Reuters: Regulatory News: UPDATE 1-Canada needs financial reforms to absorb shocks-BoC

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UPDATE 1-Canada needs financial reforms to absorb shocks-BoC Jun 14th 2012, 18:18 Thu Jun 14, 2012 2:18pm EDT * More central counterparty services needed * Stronger market "plumbing" will help absorb shocks * European crisis could have impact on Canada By Rita Devlin Marier MONTREAL, June 14 (Reuters) - Canada's financial system is solid but could be hit by a worsening of the European debt crisis, a senior Bank of Canada official said on Thursday, adding that inc reased use of central clearinghouses wou ld help the country absorb any such shock. "Canadian markets have remained relatively stable, and our banks continue to have good access to wholesale funding markets," Agathe Cote, deputy governor of the central bank, said in prepared text of a speech she was delivering in Montreal. "Nonetheless, a deterioration in the situation could have a considerable effect on Canada through trade, confidence and financial channels." She said Canada took a step towards stronger markets with the creation in February 2012 of central counterparty clearinghouse services for the repo market - in which government securities are sold with an agreement to repurchase them at a later date. The move was part of a broader global drive to strengthen banks and financial markets to reduce the risk of another crippling financial crisis. Regulators say th is kind of improved market infrastructure, t he plumbing of the trading system, will make markets more transparent and reduce risk. The bank argues that having a trusted intermediary between buyers and sellers reduces anxiety about counterparty credit risk and prevents funding markets from seizing up as they did in late 2008. "We will never have a risk-free financial system. That's why we need to take measures to render it more resilient to shocks that may occur, either from abroad or domestically." The repo market is key to ensuring liquidity for banks and money markets overall. Repo positions represent about 5 percent of Canadian-dollar denominated assets on the books of Canadian banks, at about C$90 billion ($87.4 billion), Cote said. She called for an expansion of central counterparty services to cash transactions in fixed-income securities and repo transactions negotiated by intermediaries, including those with anonymous counterparties. A third phase would involve repo transactions using a set of instruments as collateral. The Canadian Derivatives Clearing Corp (CDCC) operates the clearing services on the Montreal Exchange, both of which are owned by TMX Group, which also owns the Toronto Stock Exchange. TMX could be acquired by a consortium of Canadian banks if a deal now proposed is approved by regulators. Link this Share this Digg this Email Reprints

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