“Improved conditions in funding markets” have prompted The Bank of Canada to start curtailing expanded collateral rules under its Standing Liquidity Facility, starting early next year.

Starting February 2, 2010, the temporary measure of allowing firms to use non-mortgage loan portfolios as eligible collateral will be gradually reduced from 100% to 20% of each participant’s total pledged collateral, the Bank of Canada said Thursday.

The BoC will introduce a new limit of 80% as of February 2, 2010. It will then be reduced to 50% on March 1, and to 20% on April 1.

The expanded collateral requirement were announced on October 14, 2008, as a temporary measure to provide firms with greater flexibility in managing their collateral, and to support institutions’ efforts to efficiently generate liquidity.

The BoC said that as part of its ongoing review of the collateral policy for the SLF, it has determined that there are efficiencies associated with limited use of the non-mortgage loan portfolio as collateral on a regular basis, so the 20% limit will continue permanently.

Under the new policy, the BoC will consider temporarily lifting this 20% limit in exceptional cases, for a very limited period, to accommodate the liquidity needs of individual participants when there are extremely large payment flows, it notes.

“These changes have no implications for the stance of monetary policy,” it adds. “The Bank of Canada continues to closely monitor global market developments and remains committed to providing liquidity, as required, to support the stability of the Canadian financial system and the functioning of financial markets.”

IE