Excess hot potatoes

Aaron Carter: Everyone would say CORRA is kind of setting high versus target. I said, well, it’s kind of low in a truly balanced system where there was no access to reserves.

Ian Pollick: Ooh, that is spicy. This is controversial.

Aaron Carter: What’s the mid of a 25 basis points, right? It’s 12 and a half. So people say, oh, it’s trading five over target. That’s expensive. I say, no, that’s still seven and a half basis points below a mid.

Ian Pollick: It is the first Curve Your Enthusiasm episode of 2025. It is a Friday and we have a lot to discuss, but we’re not going to talk about tariffs. We’re not going to talk about macro. We’re going to talk about something a little bit more nuanced. And I’m joined today by a good friend of mine, Aaron Carter, Executive Director on our Global Collateral Finance desk. Aaron, thank you for being on the podcast.

Aaron Carter: Thank you for having me.

Ian Pollick: So let’s just start off with what has been a very subtle, but very important topic in the Canadian market right now. That was the somewhat surprise deposit rate adjustment that the Bank of Canada introduced two weeks ago.

Aaron Carter: Yeah, pleasant surprise.

Ian Pollick: Pleasant surprise, not on the radar. From my perspective, we have been talking for a very, very long time about the intricacies of CORRA, what’s wrong with CORRA, what’s wrong with the QT program. I’m not going to rehash some of my criticisms, but one of the things the bank had repeatedly said is that we are now in a floor system. There’s a hundred billion dollars of reserves. By definition, you’re not supposed to have that many reserves in the corridor system. And so for those of you who don’t know what happened, the Bank of Canada lowered its deposit rate by five basis points below the target rate. And so in the parlance of today, that means the deposit rate is at 295, the target rate is 3%. And what’s interesting is that despite all of the narrative the bank has discussed with us over the past year and a half, we have for a very long time said we think the problem with QT is that the underlying distribution of settlement balances is too concentrated and that concentration problem causes frictions. And we can talk about those frictions and they were vehemently saying that that really wasn’t the case. And yet, if I look at the reason why they made this adjustment, other than to try and ensure a stronger transmission of policy, maintain lower volatility in the core distortion to the target rate, it was to increase the velocity of cash in the system such that we didn’t have to worry about that distribution problem. And so I think there’s some admittance there that the concentration reserves was an issue, but let’s take a step back. And you can see I have a lot to say on this topic.

Aaron Carter: There’s already a lot to unpack there.

Ian Pollick: There’s a lot to unpack there. But as a first step, were you surprised by the move and do you think it is going to work in helping to stabilize CORRA?

