are contained in the document Business Continuity Plan. The plans consider and prepare for an exhaustive list of operational contingencies, including communications disruptions, personnel availability, and the need to relocate physical premises. Personnel are aware of the continuity plans and have been suitably trained.
3.18 Level of Funding Service
Prior to the introduction of the CBP, Crown corporations negotiated all funding transactions directly with private sector banks and investment dealers, and this effectively set the benchmark for funding service.
Banking credit facilities provided Crown corporations with ready access to short-term funding available throughout the business day. The credit facilities were negotiated with banks, required signed agreements, and entailed credit fees. Under the CBP, Crown corporations have access to same-day loans of up to $100 million until 9:30 a.m., with no fees.
Prior to the CBP, longer-term funding needs were met through treasury-bill, floating-rate note, structured note, and bond issuance. Floating-rate note, structured note and bond issuance required greater preparation and negotiation as it relied upon investment dealers accessing investor demand for Crown corporation debt offerings. Crown corporations also had to make use of currency and interest- rate swaps to manage the maturity and duration mismatch between the note liabilities and the customer loan assets.
Since the introduction of the CBP, loans have been structured to meet the terms of Crown corporation customer loans, so the need for currency and interest-rate swaps has decreased. Longer-term CBP loans, either floating or fixed, are now available on a same-day basis, greatly reducing transaction preparation and negotiation efforts. The maturity date of longer-term loans can be set from 1 day to 30 years, at the choice of Crown corporations. Bond issues in the debt capital markets are typically less flexible, often set to mature in whole-year increments. Investment dealers prefer, for reasons of economy, a few larger bond issues to many small ones. The reliance upon larger issues with limited maturity options requires Crown corporations to perform greater financial forecasting and planning, and to increase their interest-rate risk management activities.
CBP loans are priced off the GoC market. While Crown corporations had some ability to fund through structured notes at levels below the GoC market, this funding source was limited and created added liquidity and credit risk for Crown corporations. Pricing efficiencies have been achieved in floating-rate note and bond issuance. Floating-rate notes typically have to be issued at a spread over the floating-rate index, as floating-rate investors require liquidity and credit premium to invest their funds for longer periods of time. The CBP provides long-term floating-rate loans at zero spread to the floating-rate index. While investors have required an agency spread on fixed-rate bonds issued by Crown corporations, under the CBP Crown corporations are able to obtain long-term loans at zero spread to GoCs.
Since the introduction of the CBP, Crown corporations have been able to fund themselves at reduced cost with loans that better match the maturity and structure of their customer business. Crown corporations have lost some timing flexibility as markets are updated only every 15 minutes and same-day loans have a 9:30 a.m. cut-off time.
Issue 6: The continued relevance of the CBP
The CBP continues to be very relevant to Crown corporations and to the Department of Finance.
Crown corporations, in support of their ongoing business activities, will need to continue to refinance their existing loan portfolios and to fund additional loans as they arise.
The CBP has achieved economic efficiencies for Crown corporations through reduced operating costs, reduced balance sheet complexity, reduced counterparty credit risk, and through interest-rate spread savings that contribute to the efficiency objectives of Finance Canada and the GoC.
The CBP was instrumental in quickly introducing and managing the EFF. This ability to implement Government fiscal policy may be needed again in the future.
The evaluation found the CBP aligned with federal government priorities, as well as with its roles and responsibilities.
The evaluation also found that the CBP achieved its expected outcomes of providing for Crown corporation funding liquidity and price efficiency, and the enhancement of the function and liquidity of the GoC bond market.
The CBP has been implemented largely as outlined in the original plan. Its operations were consistent with the operational methods and proceduresas defined by the Crown Borrowing Program Operations Manual. Differences arose as changes were made to enhance TMS functionality and due to the implementation of the EFF program.
The CBP allowed for rapid and seamless implementation of the EFF program, a positive indication of the robustness and elegance of the governance and operational framework of the program.
The evaluation found that the CBP has achieved its objectives and expected outcomes. The three objectives established for the CBP in Budget 2007, providing for Crown corporation funding liquidity, price efficiency, and the enhancement of the functioning and liquidity of the Canada bond market, were met. Also, the six guiding principles adopted for the CBP were followed.
