The Bank of Canada has revised the eligibility requirements for certain assets that it will accept under the Standing Liquidity Facility.

Since August 2007, the central bank has been exploring ways of providing liquidity to the financial system. One of these initiatives, has been to expand the range of acceptable collateral for its Standing Liquidity Facility (SLF), including accepting asset-backed commercial paper (ABCP) as collateral.

However, when the Bank first announced the eligibility criteria and conditions for accepting ABCP as SLF collateral, it also indicated that there were outstanding issues related to previously securitized assets and that a review was ongoing.

Now it has decided, after further study and consultation with market participants, to revise its eligibility criteria to permit exposure to certain assets that were securitized prior to being acquired by the ABCP conduit, “provided that specific program and transparency requirements are met”.

These requirements include:

the ABCP program must be sponsored by a deposit-taking institution that is federally or provincially regulated and that has a certain minimum stand-alone credit rating; and

the liquidity provider must provide funding in all circumstances except in the event of insolvency of the conduit or against defaulted assets.

Also, the program must not contain any exposure to highly structured products, such as collateralized debt obligations, securities that are backed by exposures to CDOs, securities that have exposure to credit-linked notes, credit default swaps, or similar credit derivatives.

The transparency requirements include:

> a single concise document that is provided by and validated by the sponsor, and that includes all relevant investment information; and

> agreement by the sponsor to provide timely disclosure to all investors of any significant change to the information.

IE