Aaron Carter: I think it is definitely going to work. It is going to help. It may require more work eventually, but like, yeah, as you said, you and I have discussed this. We thought this was a good move. We have been mentioning that with our conversations for the bank that lowering the debt rate was probably what would be required once we get to a more sustainable long-term run level of balances in the system as they roll down the balance sheet. So then was really just a question of timing. I thought this might happen later in the year. I think that’s when you and I thought maybe the back half. So was nice to see it introduced a little bit early. And I think it makes sense actually, like in retrospect. Not that I saw it, but in Gravel’s speech he had mentioned about the arbitrage to help bring things in line. And that’s where I talk about the difference between a floor system and a corridor system. The whole notion of a target is that you have to incentivize the market to approach your target. So that’s the classic corridor. You leave money at the Bank of Canada, you get the deposit rate. If you need to borrow, which I don’t think anyone has done in like maybe a decade, you pay the bank rate. So if that’s a 25 basis point spread, and you know, Canada’s small market, friendly, if I have cash and I don’t need it and you need it and you’re going to lose essentially 25 basis points, we’ll meet in the middle at 12 and a half in the middle of that corridor and that’s how target is reinforced. But when the system has ample reserves that aren’t needed, nobody needs extra cash, they won’t have to take any from the bank, so they just leave it on deposit with the bank at 3%, previously I guess adjusted. So the way to make that ARB work again is there needs to be an incentive for me to take cash out of my account and give it to someone else. If target is at the deposit rate, I really don’t have any incentive to do that. We have to take some operational risk. There’s some counterparty risk in there. So if I’m not going to get at least a couple basis points to make it worth my while, I might as well just leave it on reserve at the bank. And then you have to look at the counter parties who actually have those reserves and what their incentives are. So for a large portion of them, it’s not so much a question of trying to maximize P&L and get the last basis point out of it. It’s more a question of having sufficient reserves that you are able to handle the daily cash flow movements, right? If we have a large corporate client that makes a transaction that we don’t find out about until the end of the day and that’s 500 million dollars that we have to wire to someone else, if I don’t have that in my account, now I’m short cash at the end of the day. So I always want to have a buffer. I always think of it, you never have just enough money in your checking account to cover your rent or mortgage payment. You always need a little bit more to cover the excess. I mean, you’ve said before the hoarding of cash. I don’t know if I like that term. I would say it’s more the larger players naturally will have a larger balance. They have a desire for it. So there’s a question of the materiality there, and there certainly has been some excess reserves beyond what institutions need, but you need to have some buffer there. That just makes sense. And there was no incentive to manage that buffer by putting it out into the system. And now there is. Because now that you get five basis points left, it’s essentially a charge for leaving your money at the bank. So to the extent that you have satisfied your buffer liquidity requirements, it makes sense to try to put that into the market to other participants who could use it. And that’s going to push cash back into the system. And we’ve really seen that.

Ian Pollick: But let me ask you this. Let me ask you this. You know, we are talking about theory right now, right? And so practically, at 100 billion in reserves, that five basis points is, you know, 60 million bucks a year. In aggregate for the banking system.

Aaron Carter: So let’s just explain that for everybody. If you think about these settlement systems, the balance in the settlement system is 110, 120 billion, somewhere around there. So by imposing this five basis point below-target target, someone is going to pay it. There’s no getting around it. You can’t choose to not leave your money at the of Canada. Yeah, you can’t just take it and throw it under your mattress. If I give it to you, your account eventually ends up in links.

Ian Pollick: That’s a very good point. And I just want to reiterate this. Only the Bank of Canada can destroy or create reserves or settlement balances because they’re not really reserves. They’re settlement balances. But no one else can, you can’t just take it out and invest it in something else because it will always find its way back.

Aaron Carter: Yes. If I try to move my cash into T-bills or bonds, I buy them from somebody, they take my cash, they leave it in their account, that’s going to sit with a custodian or one of the large banks, and it’s going to go right back into that settlement balance.

Ian Pollick: Exactly, okay, sorry, go back to what you were saying.

Aaron Carter: Yeah, so on that, we take, as you said, if you look at that $100 billion of balance, five basis points on it, you can think of it as, call it an insurance premium for having the liquidity in the system or a fee, so across all participants on an annualized basis, what did we come up to? It’s like 50-ish million dollars, right? As the balances go up and down with that 5 % hit. So it’s not a question of will that get paid or not, essentially, it’s a question of who’s going to pay it. And if I’m running far more settlement balances than I really need, I’m now kind of paying that beyond what I need. So I would be motivated to put it out. And if I’m to leave it at the bank at 295, is 296 better? Sure, but there’s some operational cost, doesn’t really move the needle. Maybe I start putting it out at 303, 301. And there’s the two points there that I’d make is that we’ve seen this where CORRA’s started to come down. The average is published every day. It doesn’t come down as much, but we can see it in the intermarket. There’s a lot more trading at slightly lower levels. But the main point is you look at the volume that’s going through CORRA. And that’s gone up, say the base was around $35 to $40 billion a day, maybe slightly lower, it’s gone up about 10 to 20 billion dollars.

Ian Pollick: So let’s talk about that for one second, right? Because before we, this is a really, really important point. And so before we get there, I want to take a step backwards. You know, we’ve long talked about this distribution problem, this concentration problem. I won’t use the word hoarding. Let’s just call it just the natural organic size of certain institutions is reflected in the ownership of relative balances, okay? Did you see that have an impact on CORRA moving higher?

