OSFI defers liquidity guidance for high-interest savings ETFs

The Office of the Superintendent of Financial Institutions (OSFI) will wait until the fall to update liquidity adequacy requirements for high-interest savings account (HISA) ETFs, the federal banking regulator said on Wednesday.

Instead of expecting banks to adhere to current liquidity guidance on Aug. 1, OSFI said it expects to issue further guidance in October, and banks will be expected to align with any changes by January 2024.

This past spring, OSFI consulted on the liquidity treatment of HISA ETFs and other wholesale products with retail-like characteristics. The popularity of HISA ETFs has grown amid rising interest rates, and the regulator wanted to assess whether existing liquidity rules properly capture the risks posed by the products.

While sources of wholesale funding such as ordinary deposits have historically proven to be relatively sticky, HISA ETFs provide a high degree of liquidity, as client withdrawals aren’t typically subject to restrictions.

Among other things, OSFI’s consultation considered whether new categories of wholesale funding were needed to reflect the risks presented by HISA ETFs.

After reviewing varied feedback from over 175 submissions from retail investors, banks, ETF providers and other stakeholders, the regulator said it decided to defer any changes to the liquidity treatment of these products.

In the meantime, institutions should continue to “prudently manage the risk of liquidity run-offs associated with these products,” the regulator said in a release, noting that “the liquidity practices related to these products has varied between deposit-taking institutions.”

OSFI also said the industry should “remain prepared for the possibility that, because of its review, OSFI confirms a wholesale liquidity treatment for these products.”

Some providers have suggested that a reclassification of deposits could affect the rates that the ETFs offer.

Staff

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