This act was proclaimed by Parliament in July 1996. It gives the Bank of Canada responsibility for the oversight of payments and other clearing and settlement systems in Canada, for the purpose of controlling systemic risk. (Systemic risk refers to domino or spillover effects where the inability of one financial institution to fulfil its payment obligations results in the inability of other financial institutions to fulfil theirs, or in the failure of a clearing house.)
The PCSA is the government's recognition of the essential role of the major clearing and settlement systems in the Canadian economy, and of the importance of regulatory oversight of these systems. Canada was the first G-10 country to adopt legislation that specifically requires the central bank to oversee the control of systemic risk in major payment and other clearing and settlement systems.
The PCSA formally recognizes the oversight role of the Bank of Canada with regard to the design and operation of clearing and settlement systems by:
In addition, the PCSA contains provisions that, when combined with federal insolvency legislation, reinforce the legal enforceability of netting in designated payments and other clearing and settlement systems. The PCSA also provides that the settlement rules of designated systems are immune to legal stays or other legal challenges, even in cases where a participant in one of these systems fails. This increases the certainty that the legal arrangements governing the operations of a designated clearing and settlement system will produce the expected outcome in periods of financial stress.
Matters that are not directly related to an institution's participation in a designated clearing and settlement system are not subject to the Bank's oversight under the PCSA. For example, the PCSA specifically precludes the Governor from issuing a directive with respect to a participant's capital adequacy, the management of its investments, or its relations with its own customers.
The PCSA also provides the Bank of Canada with two other noteworthy powers: the ability to provide a guarantee of settlement to designated systems, and the ability to pay interest on special deposits accepted from the participants in systems.
Under the PCSA, the Bank of Canada reviews all eligible payments and other clearing and settlement systems for their potential to pose systemic risk. A system is eligible for review by the Bank if
The PCSA provides a definition of systemic risk that is consistent with the definition used in many international reports. If the Governor of the Bank forms the opinion that a system has the potential to pose systemic risk, the system may be designated as subject to the Act, provided the Minister of Finance believes that this is in the public interest. Once designated, a system has to satisfy the Bank that it has mechanisms in place to control systemic risk. In extreme situations—where the Governor judges that systemic risk is being inadequately controlled—the Bank may issue directives to the system operators or to participants in a designated system.
When deciding if a system should be designated under the PCSA, the Bank considers
Systems that handle small-value payments (either as individual payments or aggregate payment obligations) are unlikely to be designated, since they typically do not pose systemic risk. Nevertheless, the Bank monitors such systems for changes in their situation. Systems that handle large-value payment obligations are much more likely to generate systemic risk, and so are much more likely to be designated.
The following payment and other clearing and settlement systems are eligible for review under the PCSA:
The following systems have been designated as being subject to the PCSA:
This Guideline, issued by the Bank, describes how the Bank operates under the PCSA, particularly in gathering information to identify eligible systems and in determining whether eligible systems will be designated. The Guideline also indicates the minimum standards that the Bank applies to designated systems.
Under the Canadian Payments Act, all CPA rules and standards, including any amendments, are subject to a 30-day-review period by the Minister of Finance, who has the power to disallow any rule that is not deemed to be in the public interest. The Minister also has the authority to issue a directive to the CPA to make, amend, or repeal a bylaw, rule, or standard.
The Minister also has the authority to designate and oversee a payments system that is national in scope or which plays a major role in supporting transactions in the Canadian financial markets or the Canadian economy. In designating a payments system, the Minister would consider
The Minister can issue directives to designated payments systems regarding the conditions for becoming a participant in the system, the operation of the payments system, its interaction with other Canadian payments systems, and the relationship of the system with users. To date, the Minister has not designated any systems.
Finally, a non-statutory body called the Payments Advisory Committee (PAC) has been formed to minimize any duplication of oversight activities by the Minister of Finance under the CPA and the Bank of Canada's oversight responsibilities under the PCSA. The PAC is co-chaired by senior officers of the Department of Finance and of the Bank of Canada.