The CBP has increased the economic efficiencies of the debt management of Crown corporations and the GoC. The program has centralized funding activity for Crown corporations. It uses flow-through loan data processing from front to back office, minimizing personnel and operating costs. It has appropriate governance and operational documents that establish clear roles and responsibilities for Crown corporation borrowers, lending officers, loan accounting, loan payment processes, and loan activity approval and oversight. The efficiency of the CBP could be greatly increased through the creation of a CBP Fund account that would permit increased management accounting, improved risk management, and better alignment of the loan and funding maturity structure. This is the most important finding and recommendation of the evaluation.
The CBP continues to be very relevant to Crown corporations and to Finance Canada, as Crown corporations will need to continue to refinance their business activities and the CBP results in efficiencies that are aligned with Finance Canada’s priorities.
The evaluation resulted in the following eight recommendations for improving the CBP.
- The Department of Finance should investigate the constraints, costs, and benefits, including the effect on liquidity holdings of Crown corporations, of changing the loan cut-off time. Given the findings, the CBP should optimize the loan cut-off time to meet the needs of all parties. (Issue 3)
- The Department of Finance should consider the merits of establishing a distinct CBP Fund and implementing accounting controls and reporting for this account, with assigned responsibilities for management and oversight. (Issue 5)
- The Department of Finance should assess the merits of introducing a comprehensive interest-rate risk measurement and management framework for the CBP, including the use of matched debt funding and interest-rate swaps to manage residual duration differences. (Issue 5)
- The Department of Finance should upgrade the yield curve generator to allow Crown corporation users to request an immediate curve update outside of the scheduled quarter-hour system updates. (Issue 5)
- The Department of Finance should consider ways to restructure and consolidate CBP operations to reduce the numbers of active groups and participants to the extent possible, given legislative and other structural requirements. (Issue 5)
- The Department of Finance should allow Crown corporations to discontinue the provision of funding forecasts on a quarterly basis, as the ongoing biweekly and annual forecasts adequately meet the needs of all parties. (Issue 5)
- The Department of Finance should create a process with Crown corporations to study and consider ways to net cash flows within the CBP. (Issue 5)
- The Department of Finance should modify TMS to more easily input amortizing loan structures. (Issue 5)
Annex A: Matrix of Results
|1. Alignment of the CBP with the roles and responsibilities of the federal government||Evidence and assessment of alignment of the CBP and roles and responsibilities of the federal government||
Documents defining roles and responsibilities
Key informant interviews
|Objectives of CBP align with federal roles and responsibilities.
All interviewees found the CBP aligned with the roles and responsibilities of the federal government.
|2. Alignment of the CBP with the priorities of the federal government||Evidence and assessment of alignment of the CBP with the priorities of the federal government and relevant departments||Documents defining priorities of GoC, Finance Canada, BoC, Crown corporations, and the RG
Key informant interviews
|Objectives of CBP align with federal government priorities.
All interviewees found the CBP aligned with the priorities of the federal government.
|3. The manner in which the CBP has been implemented relative to the original plan||3.1 Variance between planned and actual operation, governance, and procedures since implementation of the CBP
3.2 Data concerning funding levels and sources and the variance between planned and actual CBP usage
|Documents about the original plan and current operation, governance, and procedures (Finance Canada, BoC, Crown corporations, Budget 2007, KPMG, RG)
Key informant interviews
|The CBP has largely been implemented as originally planned. Differences are in greater loan volumes and the addition of the EFF. Some system improvements were made to TMS to increase functionality.
Interviewees felt the CBP was implemented according to the original plan, but that volumes were greater and the EFF was an addition.
BoC and Finance Canada personnel felt implementation was consistent with the original plan, except for the EFF, TMS modifications, and volumes.
Loan funding amounts are higher.
|4. The degree to which the CBP has achieved its objectives and expected outcomes||4.1 Operational results of the CBP
4.2 Stakeholders’ assessment of degree of achievement of objectives and expected outcomes
|Finance Canada, BoC, Crown corporations, RG planning and performance documents related to the CBP
Key informant interviews
|Crown corporations have obtained funding savings, and the liquidity and depth of the GoC market has increased.
