The Bank of Canada is seeking comment on proposed criteria for including asset-backed commercial paper (ABCP) as collateral.

The central bank is seeking input from direct participants in the Large Value Transfer System, and other interested parties, on the proposed eligibility criteria for accepting ABCP as collateral for the Bank’s Standing Liquidity Facility (SLF).

Last year, the Bank of Canada announced that it would expand the list of securities eligible to be pledged as collateral for the SLF to include certain types of Canadian-dollar-denominated ABCP. The release stated that to be accepted as collateral by the Bank, ABCP would need to meet certain criteria. These include being bank-sponsored, covered by a liquidity provision that meets global standards, and backed by traditional assets of an acceptable credit quality. The release also noted that ABCP backed by collateralized debt obligations and other highly structured assets would not be considered at this time. As well, higher standards of disclosure and additional credit ratings would be required before the Bank would begin to accept ABCP as collateral.

Two broad policy objectives have guided the Bank’s assessment of the specific conditions that should be attached to the acceptance of ABCP as SLF collateral. “First, the eligibility criteria should mitigate any risks to the Bank that might be associated with accepting ABCP securities as collateral for the SLF. Second, the eligibility criteria should facilitate the development of a well-functioning market for ABCP by promoting more transparency for investors and by encouraging an active secondary market for these securities,” it explains.

Comments are due by March 14, and the Bank expects to announce the final terms and conditions for accepting ABCP as collateral for the SLF will be announced by March 31.

Also, as the market for ABCP in Canada is still evolving, the Bank says it intends to review these criteria in a year’s time and announce the results of that review by June 30, 2009.