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Canada’s foreign exchange reserves are owned by the federal government, but jointly managed under a relatively unique framework that is based on a partnership between the government and the central bank. This partnership is supported by a well-defined governance structure that ensures that the reserve portfolio is appropriately structured to meet its strategic objectives, that the government’s risk tolerances are respected, and that associated costs and risks are carefully managed. Canada’s reserves are primarily held to help meet the government’s prudential liquidity objectives. The foreign currency holdings also support the market’s general confidence in Canada. Given these objectives, Canada’s focus is on liquidity and safety of principal. Return, while important, is a secondary focus. To help manage risks in the portfolio, the asset structure is guided by a number of strategic portfolio parameters. These parameters ensure that the reserve assets support the strategic priorities of liquidity and safety of principal while also striving to minimize the cost of holding reserves. To better manage interest rate and foreign exchange risks, Canada manages its reserves using an asset and liability matching framework. Under this approach, every foreign currency asset is funded by a liability of the identical currency and term-to-maturity. This effectively hedges the portfolio’s foreign exchange and interest rate exposures, although significant basis risk can remain. The asset and liability matching framework has served Canada extremely well, effectively eliminating foreign exchange and interest rate risk at relatively low cost. There are a number of factors that explain this. First, Canada has a floating exchange rate with very infrequent intervention. As a result, the reserve portfolio stays hedged. Second, Canada’s high credit quality and well-developed capital markets mean that it can fund the foreign exchange reserves relatively cheaply, both directly and synthetically. This allows the portfolio to meet its liquidity and capital preservation goals and, typically, earn a positive net return.
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See Nugée ( 2015).
It could be at levels either above or below what the domestic currency would trade at if left to freely float.
Domestic cash is held in the form of a demand deposit at the Bank of Canada. The deposit is cost-neutral (it earns a rate of interest roughly equal to the cost of funding). This deposit complements the foreign exchange reserves as it represents a source of domestic currency liquidity that can be easily accessed without the need for any financial market transactions (i.e., no need to sell or repo foreign exchange reserves).
Sub-sovereign debt refers to obligations issued by hierarchical tiers below the ultimate governing body of a nation, country, or territory. This includes debt from bond issues made by states, provinces, cities, or towns.
Based on the second-highest rating among those provided by Moody’s Investors Service, Standard & Poor’s, Fitch Ratings, and Dominion Bond Rating Service.
See also Part V: “Governance and Risk Management.”
Financial Administration Act is available at http://laws-lois.justice.gc.ca/eng/acts/f-11/.
Bank of Canada Act is available at http://laws-lois.justice.gc.ca/eng/acts/B-2/.
Currency Act is available at https://laws-lois.justice.gc.ca/eng/acts/C-52/.
See also Chap. 6.
See the Statement of Investment Policy for the Government of Canada (August 2018).
See also Chap. 19.
These include, among others, events such as the 1997 Asian Financial Crisis, the 1998 Russian debt default, the 2008 global financial crisis, and the 2010 European debt crisis.
Zurück zum Zitat Finance Canada. (2017). Report on the Management of Canada’s Official International Reserves April 1, 2017 – March 31, 2018. https://www.fin.gc.ca/activty/oirrep/oir-roli-18-eng.asp Finance Canada. (2017). Report on the Management of Canada’s Official International Reserves April 1, 2017 – March 31, 2018. https://www.fin.gc.ca/activty/oirrep/oir-roli-18-eng.asp
Zurück zum Zitat Nugée J (2015) Current issues in central bank reserves management. Asset-liability management with ultra-low interest rates. In Proceedings of OeNB Workshops. March 11 2015. Nugée J (2015) Current issues in central bank reserves management. Asset-liability management with ultra-low interest rates. In Proceedings of OeNB Workshops. March 11 2015.
- Management of Canada’s Foreign Exchange Reserves
- Chapter 10
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