Aaron Carter: In terms of previous to this? Yes. Absolutely. Because I think it makes sense that when we go back a decade before we had excess reserves, there was essentially $250 million of excess hot potato in the system at the end of any day. So if I was short, someone else was long, we’re incentivized to find each other and meet in the middle. And that’s why we would always end up somewhere around target with a little bit of noise, depending on how flows work out. But once we moved to the floor system, as they call it, if you have extra cash and I really need it, what are you going to get out of bed for? Five basis points? 10 basis points? Especially on a low liquidity day where before a long weekend, there’s not a lot of people on the street. Everyone wants to their balances tied up early. So if you find out at 3 PM you have a big cash swing, you’re to have to pay somebody. And there might not be many people around. So that’s why you would see it occasionally drift higher. Like there was no incentive or no arbitrage opportunity to reinforce the target. And the only reason it was so low, in my opinion, everyone would say CORRA is kind of setting high versus target. I said, well, it’s kind of low in a truly balanced system where there was no access to reserves.

Ian Pollick: Ooh, that is spicy. This is controversial.

Aaron Carter: What’s the mid of a 25 basis points, right? It’s 12 and a half. So people say, oh, it’s trading five over target. That’s expensive. I say, no, that’s still seven and a half basis points below a mid. And I might be wrong, but I think that as we eventually get to this long run balance and reserves are come down and as the debt rate drops too, we’re going to see it trade closer to a mid. So that can happen two ways. Either the deposit rate continues to go down to bring that down to target. Or if we start seeing the balances roll down starting in March, there’s maturity in the big one in September. As those settlement balances drain, maybe the midpoint will push up and CORRA would have pressure. I mean, that leads into you know, what the bank has done. Obviously they see this coming and they’ve now added in sufficient mechanisms between the deposit rate dropping and the OR and the ORR, which are their tools for putting cash into the system or taking it back out of the system. I think they now have got the tools in place to massage that.

Ian Pollick: They do. I think that there’s a lot more stick handling that they could do right now because the tools they have are abundant. But let’s go back to, you know, what we were just talking about before we went on this little kind of rant. We are seeing CORRA volumes increase. And we are seeing them increase by roughly 40%. Like these are very material numbers. Is the increase in volume, which is exactly after the Bank of Canada, indicative that institutions with a lot of reserves are doing exactly what you just said, and they are trying to increase the velocity by which those reserves flow through the system? Or is there something else happening? Like what is the proximate reason in your mind why volumes have increased in the past five days? 

Aaron Carter: Yeah, I think that’s it. Exactly. But I’d use slightly different terminology. So when we look at this from, as you said, theory versus practice, we think are these institutions doing it? These institutions aren’t monolithic entities. There’s a million subdivisions. And because everyone’s cash at the end of the day ends up with an institution, I might have a small corporate account of a billion dollars that’s part of one of these larger institutions. I have motivation to move it because that institution is not going to pay me as much on my cash. So I want to move that. That might just be one small part of it. And I’ve seen that clients that had cash reserves that were not putting them out into the system at all started reaching out on Friday. So those that were on the ball and saw what was happening, they realized they were going to start taking that hit. So they started putting their cash into the market. The day this deposit rate change took effect.

Ian Pollick: And what’s interesting about that is that, you know, there was a time, remember during QE, where CORRA was setting persistently below. And so one of the things was that when you look at the distribution of settlement balances, a lot of the smaller FIs actually were collecting relative to their size, a lot of reserves. And so not every financial institution can actually access the bank. And so we kind of set deposits coming into the system as well. But now, are you suggesting that those people who cannot actually economically take that hit are being more active in recycling their reserves back into the system?

