Canadian Payments Association By-law No. 9 — Lynx: SOR/2021-182

Canada Gazette, Part II, Volume 155, Number 17

Registration
SOR/2021-182 August 5, 2021

CANADIAN PAYMENTS ACT

The Board of Directors of the Canadian Payments Association, pursuant to subsection 18(1) footnote a of the Canadian Payments Act footnote b, makes the annexed Canadian Payments Association By-law No. 9 — Lynx.

Ottawa, April 9, 2021

Eileen Mercier
Chairperson of the Board of Directors of the Canadian Payments Association

The Minister of Finance, pursuant to subsection 18(2) footnote c of the Canadian Payments Act footnote b, approves the annexed Canadian Payments Association By-law No. 9 — Lynx made by the Board of Directors of the Canadian Payments Association.

Ottawa, August 5, 2021

Chrystia Freeland
Minister of Finance

Canadian Payments Association By-law No. 9 — Lynx

Definitions

Definitions

1 The following definitions apply in this By-law.

Act
means the Canadian Payments Act. (Loi)
Bank
means the Bank of Canada. (Banque)
business day
has the same meaning as in the Rules. (jour ouvrable)
collateral
means a form of collateral that is identified by the Bank in written communications with members as an acceptable form of security for funds loaned or advanced to the member by the Bank. (garantie)
conditional release mechanism
means a mechanism in Lynx in which settlement instructions are temporarily held before being sent to a settlement mechanism or being rejected. (mécanisme de déblocage conditionnel)
entry
means, in respect of an entry to a Lynx account or an intraday loan account, an entry on the books of the Bank. (écriture)
finalization window
means the final window of the payments processing cycle. (période de clôture)
financial message service provider
means a person who, or an entity that, provides an electronic message service that allows members to exchange financial information, but does not include the Association or a member. (fournisseur de service de messagerie financière)
intraday loan
means a loan made by the Bank to a participant in accordance with subsection 22(1). (prêt intrajournalier)
intraday loan account
means an account on the books of the Bank that a participant has in Lynx and to which the Association makes entries respecting the making and repayment of the participant’s intraday loan. (compte de prêt intrajournalier)
Lynx
means the electronic funds transfer system that is owned and operated by the Association. (Lynx)
Lynx account
means an account on the books of the Bank that a participant has in Lynx and to which the Association makes entries respecting the settlement of Lynx payment obligations and transfers of funds to and from the account. (compte Lynx)
Lynx operating schedule
means the schedule for Lynx operations that is set out in the Rules. (horaire d’exploitation de Lynx)
Lynx payment obligation
means the obligation of a sending participant to pay a fixed amount to a receiving participant through Lynx. (obligation de paiement de Lynx)
overnight advance
means a loan that has a term of one business day, is on the books of the Bank and is made by the Bank to a participant for the purpose of enabling the participant to repay its intraday loan. (avance à un jour)
participant
means a member who is approved to participate in Lynx in accordance with this By-law. (participant)
payee
means the person, including a receiving participant, to whom the amount specified in a payment message is to be paid or credited, whether or not that person is the ultimate beneficiary of the amount. (bénéficiaire)
payment confirmation reference number
means the alpha-numeric confirmation number that is generated by Lynx to identify a Lynx payment obligation that has been settled through Lynx. (numéro de confirmation du paiement)
payment message
means an electronic message that contains settlement instructions and the information necessary for the receiving participant to make the amount of the payment finally and irrevocably available to the payee. (message de paiement)
payments processing cycle
means the portion of the Lynx operating schedule during which Lynx payment obligations may be settled through Lynx, including the finalization window. (cycle de traitement des paiements)
pledge
means a grant to the Bank of security in collateral for funds loaned or advanced by the Bank, and it includes the grant of security in which the Bank does not take possession of the collateral. (nantissement)
real-time settlement mechanism
means the settlement mechanism that is used to make and repay intraday loans and make overnight advances. (mécanisme de règlement en temps réel)
receiving participant
means a participant who receives a payment message from another participant. (participant destinataire)
reserved collateral mechanism
means the settlement mechanism that is used only to settle Lynx payment obligations that are between the Bank and a participant and for which the payee is CDS Clearing and Depository Services Inc., a corporation incorporated under the Canada Business Corporations Act. (mécanisme de garantie réservée)
Rules
means the rules made by the Board respecting Lynx. (règles)
sending participant
means a participant who sends a payment message to another participant. (participant expéditeur)
settlement instructions
means information contained in a payment message that sets out a Lynx payment obligation and the details necessary for it to be settled through Lynx. (instructions de règlement)
settlement mechanism
means a mechanism in Lynx that is used to settle Lynx payment obligations. (mécanisme de règlement)