Interviewees all felt the objectives of bond liquidity and Crown corporation borrowing liquidity and price were achieved. None of the interviewees mentioned the basis and duration risks of the portfolio.
|5. The economic efficiency of the CBP and opportunities for improvement||
5.1 Evidence of efficiency improvements
5.2 Opportunities for improvement identified by stakeholders, including feasibility
5.3 Operational results of the CBP concerning funding levels, costs, risk, transfer pricing and staffing levels
|Documents about current operation governance and procedures
(Finance Canada, BoC, RG, Crown corporations)
Key informant interviews
Finance Canada, BoC, RG, Crown corporations performance-related data
|Increased efficiency within Crown corporations because of reduced personnel needs and increased loan flexibility at reduced cost.
Report generation and cross-divisional communications were mentioned.
Staffing at Crown corporations is down, while no additional staff was required at Finance Canada or the BoC.
Loan pricing was always at the GoC level, so transfer pricing was fair, given all agent Crown corporations should be borrowing at the GoC level.
The cost of the CBP, as estimated by the chargeback calculation and as paid for by Crown corporations, is moderate and appropriate.
Operational risk can be reduced by decreasing the numbers of groups involved in operations.
|6. The continued relevance of the CBP||Evidence of a continued need for cost-efficient funding of Crown corporations||Documents from Finance Canada, BoC, Crown corporations
Key informant interviews
|Crown corporations will continue to need funding to operate their banking businesses, given loan growth.
The CBP has created efficiencies that are aligned with Government priorities.
Crown corporation personnel interviewed felt they would need to continue to have access to funding to operate their businesses.
Annex B: Documents Reviewed
The following documents were reviewed during the performance of the evaluation.
- Crown Borrowing Program Operations Manual, March 31, 2011.
- Service Agreements - Master, as well as BDC, CMHC, and FCC Agreements.
- Crown Borrowing Program / Extraordinary Financing Framework – Report on Activities, Department of Finance presentation, undated.
- Crown Borrowing Program Report,2008-2009, 2009-2010, 2010-2011.
- KPMG, Review of Borrowing Framework of Major Federal Government-Backed Entities, 2005.
- Financial Administration Act (RSC, 1985, c. F-11), as updated to 12-10-2012.
- Budget 2007, “Deeper and Broader Domestic Markets”.
- Minister of Finance, Financial Risk Management Guidelines for Crown Corporations.
- TMS Manual, March 31, 2011, Department of Finance.
- Business Continuity Plan Lending Desk, March 31, 2011.
- Administration Costs Formula, Excel spreadsheet, Department of Finance.
- Various public documents outlining plans and priorities of the Government of Canada, years 2008-2013.
- Department of Finance Canada, Report on Plans and Priorities, years 2008-2013.
- Bank of Canada, Medium-Term Plan 2010-12: Achieving Excellence Together.
- FCC, Corporate Plan of the FCC, 2012-13 to 2016-2017.
- BDC, BDC Corporate Plan Summary, 2012-13 to 2016-2017.
- CMHC, Summary of the Corporate Plan, 2012-2016.
- FCC, Annual Reports, years 2007-2011.
- BDC, Annual Reports, years 2007-2011.
- CMHC, Annual Reports, years 2007-2011.
- Department of Finance, Debt Management Strategy, years 2008-2012.
- OSFI, Corporate Governance Guideline, August 2012 Draft.
- Bloomberg, Global Structured Notes League Tables, September 2012 Q3.
Annex C: CBP Performance Estimation
Crown Corporation Spread Savings
Crown corporation spread savings are estimated by adding the savings on long-term, fixed-rate funding to the savings on short-term, floating-rate funding. The spreads on short-term and long-term funding differ, reflecting differing market demand for money market and bond instruments.
For long-term funding, the spreads of government-agency debt increased during the 2008-2009 liquidity crisis globally and in Canada. The CBP allowed funding to move from Crown corporation issuance to GoC issuance as this period began. As Crown corporation issuance ended, long-term market debt levels for government agencies in CAD must be inferred from similar debt instruments. The most liquid, longer-term debt issues that traded in Canada during that time were the CMBs issued by the CHT and guaranteed by the CMHC. The spread over GoCs for CMBs was about 10 bps prior to 2007; it gradually increased to 17-19 bps as CMB issuance increased in 2008. After the Lehman failure, CMB spreads briefly rose to 60 bps before returning to 25-35 bps from 2009 to 2012. Crown corporations stated that they could likely fund 10 bps better than CMBs due to their equal credit rating but limited issuance. (CMBs are viewed by investors as having large potential supply due to the amount of mortgages on Canadian bank balance sheets).