Aaron Carter: Yeah, I think it’s the incentive is there a little bit more? Because you could also make the argument that they could have previously mobilized this excess cash and earned some pickup, right? Even when CORRA was three or four basis points over target, you could still make three or four basis points. So there was money on the table to be made. I think this partially puts a spotlight on it in just the mechanics of how it works. Everyone uses the target as their benchmark for an overnight cash balance. So if previously you were earning your benchmark by doing nothing, you’re getting gold stars from your boss. And you could go out and earn a couple extra basis points, but for some institutions, that’s not their main focus. They’re trying to serve their clients, they’re trying to manage their liquidity. As long as they are not appearing to lose money, they don’t really need to go do anything. Now you could still, in this new world, you still go take some action and earn a couple basis points above. That really hasn’t changed. But what has changed is their benchmark is now five basis points above their default payment. So now it looks like every day I’m losing money unless I take action.

Ian Pollick: And so that action is prompting more to some of the increase in volumes. And so let’s also talk very practically just for everyone that’s listening to the podcast today. You’re an institution. You have settlement balances. You decide you don’t want to leave them all at the bank for that day. What are you actually doing with them? Are you putting them into repo? Are you investing with it? Like what is the mechanism by which I take one of my one dollar settlement balances? How do I actually utilize it?

Aaron Carter: Yeah, you would put it out into the repo market as one. You could buy T-bills, but as we said, you buy an instrument, someone owns that instrument. When they sell it to you, the cash goes from you to them. It could even end up at the same institution if you are banking at the same entity. But to those that are measured on a cash basis that try to put it out, some of that is going to go out to other institutions. So that’s where this makes sense that the bank has created an incentive to mobilize that excess cash in such a way that it will get distributed, I’m not going to say evenly, obviously, because different institutions, different sizes, but it’s going to be distributed in a way that makes more sense for the individual counterparties. So if you have these balances on reserve and you have more than you need, you give it to someone who needs some. And that person, even though they might need some more cash, think of a hedge fund that has Canadian cash or is short some position and they need to get that cash back. So they’re going to pay somebody to get that cash in. And that’s so that they don’t get charged for a loan from their institution. Even if this is all within the same institution, it just means that one particular account may need cash or may have excess. Those who need cash now have a stronger ability to get it from those who have it. Because the people who have it don’t want to pay that penalty, they’re going to be slightly more aggressive in putting it out. So at the margin, it mobilizes that excess.

Ian Pollick: It’s so interesting, right? Because on the way towards this eventual kind of cessation of QT, these operational tweaks. The whole issue when it came to cash was that this was a demand problem, right? It was too much demand relative to the reserves in the system, which was crazy because we always had over 100 billion reserves relative to like you say 10 years ago, we had zero. But the bank has chosen a supply side fix to push us on that part of the demand curve that is not moving too steeply, right? Because you’re lowering rates by utilizing the supply side. So I find this whole thing very interesting. And before we get on to actually talking about some of these administer rates in more detail, what’s happening with GC? Because there’s one thing we’re talking about CORRA, OK, but in general collateral kind of world, are we seeing the same type of improvement in GC?

Aaron Carter: Yeah. So I would say we’re seeing it more in what we might say GC than in CORRA directly. So let’s just break those two things up. CORRA is essentially the mean, not the average, but the mean.

Ian Pollick: CORR-M, not CORRA.

Aaron Carter: We’ve gone over that before. So it is essentially the calculation of the set of trades that fall within the parameters, and it’s used to publish that the following day. When we talk about the GC market, it trades throughout the day. It might be above CORRA, it might be below CORRA. There’s some trades that aren’t necessarily a GC trade, but they pulled into the calculation because of the way it’s measured. And that’s just because the way our systems work right now without Triparty, there’s no way to say that this trade is exactly a general collateral, which means the person providing the collateral has the option of posting anything they want within the parameters. So for CORRA, it’s government bonds, which is rebus and T-bills as well, and it has to be on that overnight basis. So when we see GC trade, it can start in the morning a little high. And let’s just walk through the timeline of the average day. When the bank puts in money from the overnight repo program. That tends to be about 8:30. So before that, we don’t know if they’re going to be putting money in or not. So I find that GC tends to trade a little bit higher. People are figuring out what is their cash for the day. You’re getting all of your updates overnight. You’re seeing clients come in in the morning, I don’t know exactly how much cash I have, am I excess, am I short. I’m figuring that out depending on the morning flow. Then once the OR comes out, which they haven’t been putting any cash into.

