SGC Notes

Secured General Collateral Notes

An innovative cash money-market instrument designed for the BA transition

SGC Notes | Secured General Collateral Notes - designed for the BA transition

The approaching cessation of Canadian Dollar Offer Rate (“CDOR”) in June 2024 represents an important change to Canada’s capital markets and the transition to alternative funding and investment options requires careful planning and execution.

The Secured General Collateral Notes ( “SGC Notes”) provide an opportunity for Canadian money market institutional investors to roll their Banker’s Acceptance (“BAs”) exposure into SGC Notes. These short-term cash money market discount instruments are linked to the same highly rated Canadian bank credit exposure as are BAs, but in contrast are secured with a basket of high quality debt securities.

SGC Notes represent an attractive investment with the potential for favorable yield compared to other alternatives such as T-bills. At the same time, for the basket securing the SGC Notes, Canadian Derivatives Clearing Corporation (“CDCC”) offer strong investor protection through active risk management and the leveraging of TMX’s infrastructure, including the Canadian Collateral Management Service (“CCMS”) which allows for automated collateral movements.

By holding SGC Notes, investors can benefit from these innovative features, without any additional operational complexity.

How can institutional investors buy the SGC Notes?

The SGC Notes will be issued in book-entry form and will be available in minimum denominations of $100,0001 and in integral multiples of $100,000. The SGC Notes will be offered on any Business Day with different terms to maturity, for terms of one, two, three, six or twelve month(s) (and in no event greater than 365 days). SGC Notes will be distributed on the primary market by the SGC Clearing Members at a discount (i.e. quoted on a discounted basis to the face value of the security, since they do not pay a coupon).

Institutional Investors can simply purchase the SGC Notes through any eligible subscribing bank/dealer (“SGC Clearing Member”). A subscribing bank/dealer will distribute the SGC Notes to investors as any other eligible Canadian Depository for Securities Limited (“CDS”) instrument.

Each SGC Note is defined by an ISIN that identifies the subscribing bank/dealer and maturity date. The discount rate is determined by the market dynamic (supply/demand) and not by CDCC. SGC Notes will also be available on the Bloomberg platform, including for money-market instrument trading in Canada for the secondary market.

Given that the distribution of the SGC Notes will be done via a SGC Clearing member, investors do not need to be members of CDCC, CCMS or a CDSX direct participants.

1 We refer you to the Offering Memorandum and Program documents of the SGC Notes.

How is transparency to investors assured for the SGC Securities Basket?

The SGC Notes are entirely secured by a standardized basket (“SGC Securities Basket”) of highly liquid securities (SGC Securities), including investment grade (“IG”) corporate debt securities1, managed to meet strict eligibility and ongoing market valuation criteria by CDCC. Investors can monitor at all times the specific SGC Securities’ Basket for each subscribing bank, including any daily eligible substitutions trough TMX Datalinx service. Eligible SGC Securities (at the ISIN level) are also published on CDCC’s website with corresponding applied haircut value for overcollateralization.

1 Means securities of higher grade quality (A- or higher) and lower grade quality (BBB+, BBB, BBB-); IG Corporate Debt Securities are securities rated BBB- or higher (equivalent).

How does issuance and payment at maturity work and what is the role of CDCC?

Issuance of SGC Notes to bank/dealer subscribers (who are also CDCC AA- rated Clearing Members) is done via a Special Purpose Trust (“SPT” or “SGC Note Trust”) established under the laws of the Province of Ontario.

CDCC1 is the promoter, administrative agent, custodian and paying agent of the SPT. SGC Notes are funded by an SGC repo transaction set between the SGC Clearing Member and the SPT which matches economically the terms of the SGC Notes (including the amount, rate and issuance/maturity date). The SGC repo transaction is cleared by CDCC which also acts as central counterparty clearing house (“CCP”).

This means that under the SGC repo transaction, an SGC Clearing Member will sell at issuance date eligible SGC Securities to the SPT (to secure the SGC Notes), and then unconditionally agree to repurchase those securities on the maturity date. On maturity date, holders of SGC Notes concurrently receive principal payment from the SPT at face value and funding of SGC Note is done via the unwind of the SGC repo backing the SGC Note.