During the liquidity crisis, the EDC, BDC, FCC, and CMHC found that spreads on short-term CP debt actually tightened in Canada as global investors sought out safer investment alternatives to commercial-bank-issued money market debt. So, it could be argued that Crown corporations may have been able to issue CP debt flat to Canada treasury bills during this period, and that the CBP was of no benefit in achieving tighter borrowing spreads. For the purposes of this analysis, the assumption is that the savings reflected the long-term spread of 7 bps, as proposed by the 2005 KPMG report.
The following tables present estimated spread savings for the fixed and floating loan portfolios.
The spread savings for the fixed loan portfolio are based upon the CMB spreads less 10 bps. The floating-spread savings are based upon the assumption of a 7-bps spread savings.
Based upon these assumptions, the estimated spread savings is $93,000,000, not including 2012 results.
Overall Performance Estimation
The following analysis provides an estimate of the performance of the CBP portfolio based upon the assumption of a borrowing-rate mechanism and the macro properties of the CBP loan portfolio.
Effective Borrowing Rate
The CBP loan portfolio is funded through issuance of GoC treasury bills as managed by Finance Canada. As there is no distinct CBP Account, the cost of the funds must be inferred from an estimated funding mix based on discussions with Finance Canada.
In the Debt Management Strategy 2008-09 report, the funding requirements of the CBP were discussed in the section “Borrowing by Major Crown Corporations.” The future funding split for the CBP was estimated to be:
For planning purposes, based on discussion with the individual Crown corporations, $10 billion of this amount has been allocated to Treasury bill issuance and $5 billion to bond issuance.
In discussion with Finance Canada officials, it was learned that once the characteristics of Crown corporation borrowings became apparent, the funding activity was shifted to treasury bills, with an approximate 50%/25%/25% weighting between three-month, six-month, and one-year treasury bills. For the purposes of this analysis, the CBP portfolio is, therefore, assumed to borrow through the issuance of treasury-bill debt instruments, in accordance with these hypothetical weights. The average yield of these instruments, as weighted by the issuance proportion described above is, therefore, the effective borrowing cost for the CBP. The average duration of the funding portfolio is likewise the weighted average of the issued debt instruments.
The CBP loan portfolio consists largely of short-term loans of 1-month or 3-month rate maturity and of a few larger loans of 5- to 20-year maturity. The following analysis considers the profit effects of the CBP borrowing structure given this loan portfolio.
The following chart gives the time series of CBP borrowing and one-month treasury-bill rates since 2007. Note how the borrowing rate is generally greater than the one-month treasury-bill rate.
The following chart shows the time series of the yield spread between the borrowing rate and one-month and also for three-month treasury bills.
The chart above shows that the borrowing rate ranged from –25 bps to 80 bps greater than the one-month treasury-bill rate, with an average of about 20 bps from 2008 to 2012. For three-month treasury bills, the range was 0 bp to 40 bps above the treasury-bill rate, with an average of about 15 bps. This means any floating-rate loan that was priced off three-month treasury bills and funded using the CRF would have lost 0% to 0.40% of its face amount if held for one full year. This is a systemic risk that will continue in the future, whether interest rates increase or decrease, unless changes are made to CBP borrowing and risk management methods.
The longer-term fixed-rate loans of 5- to 20-year maturities have benefited from the CBP borrowing structure, as the loan rates to Crown corporations were greater than the effective borrowing rate. Further, as rates have not risen above those prevalent when the long-term loans were issued, the CBP has benefited as borrowings were rolled over at low rates. Had rates generally risen over the period, the CBP would have suffered losses.