Ian Pollick: We’ll talk about that in a second.

Aaron Carter: Once that comes out, you find out what your results are. And if we borrowed some money from that program, now I don’t need as much in the market. And like anything else, supply and demand, if I’m sitting there with a bunch of excess cash and in the morning people thought they needed it, but then an hour or two later, they don’t need it as much, I’m not going to be able to charge as much of a premium. So I’m going to offer it cheaper. In other words, I’m going to lower the rate, which gets pulled into the CORRA calculation if transactions trade there and it really varies. So you’ll see throughout the day that it can trade up or down dependent on the cash flow needs and you know if someone has a technical issue or a system outage we’ve seen that where you suddenly find out in the end of the day that you have a large cash swing one way or another and then you can see a strong axe in the market and everyone else is cleaned up so they don’t need to respond to it and that’s when you’ll see it really move. But that’s the whole point of CORRA as an average or as a mean. It balances all of that out and then it gives you one number. They also do publish the range so you can see the core tiles around which it’s changing.

Ian Pollick: So let’s talk about, there’s a lot of rates. Okay. There’s a lot of rates and you were talking about those tools. And so if you were to kind of stack up all those tools, you have your bank rate, which is 25 above your target. You have your target rate, which is the target rate, you have your deposit rate, which is five base points below bank, the target rate. Your OR has averaged to be a little bit above the target rate between two to three basis points. Your ORR, your maximum cash level, where does that sit?

Aaron Carter: So no one has used the ORR yet, right? So this was the bank clearly having the foresight to say that they need the ability to take cash back out of the system if it goes the other way as they start balancing.

Ian Pollick: I.e. if CORRA is going too low, they need to pull it back up.

Aaron Carter: Yeah, so now that’s the one that gives them a tool to take the opposite side. So right now, so far, we’ve only had the ability to put extra cash in. So the settlement balances have come down towards the 100 billion from, we were at 200 billion, this was not a problem. There was tons of excess reserves. As we’ve gotten lower, they’ve needed to have the ability to inject for when CORRA didn’t have as much liquidity and they were seeing these spikes. So that gave them the ability to put cash back in. And that’s still kind of the paradigm that we’re in. Once we get through this, and CORRA could go below if the rate drops again, and if we get to when the term repos are on and they start managing the balance sheet from that side, if suddenly funding gets too cheap, well now they can pull cash out of the market by essentially saying.

Ian Pollick: Where’s that price set though?

Aaron Carter: It’s going to be a target as well.

Ian Pollick: A target as well. And so then you have the receiver general, which is at the deposit rate. And so let’s use all that. So remember we have a bank rate, we have our target rate, we have our depot rate, we have our RG rate, which is flat to the depot rate.

Aaron Carter: Up to six rates.

Ian Pollick: Yeah, yeah, there’s a lot of rates. And so you said something that I want to talk a little bit about. This is or was as of yesterday, because it’s early morning today, the two days in a row where there was no OR operations. And so let’s just talk about that because the Bank of Canada has been one of the largest providers of liquidity to the entire Canadian financial system. There’s been a huge demand for ORs to the point where there’s on average about two a day, and now we’ve had zero. And so walk me through what’s happening and why.

Aaron Carter: The bank is in regular communication with all the dealers throughout the day, primarily in the morning, to get a feel for how our cash demands are so that they know if they need to interject or not. So after doing the survey, then they will decide if they need to inject cash into the system. Now, previously, as you mentioned, the OR, when that was set at the debt rate and the debt rate was target, and there’s some fees on that, which is the other part, so it’s not a super cheap program. There’s no incentive for people to use that or there was less. There’s always some value in it. But the volumes there weren’t that high because you could go into the market and at two or three basis points between CORRA and target versus paying three basis points in fees to access the RG, you’re about neutral. So then you just access the normal market. And if you need to get some extra cash, that’s where the bank would come in with the OR. So the change that we’ve seen since last Friday is that the RG now provides us the receiver general auction. So that’s basically any excess cash that the government account has that can be put out into the repo.