Payment is done by CDCC, as the payment agent of the SPT, utilizing the same CDSX mechanism as any other CDS eligible debt instrument.

The SGC repo serves as both credit and liquidity support. Clearing and Risk management for SGC repo transaction is conducted under CDCC rules for Fixed Income Transactions.

1 CDCC, a wholly-owned subsidiary of the TMX Group Inc., is a regulated clearing house which clears futures, options and other derivative products traded through the facilities of the Montréal Exchange and also clears bilateral over-the-counter (“OTC”) repurchase agreements on single bonds.

Are investors directly exposed to the SGC securities under the SGC repo?

Noteholders will receive unconditionally1 the face value of their SGC Notes upon maturity from the SPT, regardless of the performance of the SGC Securities which do not serve as repayment source. Investors in SGC Notes are not exposed to the risk (or reward) of the SGC Securities. The SGC Repo Transaction is rather, set between the SGC Clearing Member and the SPT (cleared by CDCC) to fund the payment of the SGC Notes on maturity date. Hence, investors are rather exposed to the credit/liquidity risk of the SGC Clearing Member under the SGC Repo transaction, which funds the payment of the SGC Notes on maturity date.

Via overcollateralization (haircuts), each eligible SGC Securities is deemed of equal quality/value to secure the SGC Notes. CDCC through ongoing market valuation of each securities, mandatory margin calls (for the SGC Clearing Members) and substitutions, stabilizes the value of the SGC Securities Basket from issuance to maturity. This provide protection, for the benefit of the investors, that the SGC Clearing Member basket2, always fully secures all the SGC Notes for which this bank/dealer has subscribed. Any failure by the SGC Clearing Member to meet a margin call or settlement requirement under the SGC Repo is considered as a credit/liquidity breach from a CCP perspective for this Clearing Member.

1 SGC Trust does not require additional liquidity backstop since the SGC repo serves as both credit and liquidity support.

2 For each series, a single basket is created to secure all the related SGC Notes for which a bank/dealer has subscribed.

The SGC Notes’ program offers many benefits to investors, including:

  • A potentially superior return compared to other alternatives such as T-bills for Canadian institutional investors.
  • A targeted short-term rating of P-1 (Moody’s1) by each subscriber bank/dealer. Rating is fully dependent on the counterparty credit rating of the subscribing bank and not the SGC Security Basket constituents.
  • White labeling and standardization by CDCC: a single type of SGC Note for investors while maintaining a specific credit/risk profile to the subscribing bank identifiable through each issued ISIN/CUSIP.
  • Robust risk Management, operational resilience and regulatory oversight (Bank of Canada, AMF, OSC, BCSC) under CDCC Rules and Manuals for Fixed Income Transactions for the SGC repo transaction.
  • A very high level of protection for investors due to frequent and proactive monitoring of counterparty risk using CDCC’s risk management framework.
  • Daily mandatory stabilization mechanism by the subscribing bank/dealer to maintain the quality and value of its SGC Securities Basket such as multiple intraday pricing2, conservative haircuts (Bank of Canada SLF haircuts) and substitutions (for example following a downgrade of a corporate security or a concentration limit breach).
  • Bankruptcy remoteness: Each sale of SGC Securities to the Trust is structured to minimize the possibility that a bankruptcy or insolvency proceeding in respect of the applicable SGC Clearing Member, the Trust or CDCC will adversely affect the Trust’s rights in such SGC Securities.
  • Robust CDCC default management process: investors can expect a high recovery rate (in cash) in an unlikely event of default of the subscribing bank and the liquidation of its SGC Securities Basket (which has been actively risk managed by CDCC prior to the default). If the liquidation of the SGC Securities is insufficient to cover the face value of all outstanding positions, the Noteholders will bear pro rata the shortfall.
  • Designed to foster straightforward compliance with Investment Policies.
  • Transparency of the SGC Securities Basket asset constituents linked to each subscribing bank.

