Annual capital markets report is made public for the first time
A range of risks to the stability of the Canadian financial system has been highlighted in new report from the Canadian Securities Administrators.
Its 2023 Annual Report on Capital Markets includes analysis of recent financial market trends and key vulnerabilities in Canadian capital markets and highlights the CSA's efforts to mitigate those vulnerabilities and associated risks. It’s the first time the report has been made public.
While risks to financial stability in Canadian capital markets are well contained, the report notes the challenging market environment due to higher interest rates and tighter monetary conditions.
Among the main concerns is the transition from the CDOR interest rate benchmark to CORRA. The report says there has been an acceleration of CORRA adoption in 2023 ahead of the last CDOR publication on June 28, 2024.
A decline in the overall credit quality profile of Canadian non-financial corporate bonds is also highlighted, although it’s noted that the higher interest rate environment has not adversely impacted trading activity and liquidity metrics were within normal ranges.
Crypto assets are never far away when risk is being discussed and the CSA report says the market remains “volatile and unstable.”
The failure of a large dealer would be a major issue for the financial system, given the interconnected nature of the industry, but the report says leverage levels are relatively low and appropriate measures to prevent failures are in place.
Private funds risk
For investment funds, liquidity risks remain low, and the report says that ETFs have stood up well to recent episodes of financial stress. “However, exempt funds that invest in private assets – such as private debt, private equity and real estate – report liquidity mismatches,” the report states.
"The mitigation of systemic risk is a core component of the CSA's mandate. Observations contained in this report are essential to practices that support the reduction of financial vulnerabilities," said Stan Magidson, CSA Chair and Chair and CEO of the Alberta Securities Commission. “CSA members' efforts to reduce risks in financial markets, including the potential impacts on industry and investors, are critical to maintaining fair and efficient capital markets.”
In November 2023, almost four in ten investment dealers and portfolio managers polled by the CSA expressed growing concern about the stability of the Canadian financial system with household debt cited as the most risky.
