Finance Committee on May 8th, 2018

[The Chair, Liberal, Wayne Easter]

We'll call the meeting to order. I think, as everyone knows—they've heard this speech many times—we're dealing with the budget implementation act.

First of all, I understand that there are officials here for every division, and I do apologize. I know a good many people may have had plans tonight, and we really appreciate your coming to appear before our committee and breaking whatever plans you may have had.

We'll start with division 4 of part 6, which is “Securities Issued or Guaranteed by Foreign Governments”. We have Mr. Nick Marion, who is the director of reserves management, financial sector policy branch, Finance; and Mr. Grahame Johnson, managing director, funds management and banking department, with the Bank of Canada

Welcome. You have a short statement, I believe, and then we'll go from there.

[Grahame Johnson, Managing Director, Funds Management and Banking Department, Bank of Canada]

Thank you, Mr. Chairman.

Thank you for the invitation to discuss the proposed legislative changes in Bill C-74 to the Bank of Canada Act.

Under section 18(d) of the act, the Bank of Canada has the authority to buy or sell securities issued or guaranteed by the government of the country in the European Union. The Bank of Canada is proposing amendments to the act in anticipation of the United Kingdom's exit from the European Union. These amendments would ensure that the Bank of Canada can continue to buy and sell securities that are issued or guaranteed by the United Kingdom.

That's really it. I'd be happy to take questions if there are any. It's a technical amendment reflecting the Brexit vote.

[The Chair, Liberal, Wayne Easter]

That's the Government of Canada being proactive, I believe.

Are there any questions?

Mr. Kmiec.

[Tom Kmiec, Conservative, Calgary Shepard, AB]

Thank you, Mr. Chair. I'm so happy we're here this evening. It's a wonderful thing.

The exchange fund account, how much does it have in it right now?

[Grahame Johnson]

The size of the exchange fund account is about $75 billion U.S.

[Tom Kmiec, Conservative, Calgary Shepard, AB]

Is that account for the securities of all the different European Union members?

[Grahame Johnson]

No, the currencies that are held in it are U.S. dollars, euros, Japanese yen, and sterling. The euro-denominated securities would include countries such as Germany, France, and the Netherlands, but not all European members.

We have an internal credit rating assessment group. The statement of investment policy stipulates that securities must be of a minimum investment grade. It's roughly equivalent to single A-. We have an internal credit rating group that examines the rating of the sovereigns, assigns a rating to them, and investment is restricted to those entities that meet the minimum credit standards.

[Tom Kmiec, Conservative, Calgary Shepard, AB]

Basically, does this technical amendment make it possible, whether it's a soft Brexit or a hard Brexit, for the Government of Canada to able to continue to purchase United Kingdom securities?

[Grahame Johnson]

The Bank of Canada would be able to continue to purchase and sell securities issued or guaranteed by the United Kingdom, yes. Without the amendment, the United Kingdom is not in the current legislation specifically broken out from members of the European Union.

[Tom Kmiec, Conservative, Calgary Shepard, AB]

Good.

[The Chair, Liberal, Wayne Easter]

Mr. Poilievre.

[Pierre Poilievre, Conservative, Carleton, ON]

Can you list the types of securities?

[Grahame Johnson]

They're all investment-grade, fixed-income securities mostly issued by sovereigns, but there are some super-sovereigns and agencies as well.

[Pierre Poilievre, Conservative, Carleton, ON]

Basically, they are treasury bills and government bonds.

[Grahame Johnson]

That would be correct, yes, the bulk of the portfolio. There would be some issued by agencies or government-guaranteed entities, but this is an extremely liquid, very high-quality portfolio.

[Pierre Poilievre, Conservative, Carleton, ON]

By extremely liquid, does that mean you're buying short term?

[Grahame Johnson]

No, securities can go out to ten and a half years, but given the nature of the securities we purchase, a ten-and-a-half-year U.S. treasury, bund, OAT, or U.K. gilt would be extremely liquid.

[Pierre Poilievre, Conservative, Carleton, ON]

Because you can sell them instantly.

[Grahame Johnson]

Right.

[Pierre Poilievre, Conservative, Carleton, ON]

Okay.

[The Chair, Liberal, Wayne Easter]

Mr. Kmiec.

[Tom Kmiec, Conservative, Calgary Shepard, AB]

Just so I can better understand the mechanism, you said $75 billion U.S., but I have a sheet here that says $86.6 billion from January 2018 is the market value.

[Nicolas Marion, Chief, Capital Markets and International Affairs, Securities Policies Division, Department of Finance]

I'll give you a few points of clarification with respect to the figures. I think $86 billion is the totality of Canada's official international reserves. Within that, there is a portion that are within the exchange fund account. Within the exchange fund account, we have the fixed-income securities that Mr. Johnson spoke about, as well as special drawing rights issued by the IMF.

[Tom Kmiec, Conservative, Calgary Shepard, AB]

So there is $75 billion of liquid assets, like cash from currencies of other countries, and the difference then is $11 billion for everything you just mentioned including special drawing rights.

[Nicolas Marion]

There is the IMF reserve position as well.