Ian Pollick: And that’s been running, you know, just for context, the government account has had, let’s call it between 25 plus billion. So 25 is kind of in the floor. So there’s room, right? 

Aaron Carter: Yeah. I think it goes even bigger than that at times. And it’ll go up and down as-

Ian Pollick: Yeah. Like when you do issuance, right? Now, sorry. I know you’re in your line of thought and I’m completely disrupting it, but is there a maximum per counterparty in the RG? 

Aaron Carter: No.

Ian Pollick: No. And so that’s a big difference from the OR.

Aaron Carter: At least it’s high enough. It’s not a concern.

Ian Pollick: Okay. Okay. As you were, sir.

Aaron Carter: You’re going to be limited by the amount of assets you have to put in there. So yeah, the main difference is that we’ve seen volumes in that program pick up. So let’s say the demand for cash has shifted from the OR at target to the RG at slightly below target after-

Ian Pollick: Life finds a way.

Aaron Carter: (laughs) Life finds a way. So the OR has gone to zero, but the RG volumes have picked up. Maybe not quite as much as the OR has gone down. And you can kind of look at that as a whole. You say, well, we talked about the 10 to 20 billion of extra volume hitting CORRA. So that’s the excess cash that’s been mobilized. We have the OR dropping by about 20 billion. And then we have the RG picking up maybe 5 to 10 billion. So between all of those, the net amount is more cash coming into CORRA. So the OR has gone down, but the RG has gone up and the excess cash that’s been mobilized. Those two things have put more cash into the system than the absence of the OR has taken away.

Ian Pollick: And so talk to me about volumes too, because as we have seen no ORs the past couple of days, what were the average volumes pre last Bank of Canada meeting for the receiver general?

Aaron Carter: I’d have to check the actual numbers, but let’s just say it was a couple of billion dollars. right? The total outstanding was not that much. It had its moves up to five or six. Now it’s been utilized fairly heavily. I think we’re at 15 to 20 billion.

Ian Pollick: These are big numbers. These are big numbers, right? And so like when you look at CORRA volumes and you look at RG volumes, there’s clearly something that has shifted in the past week that suggests that, you know, the null hypothesis, you can’t reject it, right? Like this is working. And so I’d ask you this, you know, I have one of my money market mentors always tells me, price over priors. So like look at the price, don’t think about your prior convictions. We’re not seeing CORRA really drop all that much, right? It’s still kind of plus three to the target rate. And so we can see volume shifting, we see a higher velocity. Why aren’t we seeing a movement in CORRA?

Aaron Carter: Part of that is because we like our clients and we want to treat them well. And if I’ve been paying them at a fixed spread to target for a little while and I say, I can now get cheaper cash away, they might not like that. So I think it’s going to take a little bit of time to filter through the system.

Ian Pollick: So normalize it, socialize it.

Aaron Carter: Yeah, exactly. So you’ve seen little bits knocking down, but there’s still some clients that if we have enough business with them, we’re just going to continue to pay them for their cash at a similar to spread as what we did before. And those with a lot of market power want to insist that they get a very good rate. So it’s that balance between again, you have supply demand. You also have the market power dynamics. So with someone who’s purely transactional, if they are offering me cash and they want a very high rate and I don’t regularly deal with them, I have no incentive to do that. And that’s this arbitrage that Tony Gravel mentioned in his speech, is that they will now have to go to the next counterparty and offer them cash. Someone in that institution that they’re offering the cash to eventually is going to eat that deposit rate. So unless you find someone who needs the cash, you know, whereas previously I might help a client out if you got a lot of cash at end of the day, I’ll just take it, I’ll drop it into the debt rate. Now, or sorry, at the target rate, which was the debt rate. Now if I take their cash at the end of the day, I can’t take it at target, because I will leave it at the bank and I will lose five basis points. So previously I might be friendly, and I still will with your good clients that do favors when you need to, but I’m not going to go out of my way to lose money, so if it doesn’t suit me, I will pass on that.