TMS Loan-Based Performance Estimate
A performance estimate can be done by using the entire database of loan data contained in the TMS system and downloaded as the CSExport file. The loan data from this file, along with GoC rate data from the BoC, can be used to perform a loan-by-loan estimation. The estimation below includes both the accrual for each year and the period-ending mark-to-market value of the assets and liabilities.
|Crown||Type||2008||2009||2010||2011||2012||Total Accrual||Mark-to-Market Gain||Total Performance|
|BDC||Float||-454 979||-4 494 977||-32 869 740||-23 180 711||-4 382 206||-65 382 613||0||-65 382 613|
|BDC||Fixed||-4 445 818||-1 541 098||-195 447||-67 075||0||-6 249 438||7 827 648||1 578 210|
|FCC||Float||-2 822 315||-9 264 361||-21 181 166||-33 955 646||-10 055 087||-77 278 575||0||-77 278 575|
|FCC||Fixed||-8 000 587||-7 330 925||-7 750 189||1 982 474||1 566 291||-19 532 937||64 201 241||44 668 305|
|CMHC||Fixed||12 178 909||35 795 819||1 011 663||80 058 014||28 011 553||157 055 959||298 997 169||456 053 128|
|Totals||-11 387 604||371 026 059||359 638 455|
The accrual estimate is small in magnitude compared to the size of the CBP loan assets of $15 to $30 billion, and is within the margin of error of the estimation of being zero. The total result, including large mark-to-market gains in the CMHC fixed loans resulting from falling interest rates and short-funded loans, represents profitable operations for the CBP. These profits are a result of significant interest-rate mismatches that produced losses in the floating-rate loans of about $143 million, which were offset by profits of about $502 million in the fixed-rate loans.
Losses in the floating-rate loan book arose because the loan rates to Crown corporations are set off one month or three months, and differ from the funding rates achieved using three-month, six-month, and one-year treasury bills. As shown in the charts presented earlier, these longer-term rates are usually higher than the loan rates, so losses accrue. This is a systemic fund risk that needs to be addressed through funding or derivative hedging mechanism changes. Losses also arose due to duration differences, as the loans are largely one month or three months in maturity while the average funding maturity is six months.
The gains in the fixed-rate loan book occurred as rates fell during the loan periods and renewed funding for these fixed-rate loans was raised at ever decreasing levels. Had interest rates risen during the 2008-2012 period, the fixed-rate loan book would have lost money as funding levels increased but the loan levels remained unchanged.
Although the results in the table above appear to have losses in the floating-rate loan book offset by gains in the fixed-rate loan book, this should not be viewed as evidence that the two loan books provide proper hedges for each other. The floating-rate loans and the fixed-rate loans are not economic-rate hedges for each other because of net duration differences and because of risks of yield-curve shifts. In particular, a steepening in the slope of the short end of the yield curve, which resulted in an increased spread between the blended treasury-bill borrowing rate and the one-month and three-month lending rates, would increase the accrual losses on floating-rate loans.
Annex D: Fairness of Loan Pricing
The CBP is intended to provide loans to Crown corporations at prices consistent with GoC debt market levels. CYCLiC, the loan-pricing system, is used to do this. Loan rates are calculated by CYCLiC using secondary debt market data that is updated every 15 minutes, based on market price inputs provided by Gmarkets. The CYCLiC curve is constructed using the “Bid” side of the debt securities market, reflecting the higher rates and lower prices inherent in selling or issuing debt instruments.
The rules of loan-rate quotation and deal confirmation prevent gaming of these quotes to obtain rates that favour either Crown corporations or Finance Canada. Given the inability to game the system and lacking any error in rate calculation, any price bias would have to arise from debt-price processes. In a non-trending interest-rate market, with no drift up or down in interest rates, the movement in rates will follow a stochastic, random-walk process. The standard deviation of short-term rates was about 4-8 bps per day when rates were higher and is less than 3 bps under current rate levels. Crown corporations should, therefore, fund within 3 bps of the mean rate 68% of the time. Since CBP transaction rules prevent gaming quotes, Crown corporations cannot control when they will be above or below the mean, so any advantage they may sometimes obtain is completely random.
The natural bias for market rates to increase as debt auctions occur is referred to as an auction concession, and occurs as investor demand varies in anticipation of the added supply of new debt issues. CYCLiC rates, which are quoted to Crown corporations whether or not there is an auction scheduled for that day, could be generally lower than rates that are realized by GoC through primary auctions, on the order of 0 to 2 bps due to this concession.