PART 1

General

Application

Application

2 (1) This By-law applies to the clearing and settlement of payment messages and their associated Lynx payment obligations through Lynx.

Scope

(2) Each participant must comply with the provisions of this By-law and the Rules.

Limitation — rights, liabilities, duties and obligations

(3) Except as otherwise expressly provided in this By-law or the Rules, nothing in this By-law or the Rules

Association’s Responsibilities

Association responsible for Lynx

3 (1) The Association must manage, operate and maintain Lynx and ensure that Lynx is capable of performing all activities and functions required by this By-law and the Rules.

Association responsible for contractors

(2) If the Association enters into a contract with another person for the maintenance of Lynx or for performance of an activity or function required by this By-law or the Rules, the Association remains responsible for ensuring that Lynx is capable of performing all activities and functions required by this By-law and the Rules.

Exclusion of Liability

Association and Bank

4 Neither the Association nor the Bank, including their respective directors, officers and employees, is liable for any loss or damage suffered by a member as a result of anything done or omitted to be done in good faith in the administration or discharge of any powers or duties that are intended or authorized to be executed or performed under this By-law or the Rules.

Access to Information

Access provided

5 The Association or a participant, regardless of whether the participant is subject to a suspension under any of sections 8 to 10, may, in accordance with the Rules, access information in Lynx relating to the operation of Lynx.

PART 2

Participation in Lynx

Interpretation

Interpretation — participant

6 In sections 8 to 13, a reference to a participant does not include a reference to the Bank.

Application to Be Participant

Application

7 (1) A member may, in the form and manner set out in the Rules, make an application to the President to be a participant.

Approval criteria

(2) The President must approve the application if the member demonstrates that it has

Suspension and Revocation

Suspension

Suspension — access to accounts

8 The President must suspend a participant’s permission to participate in Lynx if the Bank notifies the President that the participant no longer has access to its Lynx accounts or intraday loan account.

Suspension — other

9 (1) The President may suspend a participant’s permission to participate in Lynx if

Prior notice to Bank

(2) Before making a suspension, the President must provide the Bank with notice of the intention to make the suspension.

Suspension — exceptional circumstances

10 (1) If an agent of Her Majesty in right of Canada, an agent or mandatary of Her Majesty in right of a province, a regulator or a supervisory body takes control of a participant or any of its assets or makes a declaration that a participant is considered to be no longer viable or that a participant is unable to meet its liabilities as they become due, the President may, after being advised of such an action having been taken or such a declaration having been made and with the concurrence of the Minister and the Governor of the Bank, suspend the participant’s permission to participate in Lynx if its further participation could adversely affect the efficiency, safety or soundness of Lynx.

Reinstatement

(2) The President may reinstate the participant’s permission to participate in Lynx if, with the concurrence of the Minister and the Governor of the Bank, the President determines that the participant’s further participation in Lynx will not adversely affect the efficiency, safety or soundness of Lynx.

Notice to participants

11 After making a suspension under this By-law, the President must

Revocation

Revocation by Board

12 (1) The Board may revoke a member’s approval to be a participant in Lynx if the participant

Prior notice to Bank

(2) Before making a revocation, the Board must provide the Bank with notice of the intention to make the revocation.

Notice by President

(3) After the Board makes a revocation, the President must

Reinstatement

Application

13 (1) A participant who has had its permission to participate in Lynx suspended under section 8 or 9 or a member who has had its approval to be a participant in Lynx revoked under section 12 may, in the form and manner set out in the Rules, make an application to the President to have that permission or approval reinstated.

Reinstatement

(2) The President must reinstate the permission or approval if the application demonstrates that the circumstances giving rise to the suspension or revocation no longer exist.