1 Refer to Moody’s sector comment: Strong counterparties will support credit quality of upcoming repo-backed ABCP, February 2024, https://www.moodys.com/research/ABCP-Canada-Strong-counterparties-will-support-credit-quality-of-upcoming--PBC_1395824

2 CDCC relies on Candeal as its primary source for pricing the SGC Securities

Product Specifications

SGC Notes

SGC Note
  • Standardized short-term debt instrument secured by a basket of securities (“SGC Securities Basket”) meeting eligibility criteria, concentration and haircuts rules
  • Generic trading ISIN by maturity and by SGC Clearing Member
  • Targeting P-1 rating (Moody’s) for the SGC Note by series (i.e by underwriter)
Underwriter and Counterparty Risk
  • Each Note is fully underwritten by a specific SGC Clearing Member
  • SGC Clearing Member must be a member of CDCC and also meet the minimum additional eligibility criteria* required under the SGC program
* Minimum credit rating of DBRS AA-, S&P AA-, Moody’s Aa3, Fitch AA- equivalent
SGC Securities

SGC Securities are comprised of debt securities denominated in Canadian dollars that are eligible for clearing through the CDSX clearing and settlement system (“CDSX Securities”) and are composed of SFL Securities and Non SLF Securities as follows:

  • SLF Securities1 means securities that are listed from time to time on the Bank of Canada’s website as eligible as collateral under the BoC’s Standing Liquidity Facility (SLF)
  • Non SLF Securities means securities which are composed of Investment Grade Corporate Debt Securities2 of lower grade quality (Non SLF IG Corporate Debt Securities) and Lynx3 Debt Securities with an investment grade credit rating

All SGC Securities will have a credit rating of investment grade (i,e, BBB- or higher).

SGC Note Trading Value C$100,000
SGC Note Issuance Term 1 month, 2 months, 3 months, 6 months and 12 months (less than 365 days)
SGC Note Issuance Date
  • On a standardized issuance cycle: 1st and 15th of a month, using a Following Business Day Convention
  • On demand (i.e. on a non standardized issuance cycle), on any business day
Payment on Maturity At maturity, the SGC Noteholder receives the principal payment at face value (no early redemption).
Trading/Access on the Secondary Market SGC Note can be sold to investors at discount, either directly, or via a bi-lateral, or CDCC cleared repo. SGC Notes would be accessible as any eligible CDS instrument: Type= Debt; SubType= Asset Backed; Class= Other Asset-Backed Security; Instrument Type =OAB

1 SGC Securities include all SLF Securities other than asset-backed securities, asset-backed commercial paper and non-mortgage loan portfolio.

2 IG Corporate Debt Securities means securities which are Investment Grade Corporate Debt Securities of higher grade quality (A- or higher) and lower grade quality (BBB+, BBB, BBB-). IG Corporate Debt Securities are securities rated BBB- or higher (equivalent).

3 Lynx Participants are financial institutions who directly participate in Canada’s high-value payment system, including chartered banks listed on Schedule I of the Bank Act, some foreign bank branches listed on Schedule III of the Bank Act and other financial institutions.

Product Specifications - SGC Securities Basket

SGC Securities Basket Basket of SGC Securities satisfying specified haircuts and Concentration Limits. For each series, a single basket is created to secure all the related SGC Notes for which a bank/dealer has subscribed.
SGC Securities (CDSX Securities)

CDS Type: Debt
CDS Class (Instrument type):

  • Canadian Government Bonds
  • (CDA) Canada Treasury Bill (CTB)
  • Corporate Bonds (CRP)1
  • Provincial Bonds (PRV)
  • Provincial Savings Bonds
  • (PSB) Provincial Notes (PN)
  • Provincial treasury bills (PTB)
  • Municipal Bonds (MUN)
  • Municipal Notes (MN)
  • Mortgage Backed Security (MBS): NHA-MBS pools only2
  • Commercial Paper (CP)
  • Bearer Deposit Note (BDN)
  • Zero Coupon Bonds - STRIP Instruments (PRN, RCP), Strip Package (PKC, CPN)
  • Certificate of Deposit (CD)