Annex E: CBP Fund Account
A CBP Fund account should be created to manage all cash flows associated with the program. The creation of an account would be consistent with the precedent set by the Exchange Fund Account, which is of similar size and complexity. Creation of the account would facilitate full managerial accounting and risk management systems, greatly increasing the efficiency and performance transparency of the CBP.
The Fund would make loans to Crown corporations and, in turn, borrow funds from the CRF at rates set by the issuance of GoC debt securities.
The asset side of the Fund, consisting of loans to Crown corporations, would operate just as the CBP does currently.
The liability side of the Fund, consisting of funding loans from the CRF, would be an addition to the existing program. The loans from the CRF would match the terms of the funds raised in GoC auctions as a result of CBP loan activity. The funding process would consist of the following steps:
- On lending money to a Crown corporation, the CBP Fund borrows daily money from the CRF.
- The CBP Fund would rebalance any duration risk that was created as a result of loan and borrowing-basis mismatches using interest-rate swaps.
- At the next GoC treasury-bill auction, the CBP Fund would aggregate all CRF borrowings and repay these by entering into a loan that matches the maturity and rate terms of the treasury-bill auction.
- The CBP Fund would rebalance any new duration risk created in repaying the daily floating-rate loan and entering into the treasury-bill-linked loan of greater maturity.
- On repayment of the Crown corporation loan, the CBP Fund would invest funds with the CRF or repurchase market GoC treasury bills that meet the maturity of the repaid loan, and then rebalance its duration risk.
- On maturity of the CRF loan, the CBP Fund would repay it using deposits the CBP fund has with the CRF or funds arising from the maturity of treasury-bill investments, and then rebalance its duration risk.
Under this process, the CRF account never absorbs any of the costs or risks created by CBP activities. Currently, all profits or losses arising from the CBP are paid into the CRF and not directly reported on. Also, under this process, the CBP Fund account becomes fully responsible for managing the cost and risks of the CBP. The profitability of the CBP would be measured and reported each year, consistent with government accounting standards. Duration risk would also be measured and managed in ways that are more transparent and consistent with the risk management requirements of the FAA.
The CBP Fund account would entail increased interest-rate risk-hedging activities. The skill set and organizational focus for this are more readily found at the BoC than in the Department of Finance. The added costs of performing all of the trading and risk management functions inherent in managing the fund are modest, given the existing skills and resources of the BoC. Given there are typically only one to six loans per day, this activity would require only a portion of a work day for a mid-level trader and a senior manager. Assuming ¼ of a day for the trader and ⅛ of a day for management oversight, the total cost including overhead is likely less than $200,000. Moving the desk would result in cost savings in Finance Canada that are likely to be similar in amount to the increased cost at the BoC, so that the total cost of CBP operations would not change significantly. Moving the loan desk to BoC would make the most efficient use of government resources, not only for risk management but also for loan pricing. If created, the CBP Fund account would address the accounting concerns raised in sub-section 3.5, the risk management concerns of sub-section 3.6, the yield curve concerns of sub-section 3.7, the operational risk concerns of sub-section 3.8, and the pricing update frequency concern of sub-section 3.18.
Annex F: Departmental Response and Action Plan
The Department is pleased to note that the evaluation report submitted by Kaufmann Financial Consulting concludes that the Crown Borrowing Program is consistent with Government of Canada priorities and aligned with the roles and responsibilities of the government. The evaluation found that the Crown Borrowing Program achieved its expected outcomes of providing for Crown corporation funding efficiency and flexibility, and the enhancement of the functioning and liquidity of the Canada bond market.
The report found that the Crown Borrowing Program facilitated the seamless implementation of the Extraordinary Financing Framework during the global financial crisis, a result that is attributed to the robust governance and operational framework of the program.
The evaluators concluded that the Crown Borrowing Program has increased the economic efficiencies of the debt management of the participating Crown corporations and the Government of Canada; however, they concluded that there may be scope to further improve efficiencies and operational processes. The Department of Finance agrees with this finding and has begun to assess the report’s detailed recommendations within the context of the original policy objectives established for the Crown Borrowing Program.