Withdrawal

Notice of withdrawal

14 A participant may cease to be a participant in Lynx by providing a notice of withdrawal to the President in the form and manner set out in the Rules.

PART 3

Lynx Operations

General

Operate accounts

15 The Association must operate the following accounts in Lynx on behalf of the Bank:

Operate every business day

16 (1) Lynx must operate every business day and in accordance with the Lynx operating schedule.

Lynx access

(2) All participants whose permission to participate in Lynx is not suspended must be provided with access to Lynx every business day, including access to all settlement mechanisms.

Connecting to Lynx required

17 All participants whose permission to participate in Lynx is not suspended must connect to Lynx every business day unless technical difficulties prevent them from connecting.

Liquidity

Collateral

Pledge and assessment

18 (1) Each participant other than the Bank must pledge collateral and the Bank must, before the beginning of the payments processing cycle every business day, assess the value of that collateral.

Allocation

(2) Before the beginning of the payments processing cycle every business day, each participant other than the Bank must allocate all or part of the assessed value of its pledged collateral as security for its intraday loan.

Change to allocation

(3) A participant may change the allocation of collateral any time before the beginning of the finalization window. However, the assessed value of the allocated collateral must not be less than the outstanding amount of the participant’s intraday loan at the time the change is made.

Limit on reassessment

(4) During the period beginning when the credit limit established for a participant under paragraph 19(1)(a) is provided to the Association and ending when the payments processing cycle ends, the Bank must not reassess the value of the collateral allocated by the participant.

Credit Limit

Credit limit established

19 (1) Before the beginning of the payments processing cycle every business day, the Bank must

New credit limit

(2) If a participant changes its allocation in accordance with subsection 18(3), the Bank must establish a new credit limit for that participant in accordance with paragraph (1)(a) and provide it to the Association.

Funding Settlement Mechanisms

Minimum amount of funds

20 Before the beginning of the payments processing cycle on a business day, the Association may, in accordance with the Rules, set the minimum amount of funds that a participant other than the Bank must apportion to a settlement mechanism under subsection 21(1).

Apportion funds

21 (1) For the purpose of funding the settlement of Lynx payment obligations in a settlement mechanism, a participant other than the Bank may — within the period before the finalization window set out in the Rules and in accordance with the procedures set out in the Rules — apportion an amount of funds from its credit limit to its Lynx account for that settlement mechanism.

Minimum

(2) However, if the Association establishes a minimum amount of funds to be apportioned to a settlement mechanism, the participant must apportion an amount of funds from its credit limit to its Lynx account for that mechanism that is no less than the minimum established.

Intraday Loan

Bank makes intraday loan

22 (1) Every business day, the Bank must make an intraday loan to each participant that is equal to the total amount of funds apportioned to all settlement mechanisms by the participant under subsection 21(1).

Instructions to repay intraday loan

(2) A participant may, within the period before the finalization window set out in the Rules, instruct the Association to repay all or part of its intraday loan by transferring funds from any of its Lynx accounts to its intraday loan account.

Outstanding amount of intraday loan

(3) For greater certainty, the outstanding amount of a participant’s intraday loan is, at any given time in the payments processing cycle, equal to the amount of the intraday loan made under subsection (1) less the amount of any repayments made in accordance with repayments instructed under subsection (2).

Transfers and entries

(4) The Association must

Participant’s instructions

23 (1) A participant may, within the period before the finalization window set out in the Rules, instruct the Association to transfer funds between any of its Lynx accounts — other than its account for the reserved collateral mechanism — if the transfer will not result in a negative balance in any of those accounts.

Transfers and entries

(2) Subject to subsection 24(3), the Association must

Direction by Bank to repay

24 (1) If directed by the Bank, the Association must

Condition

(2) The Bank must not make a direction other than for a reason specified in the Rules.

Instruction to repay or transfer

(3) If a direction is made under subsection (1), any repayment or transfer instructed by the participant under subsection 22(2) or 23(1) may be effected by the Association only after the partial repayment of the intraday loan has been made.

