OSFI’s ruling on HISA ETFs and its potential impact on the product moving forward
Yields on popular products could drop after OSFI’s new requirements take effect in 2024.
Against the backdrop of a rising rate environment, High Interest Savings Account (HISA) ETFs have grown in popularity due to their ability to allow investors to benefit from elevated interest rates while providing a high degree of liquidity, as withdrawals usually aren’t subject to restrictions. On October 31st, 2023, the Office of the Superintendent of Financial Institutions (OSFI) announced changes pertaining to the liquidity requirements for HISA ETFs that may affect the rates offered by these product types going forward.
HISA ETFs and Liquidity Adequacy
On May 10th, 2023 the OSFI initiated a study focusing on the Liquidity Adequacy Requirements (LAR) Guideline, a framework for assessing the liquidity adequacy of banks, bank holding companies, and federally regulated trust and loan companies, as it pertains to wholesale funding for HISA ETFs. The study sought to determine if there would be liquidity concerns stemming from HISA ETFs, as they are able to pay high interest rates because select banks offer them access to wholesale funding – that is, the banks pay the funds premium interest rates they would normally reserve for institutional clients, or for large orders. Similar rates would be available to wealthy retail investors who wanted to deposit millions of dollars.
Because HISA ETFs provide a high degree of liquidity, the concern was that the current liquidity coverage rules in place for banks, as it pertains to this product type, were insufficient and that banks would not have the adequate capital in place if there is a “en masse” liquidity event that occurred with these products.
Appropriate funding for appropriate risk
Based on OSFI’s findings, though HISA ETFs exhibit retail-like characteristics, the wholesale funding products they analyzed during their research were held directly by fund managers for purposes that are not specifically operational. Simply put, because of the new OSFI rules, the money in cash ETFs – which gets invested in bank savings accounts with preferential rates to generate their yield – will have to be treated as wholesale deposits, not retail deposits. Unsecured wholesale funding, which covers deposits from organizations such as small businesses and financial institutions, may see more rapid withdrawals (i.e., the run-off rate ranges from 5% for small businesses to 100% for securities firms), as such there needs to be sufficient high-quality liquid assets, such as government bonds, to support all HISA ETF balances that can be withdrawn within 30 days. Previously, banks had largely maintained a 40% runoff rate on HISA assets before this ruling.
The resulting impacting
Following the OSFI’s announcement, the greatest takeaway has been that HISA ETFs will pay a lower yield going forward. Given that OSFI’s changes don’t come into effect until January 31st, 2024, investors could examine the landscape and see how asset managers work with their banks to determine what rates on these products might be in the future.
While these changes by OSFI will impact many HISA ETFs such as the Purpose High Interest Savings Fund (Ticker: PSA), Horizons High Interest Savings ETF (Ticker: HSAV), CI High Interest Savings ETF (Ticker: CSAV), and Evolve ETF’s High Interest Savings Account (Ticker: HISA); Horizons ETFs Management (Canada) Inc. has published an FAQ on the OSFI decision that informs their investors of the changes occurring, but it also applicable to other HISA ETF investors and stakeholders.
Please note this article is for information purposes only and does not in any way constitute investment advice. It is essential that you seek advice from a registered financial professional prior to making any investment decision.
