High interest savings account (HISA) ETFs have been popular in Canada, attracting billions over the past few years. These ETFs invest in Canadian bank GICs paying premium yields. Currently many of these HISA ETFs yield over 5%.
Investors get the benefit of locked-in GIC rates with the liquidity of an ETF.
Because these are essentially wholesale funding sources for banks the rates tend to be at the top of the range for deposits available in the marketplace. The downside to the wholesale nature of these products is they usually aren’t backed by the CDIC.
There have been no problems to date with these products, but depending on how banks are using the funds there could be a liquidity mismatch between the ETFs and whatever the banks are using the money for. This would become an issue if mass redemptions occurred.
Also, because most HISA ETFs are not backed by CDIC, in a worst case scenario, funds might simply not be available to satisfy redemptions. Again, these are low probability risks but that’s what OFSI is looking out for.
To mitigate this risk, OFSI today announced that it will require banks to “hold sufficient high quality liquid assets, such as government bonds, to support all HISA ETF balances that can be withdrawn within 30 days”. (This could apply to 100% of ETF AUM, since they can be sold and settled within a couple days. Unsure. There may be discretion in the various ETF prospectuses that allow the fund manager to halt redemptions for a longer period.)
The new OFSI ruling is meant to help prevent any of these low probability risks from materializing.
While banks will generate income from holding government bonds the income is presumable lower than other alternative investments (e.g. mortgages, credit). This puts pressure on the spread earned by the banks. For this reason, I believe it is likely that yields on HISA ETFs are reduced over the next few months as this rule comes into effect.
OSFI upholds 100% liquidity requirement for HISA ETFs to promote financial resilience
Ottawa – October 31, 2023 – Office of the Superintendent of Financial Institutions
The Office of the Superintendent of Financial Institutions (OSFI) remains committed to core liquidity adequacy principles, which promote the prudential stability of, and resilience in, Canada’s financial system. After a thorough and extensive consultation, OSFI has decided to uphold those principles by maintaining the liquidity treatment of wholesale funding sources with retail-like characteristics, such as high-interest savings account exchange-traded funds (HISA ETFs).
HISA ETFs, which blend characteristics of a savings account with an exchange-traded fund, have become popular among fund management companies, retail investors, and deposit-taking institutions (DTIs) in recent years. Despite some retail-like characteristics, these sources of funding for DTIs are provided directly by fund managers for purposes that are not specifically operational.
Accordingly, any DTIs exposed to such funding must hold sufficient high quality liquid assets, such as government bonds, to support all HISA ETF balances that can be withdrawn within 30 days. All DTIs should apply this treatment, as outlined in OSFI’s Liquidity Adequacy Requirements Guideline, by January 31, 2024, if they are not already doing so. OSFI will also require corresponding changes to DTI’s public disclosure liquidity metrics.
In determining the appropriate policy direction, OSFI initiated a public consultation on HISA ETFs and similar products on May 10, 2023. This included reviewing over 175 submissions from stakeholders.
While OSFI recognizes the importance of innovation to a healthy financial system, its responsibility is to ensure the institutions it supervises manage liquidity risks prudently. This decision is consistent with established banking principles and reflects, in OSFI’s view, the appropriate liquidity treatment for these funding sources.
“After extensive consultations with stakeholders, we upheld our core liquidity principles in the treatment of wholesale funding sources with retail-like characteristics, such as high-interest savings account exchange-traded funds. These principles ensure deposit-taking institutions are resilient through uncertain times while still allowing for new financial products and services that responsibly meet consumer needs.”
– Peter Routledge, Superintendent of Financial Institutions
- Interest in HISA ETFs in Canada has experienced rapid growth, spurred by rising rates. Unlike traditional savings accounts, units are exchange-traded and lack government guarantees or deposit insurance.
- OSFI considered systemic concerns with contagion, potential for regulatory arbitrage, and the absence of guarantees or deposit insurance typically found with traditional savings accounts.
- The Basel Committee on Banking Supervision emphasizes the importance of financial institutions being able to withstand periods of financial stress. This approach, fully described in Basel III, is supported by the 100% liquidity requirement for wholesale funding that can be withdrawn by other financial institutions on demand, including HISA ETFs.