Ian Pollick: CIBC shareholders. Thank you for not going out of your way to lose money. Thank you.

Aaron Carter: You’re welcome. Try to add value where I can. So they’ll then take that cash and they’ll offer it to someone else. And eventually they’ll either find someone who still needs some or they’ll find an institution that says, you know what? You’ve been a good client. I’ll just take that hit for you. Because in the grand scheme of things, five basis points on an overnight trade is a tiny amount of money. So it’s all in context. This might be a big move in our little pond, but over the course of a year, it’s a relatively small amount of money.

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Ian Pollick: And so your expectation is, like you said, this gets normalized, takes a little bit of time to get everyone onto this new kind of world, and then eventually you think CORRA should fall. So the big question, ready for it? It’s a very big question.

Aaron Carter: Yes.

Ian Pollick: The big question is, in the steady state, what is your expectation for CORRA’s spread relative to target at the limit?

Aaron Carter: Oh, the easiest hedge bet is it should be at target.

Ian Pollick: (laughs) OK. OK, fine. 

Aaron Carter: (laughs) Zero spread.

Ian Pollick: I feel like that is. Okay, but you actually believe that? Do you believe that?

Aaron Carter: I don’t think it’ll, it depends on how things play out. If the deposit rate stays only five below, I think it’s going to persistently set a little high. But now that they have made this move, and like said, we didn’t expect them to do this right away. They could very clearly at the next meeting just drop it again. So you know, the Bank of Canada has the luck of being able to see all of the data, they can see what’s going on and how I wish I could be a fly on that wall. But they can look at it. They’ll see how market dynamics are reacting and we’ll also have a month of CORRA prints by then. And then they can say, hey, this is getting within our comfort range or it’s not. And then they can tweak it. If they lower the debt rate again, that’s going to create a lot more incentive to mobilize the cash. And that would push things even further.

Ian Pollick: That’s a world that you get closer to that zero. My expectation is kind of one to two basis points, but what you’re talking about is a real probability.

Aaron Carter: If you lower the debt rate, there’s a lot more incentive to mobilize cash. It’s going to go around target. And if it starts to go below target, well, now they can incentivize us to bring it back up because instead of someone giving it out to another counterparty at 295 to avoid that hit, there will be those of us who say, well, I can take that cash. could then leave it at the Bank of Canada at target again, right? So above the debt rate using that program. And that would then pull it back up. So the bank has the tools to move it to where they want to, which is why I think plus or minus around target is going to be where it should end up.

Ian Pollick: Okay, so I’m to throw you another wrinkle here before we move on. In a world where you have Triparty in Canada, how does that interact with everything we just talked about in terms of some of the incentivize, what’s the plural for incentivize?

Aaron Carter: Incentives.

Ian Pollick: Incentives. How does that change the incentives when you start to reintroduce Triparty?

Aaron Carter: I don’t think it changes the incentives at all. I think it provides a more efficient tool for mobilizing your cash. As I said, one of the frictions is operations, booking tickets, making sure that you have enough time in the day to settle real things. These are absolutely real things. Like I say, settlement lag, everyone thought of that as a bug. It was clearly a feature. It gives people a time to get everything through. And Canada’s infrastructure is not as good as other parts of the world in our financial system. So it takes a little while to make sure everything gets through. Triparty will solve huge amounts of that problem. So once you have your cash in that system and you want to mobilize it to another counterparty within that system, it’s going to be almost instant.

Ian Pollick: That’s awesome.

Aaron Carter: And it’s also going to have the advantage of a proper GC trade, one that is clearly flagged as such. We can tell specifically, yes, this one is a trade not driven by the desire for a particular bond. So it’s not short covering. It’s not a collateral requirement. It is to move the money. So that means that your calculation, once it incorporates that, is going to get more accurate. It’s going to be a little bit more reflective of what it’s designed to measure.