Liquidity for Lynx Payment Obligations

Liquidity available

25 At any time, the total amount of liquidity available to a participant to settle Lynx payment obligations is equal to the amount calculated in accordance with the following formula:

A = B + (C – D)
where
A
is the total amount of liquidity available to a participant to settle Lynx payment obligations;
B
is the participant’s credit limit;
C
is the total amount of the payments received by the participant from the settlement of Lynx payment obligations in all settlement mechanisms; and
D
is the total amount of the payments sent by the participant in settlement of Lynx payment obligations that have been settled through Lynx in all settlement mechanisms.

Payment Messages

Payment items

26 For the purpose of the definition payment item in subsection 2(1) of the Act, payment messages are a class of payment items.

Sending payment messages

27 (1) A participant may, in accordance with the procedures set out in the Rules, send a payment message to another participant for the settlement of a Lynx payment obligation through Lynx.

Designation of settlement mechanism

(2) The participant must designate in the payment message the settlement mechanism that is to be used.

Settlement

Financial message service provider

28 The Association must arrange for a financial message service provider to extract settlement instructions from payment messages, send those settlement instructions to Lynx and provide participants with payment messages and payment confirmation reference numbers.

Extraction of settlement instructions by participant

29 A sending participant may extract the settlement instructions from a payment message and send them to Lynx if, as a result of technical difficulties,

Settlement instructions sent to settlement mechanism

30 (1) Immediately after receiving settlement instructions, Lynx must send them to the settlement mechanism designated under subsection 27(2).

Exceptions

(2) Despite subsection (1), the settlement instructions must

Settlement required

31 (1) Subject to subsection (2), the Association must settle each Lynx payment obligation for which settlement instructions are sent to a settlement mechanism under subsection 30(1) or from the conditional release mechanism.

Exception — negative balance

(2) Unless the sending participant is the Bank, the Association must not settle a Lynx payment obligation if settling it would result in a negative balance in the Lynx account for the settlement mechanism designated under subsection 27(2).

Settlement through Lynx

32 (1) For the purpose of this By-law, a Lynx payment obligation is settled though Lynx when

Payment confirmation reference number

(2) After a Lynx payment obligation is settled through Lynx, the Association must provide the financial message service provider with the payment confirmation reference number that is to accompany the payment message that the service provider will provide to the participants.

Finality for participants

33 A sending participant’s payment to a receiving participant is final and irrevocable when the Lynx payment obligation is settled through Lynx in accordance with subsection 32(1).

Settlement queues

34 (1) If a Lynx payment obligation cannot be settled through Lynx immediately after the settlement instructions are sent to a settlement mechanism, those instructions must

Removal from queue

(2) A sending participant may, at any time, remove from a settlement queue any settlement instructions that were contained in a payment message that it sent.

Rejection of settlement instructions

35 Settlement instructions must be rejected if

Payments to Payees

Payment

36 (1) After a Lynx payment obligation is settled through Lynx and the receiving participant has the payment message and the payment confirmation reference number, the receiving participant must make the amount of the payment finally and irrevocably available to the payee

Service charges

(2) A receiving participant may deduct the amount of a service charge from the amount of a payment and must comply with the deduction and disclosure procedures, if any, set out in the Rules.

Final and irrevocable

(3) The amount of a payment is made finally and irrevocably available to a payee when the earliest of the following actions is taken:

Representation to payee

37 (1) A receiving participant must not represent to a payee that a payment it has made to the payee is a payment under section 36 unless there is an associated Lynx payment obligation that has been settled through Lynx.

Finality for payee

(2) If a receiving participant makes a payment available to a payee and there is no associated Lynx payment obligation or that obligation has not yet been settled through Lynx, the amount of the payment is made finally and irrevocably available to the payee if

Exceptional circumstances

38 If any of the following exceptional circumstances exist, the receiving participant must comply with the procedures set out in the Rules for those circumstances instead of making the amount of the payment finally and irrevocably available to the payee in accordance with section 36:

Payment confirmation reference number

39 A receiving participant must provide a payee with the payment confirmation reference number if the receiving participant has the number and it is requested by the payee.

Payee identifier

40 (1) A receiving participant who receives a payment message that identifies the payee both by name and an account number or other identifier specified in the Rules is not required to detect any inconsistency between them and may, for the purpose of making the amount of the payment available to the payee, rely on that account number or other identifier.

