The IMF and Risk Management in Canada

New developments in financial markets will present new challenges for risk management in Canada, according to the International Monetary Fund (IMF). With a "sound and stable financial system" in place, Canada has already made great progress in the area of risk management, but still has work to do. Addressing the risk management capabilities of the Canadian financial system, the IMF observes that "The changing nature of financial instruments, including the growing reliance on derivative and other off-balance sheet transactions, the securitization of assets in order to reduce the need for regulatory capital, and the rapid growth of life insurance segregated funds could increase the volatility of income and heightens the importance of maintaining and developing further good risk management tools." The IMF also suggests that the Canadian financial industry should work towards the coordination and harmonization of the regulatory framework, at both the federal and provincial levels. Recent cooperation in this area was seen with the restructuring of the respective roles of the exchanges, as reported below.

Source: IMF's statement of preliminary findings to the Executive Board

New Roles for Canadian Exchanges

The Canadian exchanges have changed the way they do business. Each exchange now specializes in one particular segment of the securities market. The concept behind the changes is to eliminate fragmentation of the markets, and enable each exchange to compete more efficiently in an increasingly competitive and global marketplace.

The Alberta and Vancouver Stock Exchanges have merged to become the Canadian Venture Exchange (CDNX). As the name implies, CDNX is a national venture capital exchange, concentrating solely on junior equities. The merger and specialization should reduce costs and benefit participants by making it easier for small businesses to raise capital.

The Toronto Stock Exchange (TSE) has given up junior equities and derivatives, and will exclusively trade senior equities. Concentrating on senior issues should allow the TSE to compete more effectively with exchanges such as Nasdaq and the New York Stock Exchange in the United States.

The Montreal Exchange (ME) no longer trades senior equities, focusing instead on the role of a national derivatives exchange (although a small part of its business will be a junior equity market linked to the CDNX). According to Luc Bertrand, Chairman of the Montreal Exchange, these changes are positive for both the ME and the industry. Focusing on derivatives not only makes good business sense for the ME, according to Bertrand, but is a natural fit, since the exchange was a leader in options and futures trading before the split. The reorganization will also simplify the use of these products for market participants. Bertrand anticipates considerable growth in the derivatives market as the demand from the industry for new risk management products increases.

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The strength of the global economy exceeded expectations during 1999, according to the Honourable Paul Martin, Minister of Finance. Canada showed better economic performance than anticipated, due to low rates of interest and inflation, as well as an increase in domestic demand, combined with a strong demand for exports. Japan and other Asian countries also performed better than anticipated, starting to recover from the Asian crisis much faster than generally expected. The United States continued its expansion, while growth in Europe was moderate.

Looking to the future, the ongoing strong performance of the U.S. and much of the rest of the world raises concerns about how long inflation and interest rates can be contained. Despite these pressures, Paul Martin expects Canada to record "one of the best rates of economic growth among the major industrial countries" for the year 2000. The chart below shows International Monetary Fund (IMF) GDP growth forecasts for the G-7 countries through 2000.