On May 2 2016 the Bank of Canada designated the Automated Clearing and Settlement System (ACSS) operated by the Canadian Payments Association (CPA) as having the potential to pose payment system risk (a 'prominent payment system'). This designation means that the ACSS will now be overseen by the Bank of Canada in accordance with the Payment Clearing and Settlement Act.

Background

The ACSS is the system through which the majority of payment items in Canada (including pre-authorised debits, direct deposits, Interac debits and e-transfers, and cheques) are cleared and settled. The ACSS tracks the volume and value of payment items exchanged between CPA members (Canadian financial institutions) to determine the balances due to and from each CPA member that acts as a direct clearer. The ACSS rules and standards, which are established by the CPA, detail the procedures that apply to the exchange, clearing and settlement of payment items.

The CPA operates another major payment system, the Large Value Transfer System (LVTS). The LVTS is an electronic wire system for settling large-value Canadian dollar payments between participating financial institutions. Although the majority of payment items in Canada are cleared and settled through the ACSS, most of those payment items are for relatively small amounts. The majority of the total value of payments in Canada is cleared and settled through the LVTS. In 2012 the LVTS was designated as systemically important and it is now subject to oversight by the Bank of Canada.

Effect of designation

The Bank of Canada has published Risk Management Standards for Prominent Payment Systems, which reflect the Bank of Canada's expectations in connection with the design and operation of a prominent payment system. These standards now apply to the ACSS by virtue of its designation as a prominent payment system. It is understood that the CPA will address many of these risk management standards as part of its current modernisation initiative. The CPA has indicated that it will collaborate with its members to satisfy the new standards.

The primary legal effect of designation of the ACSS as a prominent payment system is that the Bank of Canada may now issue a directive to the CPA or to any participant in the ACSS to take corrective measures that the Bank of Canada considers necessary to control systemic or payment system risk.

Designation of the ACSS as a prominent payment system brings with it the possibility that financial institutions (particularly those that act as CPA direct clearers and group clearers) could be subject to directives issued by the Bank of Canada if the governor of the Bank of Canada believes that systemic risk or payment system risk is not adequately controlled. Although the power of the Bank of Canada to issue directives is fairly open-ended, the Bank of Canada is not permitted to issue directives to a participant (CPA member) in connection with matters that are not directly related to the participant's participation in the ACSS. For example, the Bank of Canada may not issue a directive in respect of the capital adequacy or corporate governance of a participant.

The designation of the ACSS as a prominent payment system allows the Bank of Canada to more actively monitor the CPA's modernisation initiative and the changes to the ACSS that arise as part of this initiative. It also places the ACSS within the same regulatory regime that would apply to any future competing payment system, should any emerge, provided that the Bank of Canada determines that any such competing payment system also poses payment system risk.

For further information on this topic please contact John Jason or Sharissa Ellyn at Norton Rose Fulbright Canada by telephone (+1 416 216 4000) or email (john.jason@nortonrosefulbright.com or sharissa.ellyn@nortonrosefulbright.com). The Norton Rose Fulbright Canada website can be accessed at www.nortonrosefulbright.com/ca/en/.

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