Reliance on payee identifier

(2) A receiving participant who relies on an account number or other identifier under subsection (1) is deemed to have complied with section 36 even if that reliance results in the amount of the payment being made available to a person other than the payee identified by name in the payment message.

Obligations to payee

41 The obligations of a receiving participant under any of sections 36 to 40 are to the payee and no obligation is owed by the receiving participant to the sending participant, the payor or any other person solely because of any of those sections.

Requirements not limited

42 The requirements set out in sections 36 to 41 must not be limited by the Rules or any agreement.

Repayment of Intraday Loan

Consolidation of balances

43 (1) Before the beginning of the finalization window, the Association must, for each participant, consolidate into the participant’s Lynx account for the real-time settlement mechanism the balances in all of the participant’s other Lynx accounts.

Transfers and entries

(2) The Association must

Repayment

44 (1) If the balance in a participant’s intraday loan account is greater than zero when the finalization window begins, the Association must

Balances provided

(2) After making any transfer required under subsection (1), the Association must provide the Bank with the balance in the participant’s Lynx account for the real-time settlement mechanism and the participant’s intraday loan account.

Transfer to Bank’s Lynx account

(3) The Association must transfer the amount of the balances consolidated under subsection 43(1), less any amount transferred under subsection (1), to the Bank’s Lynx account for the real-time settlement mechanism and make the corresponding entries to those accounts in accordance with the procedures set out in the Rules.

Rights and liabilities

(4) For greater certainty, the respective rights and liabilities of the Bank and a participant in respect of the amount transferred to the Bank under subsection (3) are governed in accordance with the terms of the agreements between them.

Overnight Advances

Advance by Bank

45 (1) If the balance in a participant’s intraday loan account remains greater than zero after a transfer referred to in paragraph 44(1)(a) has been made, the Bank must make an overnight advance to the participant in an amount equal to the outstanding balance of the intraday loan.

Transfer and entries

(2) The Association must

Rights and liabilities

(3) For greater certainty, the respective rights and liabilities of the Bank and a participant in respect of an overnight advance are governed in accordance with the terms of the agreements between them.

Intraday loan repaid

46 A participant’s intraday loan is repaid when the balance of in its intraday loan account is reduced to zero by means of a transfer referred to in paragraph 44(1)(a) or subsection 45(2).

Application of sections 36 to 46

47 (1) Subject to subsection (2), sections 36 to 46 apply in respect of a participant who is subject to a suspension or revocation under this By-law.

Payment to payee

(2) A participant who is subject to a suspension or revocation under this By-law is required to make the amount of a payment available to a payee only if the associated Lynx payment obligation is settled through Lynx before the suspension or revocation, as the case may be.

End of Payments Processing Cycle

End of cycle

48 The payments processing cycle ends when the Association has made all transfers and entries required under section 44 and subsection 45(2).

Emergencies

Emergency condition

49 If communications between Lynx and a participant are interrupted, the ability of Lynx to receive, send or otherwise process payment messages or to settle Lynx payment obligations is impaired, the safe and efficient operation of Lynx is placed into question or any other emergency affects its operations, the President, with the prior agreement of the Bank and in accordance with the procedures set out in the Rules, may

PART 4

Consequential Amendments, Repeal and Coming into Force

Consequential Amendments

By-law No. 7 Respecting the Large Value Transfer System

50 (1) The definition business day in section 1 of the By-law No. 7 Respecting the Large Value Transfer System footnote 1 is replaced by the following:

business day
has the same meaning as in the rules. (jour ouvrable)

(2) Section 1 of the By-law is amended by adding the following in alphabetical order:

Lynx
has the same meaning as in section 1 of the Canadian Payments Association By-law No. 9 — Lynx. (Lynx)

51 Subsection 5(1) of the By-law is replaced by the following:

5 (1) The LVTS shall be operational and available to all participants whose LVTS status has not been revoked or suspended on a day that

52 The By-law is amended by adding the following after section 22:

22.1 Despite subsections 22(1) and (4), a bilateral credit limit referred to in those subsections must not be set or established at an amount greater than zero if Lynx is operational for any period of time after August 28, 2021.