In the accompanying table of recommendations, management responses, and planned actions, the eight recommendations by Kaufmann Financial Consulting are grouped into three categories: Category 1, with emphasis on asset-liability management; Category 2, with emphasis on funding flexibility; and Category 3, with emphasis on operational risk and efficiency.
|Recommendation||Management Response||Action Steps||Lead||Date|
|2. The Department of Finance should consider the merits of establishing a distinct CBP Fund account and implementing accounting controls and reporting for this account with assigned responsibilities for management and oversight.||The Department agrees with this recommendation.||The Department and the Bank of Canada will assess the costs and benefits of establishing a distinct Crown Borrowing Program account. This assessment will reflect a broad review of government practices and the measures taken to address Recommendation 3.||Department of Finance and Bank of Canada||Analysis will be completed by December 2014.|
|3. The Department of Finance should assess the merits of introducing a comprehensive interest rate risk measurement and management framework for the CBP, including the use of matched debt funding and interest rate swaps to manage residual duration differences.||The Department agrees with this recommendation.
Comment: There are significant costs and risks associated with this specific recommendation that will require further examination in the context of the Government’s broader funds management responsibilities. This includes the upfront costs to establish the program as well as ongoing costs to operate the program efficiently and with the proper controls and oversight. The risks that will need to be considered include counterparty risk, operational risk and basis risk.
|1) The Department, in consultation with the Bank of Canada, will examine cost-effective options to more closely integrate the Crown Borrowing Program into the broader asset-liability management framework for the Government’s funds management activities.
2) Based on the outcome of the above review, appropriate enhancements to the asset-liability management framework will be implemented.
|Department of Finance and Bank of Canada||Analysis will be completed by March 2014.|
|Recommendation||Management Response||Action Steps||Lead||Date|
|1. The Department of Finance should investigate the constraints, costs, and benefits, including on liquidity holdings of Crown corporations, of changing the loan cut-off time. Given the findings, the CBP should optimize the loan cut-off time to meet the needs of all parties.||The Department agrees with this recommendation.||The Department, in conjunction with the Bank of Canada, the participating Crown corporations and Public Works and Government Services Canada, will review the feasibility of having a later loan cut-off time for same day funds.||Department of Finance and Bank of Canada||Analysis will be completed by December 2014.|
|4. Finance should upgrade the yield curve generator to allow Crown corporation users to request an immediate curve update outside of the scheduled quarter hour system updates.||The Department agrees with this recommendation.||The participating Crown corporations will be consulted on the optimal frequency of system updates (with the associated costs being charged to the Crown corporations).||Department of Finance||Upgrade will be completed by March 2014.|
|8. Finance should modify TMS to more easily input amortizing loan structures.||The Department agrees with this recommendation.||The participating Crown corporations will be consulted on modifying TMS to more easily input amortizing loan structures (with the associated costs being charged to the Crown corporations).||Department of Finance||Modification will be completed by March 2014.|
|Recommendation||Management Response||Action Steps||Lead||Date|
|5. The Department of Finance should consider ways to restructure and consolidate CBP operations to reduce the numbers of active groups and participants to the extent possible given legislative and other structural requirements.||The Department agrees with this recommendation.||The Department, in consultation with the Bank of Canada, will explore practical options to restructure and consolidate Crown Borrowing Program operations to make them more efficient.||Department of Finance and Bank of Canada||Analysis will be completed by March 2014.|
|6. Finance should allow Crown corporations to discontinue the provision of funding forecasts on a quarterly basis, as the ongoing biweekly and annual forecasts adequately meet the needs of all parties.||The Department agrees with this recommendation.||Crown corporations will be informed of the Department of Finance’s decision.||Department of Finance||Notification will be provided by May 31, 2013|
|7. The Department of Finance should create a process with Crown corporations to study and consider ways to net cash flows within the CBP.||The Department agrees with this recommendation.||The Department, in conjunction with the Bank of Canada and Public Works and Government Services Canada, will review the possibility of netting cash flows under the Crown Borrowing Program.||Department of Finance and Bank of Canada||Analysis will be completed by December 2014.|
 Please note that the CBP’s continued relevance is addressed on page 20 of this report.