THE ECONOMICS OF MONEY,BANKING, AND FINANCIAL MARKETS 467

CHAPTER 17

FYI

Tools of Monetary Policy

Monetary Policy Implementation in the LVTS
Environment

In the LVTS environment, the Bank of Canada
operates under a system of eight fixed dates
throughout the year for announcing, via a
press release (at 9:00 a.m.), the target and the
operating band for the overnight interest rate.
The upper limit of the operating band defines
the bank rate at which the Bank provides
overdraft loans to LVTS participants at the end
of the day and the lower limit is the rate the
Bank pays to LVTS participants with positive
settlement balances at the end of the day.
The operating band for the overnight
rate, reinforced by the Bank s standing liquidity facilities, and a target level of settlement balances (of roughly $50 million) are
currently the framework within which the
Bank of Canada implements monetary policy. The midpoint of the operating band, the
policy rate, is the operating target of the
Bank s monetary policy.
In targeting the midpoint of the operating
band, the Bank of Canada will intervene in
the overnight market at 11:45 a.m. to conduct
open market buyback operations at the target
overnight interest rate, if required. In particular, the Bank will use SPRAs if overnight

funds are traded above the target for the
overnight rate and SRAs if overnight funds
are traded below the target for the overnight
rate. There will be no Bank of Canada intervention in the overnight market if the
overnight rate is around the target rate.
To maintain the desired level of settlement balances, the Bank of Canada must
neutralize the net impact of its open market
buyback operations and of certain federal
government and Bank of Canada flows that
potentially affect settlement balances. The
neutralization is effected through the shifting
(transfer) of federal government deposits
(balances) between the government s
account at the Bank of Canada and the par-

ticipants in the auction of government cash
balances. The shifting is made through the
twice-daily auctions of Receiver General
(federal government) balances (the first at
9:15 a.m. and the second at 4:15 p.m.).
The LVTS has a pre-settlement trading
period of half an hour, at the end of the
banking day (6 6:30 p.m.), to permit participating financial institutions to adjust positions with each other (in the overnight
market) at a better return than can be
achieved at the Bank of Canada s standing
facilities. LVTS participants with settlement
imbalances at the end of the banking day use
the Bank of Canada s standing facilities to
bring their settlement balances to the target
level. That is, LVTS participants that require

an overdraft loan to cover negative settlement balances on the books of the Bank borrow from the Bank at the bank rate. LVTS
participants with positive settlement balances at the end of the day earn the bank
rate less 50 basis points.
The Market Timetable
9:00 a.m.

9:15 a.m.
11:45 a.m.
4:15 p.m.
6:00 p.m.
6:00
6:30 p.m.
8:00 p.m.
or earlier

Bank of Canada announces
changes (if any) to the target
and the operating band for
the overnight rate
Auction for (federal)
government cash balances
Open market buyback
operations (if required)
Auction for (federal)
government cash balances
Close of LVTS for client
transactions
Pre-settlement period
Settlement of LVTS balances
at the Bank of Canada

Source: Donna Howard, A Primer on the Implementation of Monetary Policy in the LVTS Environment, Bank of
Canada Review (Autumn, 1998): 57 66; The Framework for the Implementation of Monetary Policy in the Large
Value Transfer System Environment, Bank of Canada Release, March 31, 1999. Reprinted with permission.

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