A System with Zero Reserves and with Clearing Outside of the Central Bank: The Canadian Case

In a number of ways, implementing monetary policy in Canada stands apart from monetary policy in most other industrial countries. Commercial banks and other participants to the main clearinghouse - the large-value transfer system (LVTS) - hold no reserves at the central bank. Clearing and settlement is both in real time and net, while only settlement occurs on the books of the central bank. The Bank of Canada does not conduct open-market operations and rarely intervenes in the repo market; and despite this, the collateralized overnight rate always remains within 2 or 3 basis points of the target interest rate. The paper explains why this is so by describing the setup of the Canadian clearing and settlement system, including the rules that have been put forward in case a bank defaults on its due payments before settlement occurs. Some puzzles that arose through the years are also discussed, as well as the unlikely prospect of introducing blockchain technology in the Canadian clearing and settlement system.