53 Subsection 24(1) of the By-law is replaced by the following:

24 (1) Subject to subsection (1.1) and in accordance with any procedures that may be set out in the rules, a participant may, at any time during the LVTS cycle, increase any of the bilateral credit limits that it has established, by notifying the Association of the increase.

(1.1) A participant must not increase a bilateral credit limit that it has established if Lynx is operational for any period after August 28, 2021.

Canadian Payments Association By-law No. 3 — Payment Items and Automated Clearing Settlement System

54 (1) Section 5 of the Canadian Payments Association By-law No. 3 — Payment Items and Automated Clearing Settlement System footnote 2 is amended by adding the following after paragraph (a):

(2) Paragraph 5(a) of the By-law is repealed.

Canadian Payments Association By-law No. 2 — Finance

55 (1) The definitions participant and system in section 1 of the Canadian Payments Association By-law No. 2 — Finance footnote 3 are replaced by the following:

participant
means
  • (a) a participant as defined in section 1 of the By-law No. 7 Respecting the Large Value Transfer System;
  • (b) a participant as defined in section 1 of the Canadian Payments Association By-law No. 9 — Lynx;
  • (c) a direct clearer or group clearer as those terms are defined in section 1 of the Canadian Payments Association By-law No. 3 — Payment Items and Automated Clearing Settlement System; or
  • (d) a party to any other system. (participant)
system
means
  • (a) the Automated Clearing Settlement System as defined in section 1 of the Canadian Payments Association By-law No. 3 — Payment Items and Automated Clearing Settlement System;
  • (b) the Large Value Transfer System as defined in section 1 of the By-law No. 7 Respecting the Large Value Transfer System;
  • (c) Lynx as defined in section 1 of the Canadian Payments Association By-law No. 9 — Lynx; or
  • (d) any other clearing and settlement system, payment system or system or arrangement that is established or operated by the Association. (système)

(2) Paragraph (a) of the definition participant in section 1 of the By-law is repealed.

(3) Paragraph (b) of the definition system in section 1 of the By-law is repealed.

Canadian Payments Association By-law No. 1 — General

56 (1) The definition direct participant in subsection 18(3) of the Canadian Payments Association By-law No. 1 — General footnote 4 is amended by deleting “or” at the end of paragraph (b) and by replacing paragraph (c) with the following:

(2) Paragraph (b) of the definition direct participant in subsection 18(3) of the By-law is repealed.

(3) Subparagraph (d)(ii) of the definition direct participant in subsection 18(3) of the By-law is repealed.

Repeal

57 By-law No. 7 Respecting the Large Value Transfer System footnote 1 is repealed.

Coming into Force

August 28, 2021

58 (1) This By-law, other than subsections 54(2), 55(2) and (3) and 56(2) and (3) and section 57, comes into force on August 28, 2021.

June 1, 2022

(2) Subsections 54(2), 55(2) and (3) and 56(2) and (3) and section 57 come into force on June 1, 2022.

REGULATORY IMPACT ANALYSIS STATEMENT

(This statement is not part of the By-law.)

Issues

The creation of a new Canadian Payments Association by-law is required as a result of the introduction of Lynx, a new payment clearing and settlement system that will be a successor system to the Large Value Transfer System (LVTS).

Background

The Canadian Payments Association (doing business as Payments Canada) is a statutory corporation with a mandate to establish and operate national systems for the exchange, clearing and settlement of payments between its member financial institutions. The Canadian Payments Act (the Act) establishes the Canadian Payments Association and sets out its governance and membership. The Act also provides for the making of by-laws and rules by its Board of Directors in relation, among other things, to its clearing and settlement systems.

Payments Canada operates the LVTS, an electronic payments clearing and settlement system, launched in 1999, that enables participating financial institutions and their clients to send time sensitive or large value payments (sometimes referred to as “wire payments”) securely with certainty that the payment will settle. In 2020, the LVTS processed over 41 000 transactions ($398 billion) each business day — totalling almost $101 trillion over the year.

Lynx is a replacement for the LVTS, with a new financial risk model to further reduce systemic risks. As such, most of the Lynx by-law replicates the LVTS, with adjustments to reflect the new risk model and current drafting conventions.

