Bay Street is fighting over high-interest ETFs that retail investors love, sparking a federal review

https://www.theglobeandmail.com/business/article-banks-high-interest-savings-etfs/

The federal banking watchdog has launched a formal review of cash exchange-traded funds, one of Canada’s most popular retail investments, amid a Bay Street spat that stems from surging demand for them.

The Office of the Superintendent of Financial Institutions, which regulates banks, launched its review in the fall and is studying any liquidity concerns posed by these ETFs, according to three financial industry sources. The Globe and Mail is not identifying the sources because they were not authorized to speak publicly about the matter.

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OSFI confirmed the existence of its review in an e-mail to The Globe. “Cash ETFs, which have become very attractive to investors in light of the rising rate environment, are being reviewed by OSFI,” spokesperson Carole Saindon wrote. “In particular, we are focused on understanding the characteristics of this product from a liquidity perspective to ensure banks have appropriate treatment and are managing liquidity risk effectively.”

The regulator did not comment on what had prompted its review, or whether a specific bank had complained. Every Big Six bank declined to comment on OSFI’s review, but the sources said that, in addition to the lower margins, some banks are concerned about how cash ETFs are structured.

Canada’s banks are heavily regulated, and there are now strict limits on how they fund their loans. Crucially, since the 2008-09 global financial crisis, OSFI has required them to fund more of their operations with highly liquid assets. Cash ETFs may not meet those guidelines.