Ref: https://www.cds.ca/resource/en/287

Denomination Canadian-dollar
Min. Amount Outstanding at Issuance C$25M
Min. Remaining Time to Maturity (Business Day) 10 business days
Optionality The security must not have an embedded option or carry a right of conversion into equity securities, with the exceptions of non-financial calls (i.e. “Canada Call”) or “soft bullets” in the case of covered bonds.
SGC Initial Securities Adjustments (Haircuts) Margins (haircuts) published by BoC for SLF Securities on the BoC website, as adjusted by CDCC3 from time to time for the SGC Securities included in each SGC Securities Basket as published on CDCC’s website (for each eligible ISIN)
Minimal Equivalent Rating4

As published by BoC for SLF Securities on the BoC website, except for corporate debt securities. All SGC Securities will have a credit rating of investment grade.

  • Corporate and commercial paper: BBB-
  • Municipal bonds: A
  • Other Public Sector securities: AA-
  • Covered Bonds: AAA
SGC Securities Basket Concentration Limits

Issuer Concentration Limit

  • ≤ 5% limit for any single IG Corporate Debt Securities issuer and Municipal Debt Securities issuer

Category Concentration Limit

  • ≤ 25% limit for Mortgage Backed Securities
  • ≤10% for Covered bonds
  • ≤ 25% limit for Municipal Debt Securities
  • ≤ 25% limit for any single industry sector of IG Corporate Debt Securities5
  • ≤ 25% limit for Non SLF IG Corporate Debt Securities

1 Including Covered Bonds.

2 NHA MBS pools 975, 965 & 981

3 For Non SLF IG Corporate Debt Securities and debt securities of Lynx participants rated BBB+, BBB or BBB- that are currently not covered by the BoC’s Standing Liquidity Facility ‘haircuts’, CDCC will apply a 25% buffer adjustment over the level of the BoC’s Standing Liquidity Facility ‘haircuts’ for eligible SLF corporate debt securities.

4 Refer to Clearstream CmaX product guide, section 7 for details on the ratings methodology: https://www.clearstream.com/resource/blob/1318456/71a601149e9d4bdf070d0be5d42f4f58/cmax-product-guide-data.pdf

5 Excluding Covered bonds. Industry sectors of IG Corporate Debt Securities are defined by CCMS and are posted on CDCC’s website: https://www.cdcc.ca/en/

Comparison table for money market instruments in Canada

SGC NOTES ABCP (standard) GoC T-BILL BDN BA
Credit rating P-1 (equivalent R-1 High) Typically R-1 (High) R-1 (high) Typically R-1 (High) Typically R-1 (High)
Term 1m, 2m, 3m, up to 12m (Mostly 1m) Up to 12m 1m, 3m, 6m, 12m 3m to 12m Mostly 1m
Single Security with Identifier (CUSIP/ISIN) Yes Yes Yes Yes Yes
Market Liquidity Expected medium/high Low Highest Low (tenor dependant) High
Yield pickup vs T-Bills Expected High1 High N/A Medium/Low High
Complexity Medium/High High Low Low Low
Transparency/Disclosure High Low High Low Low
Risk Management Active by CDCC Limited N/A Internal Internal
Collateral HQLA: managed to specific criteria Receivables; ABS, MBS and other loans N/A N/A N/A
Loss Given Default Very low: Daily management and stabilization to maintain quality High to low / structure and asset performance dependant N/A Pari-passu with issuer’s senior debt Pari-passu with issuer’s senior debt
BoC SLF Eligible Pending Approval Yes, with many restrictions Yes Yes but very limited: excluding those of Lynx participants and related entities Yes but very limited: excluding those of Lynx participants and related entities
Credit/Liquidity Risk - primary payment source Counterparty payment to repurchase assets at repo close Collections from assets- OverCollateralized, tranches Obligation of the issuing federal government Obligation of the issuing bank Obligation of the issuing bank
Backup Source of Liquidity Repo agreement serves liquidity support Trust can conditionally draw on liquidity lines from bank sponsors N/A N/A N/A

1 Market price based on demand/supply (not CDCC) will set the level. The best proxy is ABCP in Canada.

Have a question?

Contact us at cdcc-cs@tmx.com and we will be happy to assist you.