The new risk model will see Lynx settle each payment immediately when sent, rather than at the end of the day, as it is done currently for the LVTS. As a result, credit risk exposure in Lynx will be covered by the financial institutions participating in the system rather than relying on a residual guarantee from the Bank of Canada.

The LVTS is a systemically important financial market infrastructure designated and overseen by the Bank of Canada under the Payment Clearing and Settlement Act (PCSA). Lynx was built to meet internationally agreed upon standards for minimizing systemic risk, and it is expected to be designated and overseen by the Bank of Canada under the PCSA.

The by-law provides a legal foundation for Lynx and is required to be in place before it can commence operation.

Objective

The purpose of Canadian Payments Association By-law No. 9 — Lynx (Lynx by-law) is to ensure Lynx, as a new clearing and settlement system, has a well-founded, clear, transparent and enforceable legal basis. The by-law has been created to ensure that the new system will operate in a safe, sound and efficient manner and that it will meet the Bank of Canada’s oversight requirements for systemically important financial market infrastructures.

As a fundamental element of the Lynx system, the by-law also articulates key rights and responsibilities for Lynx participants, those Payments Canada members financial institutions that will send and receive payments for settlement in Lynx. As such, the by-law supports the new financial risk framework and related operational requirements.

The by-law also incorporates a request from the Standing Joint Committee for the Scrutiny of Regulations to clarify when the President is to provide notification that a participant has been suspended (e.g. when declared to be non-viable).

Description

The Lynx by-law sets out foundational elements of the Lynx legal framework, supported by more specific operational and technical requirements and procedures within the Lynx rules and related documentation. The by-law is comprised of three parts.

General

This part of the by-law parallels the LVTS by-law. It focuses on Payments Canada’s operation of Lynx, the role of the Bank of Canada, and limits Payments Canada’s liability to financial institutions participating on the system. As many functions in Lynx are performed by the Association on behalf of the central bank, exclusion of liability also includes the Bank of Canada, its directors, officers and employees.

Participation

This part of the by-law parallels the LVTS by-law. It establishes the general eligibility criteria for Lynx participation. All participants are required to be members of Payments Canada, have a settlement account at the Bank of Canada, and meet the technical requirements set out in the by-law and rules. This part also permits Payments Canada to suspend participation in certain circumstances (e.g. being unable to meet the technical requirements) as well as sets out the criteria for reinstatement.

The by-law also clarifies when the President is to notify participants of a suspension. This resolves an issue with the LVTS raised by the Standing Joint Committee for the Scrutiny of Regulations.

Operations

This part of the by-law generally describes the intended day-to-day operations of Lynx. It also outlines the financial risk model, finality of payment, and the rights of responsibilities of participants using the system. Finally, it contemplates that disruptions could negatively impact the operations of Lynx, or of a Lynx participant.

In LVTS, settlement between participants occurs on a multilateral net basis at the end of each payment cycle. LVTS provides for a hybrid credit risk model combining survivor-pay and defaulter-pay loss-sharing arrangements supported by collateral. This means that if a participant fails to pay their end-of-cycle position there is a risk that surviving participants will be required to cover outstanding balance.

In Lynx, all payments are pre-funded, meaning that payments are sent and settled only when sufficient funds are available, mitigating for credit risk between participants by providing for a pure defaulter-pay model. In Lynx, settlement of each payment occurs on a real-time, gross basis.

As with the LVTS by-law, once settled, the payment between participants is final and irrevocable. Once a Lynx payment has been settled between participants, the receiving participant must make the amount of a payment finally and irrevocably available to the payee no later than the end of the payments processing cycle (approximately 7:00 p.m., eastern time), subject to certain exceptions (e.g. sanctions).

The Lynx by-law provides that the President of Payments Canada may, with prior agreement of the Bank of Canada, take certain actions to respond effectively to a wide variety of potential issues (e.g. operational failures, power outages, etc.).

Consequential amendments to other Canadian Payments Association by-laws

Consequential amendments to other Payments Canada by-laws are included to (1) implement Lynx and the eventual decommissioning of the LVTS; and (2) support the possible use of the LVTS should an emergency significantly impair Lynx during a transition period.