Ian Pollick: Less noise.

Aaron Carter: Yeah.

Ian Pollick: And so give me an update, Triparty in Canada.

Aaron Carter: We’re working through it. The platform is basically live. There’s not a lot of volume there. The hardest part, unfortunately, is if you build it, they will come. The platform, I think, is great. The capabilities are great. I can’t wait to see it up and running fully. It’s just a question of every institution has to get through the onboarding process. They have to go through the risk teams, etc. So we’ll get there. And then once you get the volume up, it’ll be the network effect. More and more participants will come in as it makes sense.

Ian Pollick: And remind me, in this Triparty world, what is the collateral substitution like?

Aaron Carter: It can be near instant. So the main, yeah, let’s set that up right now, is in the current world, any collateral substitution requires an individual trade on an ISIN level. So at every single piece of collateral has to be booked, ticketed, settled. In the triparty world, it just says within this big bucket of collateral I have, as long as I have enough to fulfill this particular obligation. The trade goes through. And we don’t actually have to physically move it between different institutions. It stays in one world, and it’s just essentially ring-fenced between your box or my box. So that takes away all of the operational hurdles. And with anything, when you reduce the frictions, you’re increasing the velocity. So it should make the system more efficient and should make GC trading much more level playing field, let’s say.

Ian Pollick: Okay, and so let’s take this one step further. So we’re in the middle of March, all of a sudden, you know, February’s done, QT is now officially over, the bank is doing term repos. Those term repos are one month, three month in nature. Talk to me about how these fit into everything we just talked about. And then I want to talk about the differences in how these term repos treat collateral substitutions.

Aaron Carter: Sure. So just starting with in March, once we get the term repos, they’re going to start firing back up as the bank manages their balance sheet. That’s going to be term cash. So right now all of the bank’s programs, whether it’s the RG can be a couple of days, the OR and the ORR are both overnight. So when we have term repos, that’s liquidity that we don’t have to refresh every day. So to some extent, you will get your cash from that and then you won’t need to get in overnight. 

Ian Pollick: So it’s all additive, right?

Aaron Carter: Yes. But well, again, it all ends up in the same system. So I won’t say it’s additive in terms of overall liquidity in the system. It’s just shifting.

Ian Pollick: It’s additive in terms of what the impact of all this is.

Aaron Carter: Yeah, it’s another good tool. I think the market will welcome it and it’s going to provide term liquidity, which means you no longer have to rely as much on overnight funding. So we could see CORRA volumes decrease on that.

Ian Pollick: Well, I think you would.

Aaron Carter: Absolutely. As we pick up some term liquidity. And then that is again, when you have less volume, you’re going to be less subject to the extremes. It’s kind of reducing everybody’s main requirements for overnight cash. So maybe we’ll see CORRA tighten up a little bit as well.

Ian Pollick: Okay. And you know, last thing I want to talk about is, so when the bank does these term repos, there’s a little bit of a difference in the way they’re going to be treating collateral, right? Because they’re not on, was it CCMS?

Aaron Carter: Yeah, they’re not on CCMS yet.

Ian Pollick: And so let’s just explain that really quickly to people and why maybe it matters. 

Aaron Carter: Sure. So CCMS is the Canadian Collateral Management System. That’s going to be the Triparty platform. I think the bank will eventually join it, but again, large infrastructure lift there. Once they get that, it’ll make it easy to sub-collateral in and out. But in the beginning, it’s going to be on their existing infrastructure, which means you’re somewhat limited in your substitution ability. I don’t think it’s really that much of a friction, but it is a marginal friction. And as we know, everything is, prices are always set at the margin. So it’s going to be a good tool for them to have. And then it is only going to get better over time.

Ian Pollick: Okay, look, we have talked a lot. We have stayed in the extreme short end of the pool. Anyone that was listening to this podcast to try and find out what we think about like Canada US 10s, I’m really sorry this was not the episode for you. But Aaron, thank you very much for being on the show. We’ll update this. And remember, there are no bonds harmed in the making of this podcast.

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