How Does a Major Government Agency Select a Treasury System?
Canada Mortgage and Housing Corporation (CMHC) is Canada’s national housing agency. As an agent of the Canadian Government, CMHC is fully and directly guaranteed by the Government of Canada.
CMHC’s vision is realized through four key pillars: housing finance, research, assisted housing, and international activities. Through housing finance activities, including mortgage loan insurance and mortgage loan securitization, CMHC ensures availability, accessibility and choice of housing funding to Canadians by being creative, competitive and effective. CMHC’s research improves housing and supports the housing market by being the key Canadian source of reliable and objective housing information.
CMHC participates in assisted housing initiatives as directed by the federal government with ongoing responsibility for federal social-housing funding. In particular, CMHC supports aboriginal communities in their efforts to become self-sufficient in developing and maintaining their housing.
Finally, CMHC supports and promotes the export of Canadian housing products and expertise by identifying market opportunities and providing practical information and advice to the housing industry.
Within the activities described above, CMHC’s Treasury is responsible for many aspects, including the management of CMHC’s short-term and long-term debt program of both CMHC and the Canada Housing Trust (the largest borrowing program in Canada after the Government of Canada); the management of CMHC’s Insurance and Securitization Investment Funds; CMHC’s matched book repo program; the pricing of direct mortgages and loans, and corporate cash management. As a result, CMHC’s Treasury currently manages over C$15 billion in debt programs and C$10 billion in investments.
Of course, none of these activities would be possible without leading-edge middle and back offices, performed by CMHC’s Risk Management and Finance Divisions, respectively. CMHC’s Risk Management Division is responsible for policy development and monitoring; position reporting; credit reporting; market valuation, and performance measurement and attribution. Among many other things, the Finance Division is responsible for accounting; transaction and payment settlement; corporate banking, and cash monitoring and forecasting.
While CMHC may be Canada’s national housing agency, there are many institutions that can be considered as its peer. Because of its dual role as both a niche mortgage lender and mortgage insurer, CMHC can be compared to mortgage lenders, insurance companies. And, because of its Insurance and Securitization Investment Funds, CMHC can also be compared to large institutional money managers.
In terms of CMHC’s role as a Crown agency, comparable Canadian institutions would be other federal Crowns. As well, the Canadian environment encompasses many other governmental agencies that are active in the financial markets such as provincial agencies, particularly hydroelectric utilities, municipalities and regions, and, more recently, tax revenue securitizations.
While many institutions lend money via mortgages in Canada, including banks, trust companies, credit unions and caisses populaires, and other specialized firms, few entities lend money to CMHC’s clients at similar rates. CMHC lends to provinces, municipalities, non-profit and cooperative social housing sponsors, and aboriginal reserves on a break-even basis, allowing the borrower to obtain funding at rates that are not available elsewhere in the market. CMHC’s Government of Canada guarantee makes this possible. CMHC’s social housing activities are managed jointly with the provinces.
To remain at the top of its field, CMHC acknowledged at the start of this decade that it needed to implement a full front-to-middle-to-back-office system. CMHC needed to be able to consolidate, view, value, and shock its balance sheet as a whole, as well as at a detailed level. One area that required improvement was the consolidation of data from its lending activities with data from its Treasury activities. CMHC was looking for reliability, financial expertise, and flexibility. We found this in Trema when comparing treasury system vendors. In the end, it was that company’s financial proficiency and open-minded approach that made the difference.
To select the system, CMHC first engaged an outside consultant to narrow the possible systems to five. A rigorous evaluation methodology was created, including a spreadsheet containing technical and financial requirements, cut-off criteria, and a scripted demo with sample trades. In the end, this methodology proved effective in selecting the most appropriate vendor for CMHC’s needs, as it was possible to clearly assess the capabilities of each candidate system.
Prior to the implementation of Finance KIT, CMHC’s Treasury ran a potpourri of homemade and purchased solutions. There was, by example, one system for derivatives, one system for fixed income and spreadsheets for equities; loans were stored in a mainframe application, and debt was in a mixture of mainframe and spreadsheets. It was a significant and onerous task for CMHC’s Risk Management group to combine all this information and to provide the monitoring, analysis, and reporting expected. Comprehensive stress testing or interest rate shock modeling was extremely time-consuming and difficult.
Since going live with Finance KIT last year, CMHC has been able to improve the timeliness and comprehensiveness of its analyses. The system has enabled CMHC’s Treasury to view positions and portfolios on a consolidated basis and Treasury Monitor helps CMHC to slice and dice portfolios in many ways: by issuer, counterparty, maturity buckets, and instrument type among others. Trema’s solution has also facilitated the addition of new instrument types not previously considered because of system constraints. Limit Monitor has made it easier for CMHC to avoid limit violations. Through the use of pricing tools and Performance Monitor, pricing and performance calculations are now automated.
Finally, the accounting for CMHC’s portfolios has been moved from a spreadsheet-based generation of entries to the General Ledger to an automated process on a straight-through basis. Settlement instructions are sent to CMHC’s custodian electronically, enabling cradle-to-grave electronic processing.
CMHC is Trema’s first all-Canadian client. As a result, the idiosyncrasies of the Canadian market were not fully reflected in its system. While real-return bonds in Canada trade the same way as Swedish inflation-linked bonds, for example, monthly compounding swaps represented a new product to Trema. However, the company adapted its overnight index swap capabilities to the more general case of an average-rate or compounding swap as part of the changes needed to adapt to the Canadian market.
Our new system has also provided CMHC with an interface to other systems through comKIT, which allows scripted in- and output of data to Finance KIT. This has allowed CMHC to link Finance KIT to CMHC’s loans, General Ledger, and settlement systems, among others.
CMHC plans to use comKIT to link Finance KIT to Can-Deal, the leading Canadian electronic debt trading system, enabling CMHC to implement externally originated straight-through processing.
Our supplier is responsive to changing needs, evidenced by their emphasis on implementing and gaining expertise in non-Oracle database solutions such as Microsoft SQL. They provided technical advice and training to CMHC’s implementation staff and, this was ongoing throughout the project.
The implementation project was delivered on time and on budget, despite setbacks on both sides. To whit, when one implementation consultant became unavailable for personal reasons, our supplier brought in a replacement all the way from South Africa.
As CMHC becomes more familiar with its new system, it is moving further from its life before Finance KIT. Staff can now spend less time trying to keep up with processing transactions and generating reports and can move toward placing greater emphasis on analysis and idea generation
Per Homer, CFA, is Portfolio Manager, Money Markets, for CMHC.