Implementing Lynx and decommissioning the LVTS

Amendments to Canadian Payments Association By-law No. 1 — General, Canadian Payments Association By-law No. 2 — Finance, and Canadian Payments Association By-law No. 3 — Payment Items and Automated Clearing Settlement System add references to Lynx, as applicable. These Lynx-related amendments will come into force at the same time as the new Lynx by-law. Once the LVTS is decommissioned, the references to it in these by-laws will be repealed.

The LVTS transition period

For a period following Lynx implementation, the LVTS will remain available to use as a back-up if Lynx becomes inoperative. Consequential amendments are made to By-law No. 7 Respecting the Large Value Transfer System to incorporate the Lynx financial risk model should the LVTS be inoperative. These amendments become effective with the commencement of Lynx. Further amendments will repeal the LVTS by-law when the LVTS is decommissioned.

Regulatory development

Consultation

Payments Canada consulted extensively with its member financial institutions, stakeholders, and regulators in support of Lynx system development, including all elements of the Lynx by-law.

In addition to working closely with members and regulators on key system aspects, Payments Canada conducted a broad public consultation on critical public policy proposals, with a focus on system access, finality of payments to payees, and the deduction of service changes. The consultation included Payments Canada members and stakeholders via the Member Advisory Council and Stakeholder Advisory Council. In addition, it was shared with targeted interest groups, trade associations, and was released on Payments Canada’s website for public comment. Respondents to the consultation were in general agreement with the policy direction proposed in the consultation document that is now set out in the Lynx by-law, with recognition that the legal framework for Lynx should continue to evolve after the initial release of the system as new processes, technology and standards are developed and refined.

The drafting instructions for the Lynx by-law and early drafts were also the subject of extensive consultations with members, via Payments Canada’s Legal and Policy Group. The group — which comprises operational, policy, and legal subject matter experts from the majority of Payments Canada’s current financial institutions participating in LVTS, including the Bank of Canada — provided significant review and input during the course of the development of the Lynx by-law. The Bank of Canada, from a system oversight perspective, and the Department of Finance were closely involved in the development of the Lynx by-law.

Modern treaty obligations and Indigenous engagement and consultation

The Lynx by-law has no impact on modern treaty obligations, and the launch of the Indigenous engagement and consultation process is not required.

Instrument choice

The Lynx by-law will be implemented under the Canadian Payments Act.

Regulatory analysis

Benefits and costs

Canadian businesses, consumers, and financial institutions will benefit from further enhancing the soundness of the systemically important payments system that underpins Canada’s economy.

There are no costs to the Government or taxpayers. Payments Canada is a statutory corporation (non-share capital) created by an Act of Parliament. It operates on a not-for-profit basis and recovers its costs through transaction fees and common service dues levied on members.

Financial institutions participating in the system will have cost implications related to moving from the LVTS to Lynx. The estimated industry costs shared between all anticipated Lynx participants (approximately 16 Payments Canada members), and the Bank of Canada is estimated to be approximately $85 million.

Small business lens

The small business lens does not apply, as the amendments do not impose costs on small businesses. All Lynx direct participants are financial institutions.

One-for-one rule

The one-for-one rule does not apply, as the by-law does not impose new administrative burden or costs on businesses.

Regulatory cooperation and alignment

The Lynx by-law is not related to any commitments with regard to regulatory cooperation or alignment.

Strategic environmental assessment

In accordance with the Cabinet Directive on the Environmental Assessment of Policy, Plan and Program Proposals, a preliminary scan concluded that a strategic environmental assessment is not required.

Gender-based analysis plus

No gender-based analysis plus (GBA+) issues have been identified for this proposal.

Implementation, compliance and enforcement, and service standards

In accordance with subsection 18(2) of the Canadian Payments Act, a new by-law requires approval by the Minister of Finance to come into force. Following ministerial approval, the by-law must be sent to all members by the President. Payments Canada is responsible for ensuring that its members comply with the Lynx by-law, as applicable. The creation of the Lynx by-law does not require any new mechanisms to ensure compliance and enforcement.

Contact

Sara Supple
Principal, Senior Legal Counsel
Payments Canada
Constitution Square, Tower II
350 Albert Street, Suite 800
Ottawa, Ontario
K1R 1A4
Email: ssupple@payments.ca