Canadian institutions should not fear using liquidity facility, says Bank of Canada

By Promit Mukherjee

OTTAWA, Sept 29 (Reuters) - The Bank of Canada on Tuesday urged financial institutions to use its Standing Liquidity Facility for overnight liquidity when needed without worrying that it might be seen as a sign of stress.

In a joint statement with the Office of the Superintendent of Financial Institutions, Canada's banking regulator, the BoC said SLF advances were considered normal.

The statement was released at the same time as remarks by Deputy Governor Toni Gravelle on the bank's

efforts to strengthen repo market operations.

"We view an institution's use of the SLF for overnight liquidity as a normal part of day-to-day liquidity management, not as an exceptional event or a sign of stress," Gravelle told a Bloomberg conference in New York.

The SLF is essentially a high-value payment system held by the BoC and it provides financial institutions who are a part of the central bank's Lynx payment system with fully secured intraday and overnight credit.

This helps institutions settle payments during the day and at the end-of-day operations.

Institutions usually settle their end-of-day payments from reserves they are holding as a buffer - money which could otherwise be released into the market, helping payment system efficiency.

The BoC and OSFI consider SLF use by Lynx participants to be consistent with routine liquidity management activities, the central bank said, adding the participants can use the facility as needed.

Gravelle said the BoC was working to update and strengthen its repo clearing infrastructure as it starts using a new tri-party platform which will help develop the term repo market and attract new participants such as large corporate treasuries.

Repo markets are crucial for the functioning of government bond markets and are also an important source of short-term funding. But their size and widespread use mean they can transmit financial stress if conditions deteriorate.

(Reporting by Promit Mukherjee, editing by David Ljunggren)

((Reuters Ottawa editorial; [e-mail])))

Keywords: CANADA CENBANK/