Payments Canada Begins Consultation on Policy Framework for High-Value Payments

On October 9, 2019, Payments Canada released a request for feedback on policy proposals for its Lynx Policy Framework.  Lynx is the new high-value payments system that Payments Canada is developing to replace Canada’s current Large Value Transfer System (LVTS).  The purpose of the Lynx Policy Framework and consultation is to inform the drafting of the by-law that will provide the legal foundation for the Lynx system.  The deadline for consultation submissions is November 15, 2019.

What is Lynx?

Lynx is the system that is scheduled to replace the current LVTS in as part of Payments Canada’s broader modernization program.  The goals of the Lynx implementation are to:

  1. Facilitate secure payment transfers between Payments Canada and member financial institutions;
  2. Ensure compliance with the Bank of Canada’s Risk-Management Standards for Designated Financial Market Infrastructures as a Real-Time Gross Settlement System (RTGS);
  3. Support Canada’s current needs and be adaptable to future changes in technology and business processes in an effective manner; and
  4. Provide a safe and secure foundation that supports a dynamic payments environment.

Lynx Policy Framework

The Lynx Policy Framework sets out several positions for discussion including:

Access

Lynx  and other critical financial market infrastructures are required by the Bank of Canada to have “objective, risk-based and publicly disclosed criteria for participation, which permit fair and open access”. Payments Canada has proposed that all Payments Canada members be eligible for Lynx participation provided they have completed  the necessary application procedures. 

The Lynx Policy Framework proposes no eligibility restrictions on affiliates of members becoming Lynx participants in their own right, as long as the affiliate possesses a separate settlement account and loan facility with the Bank of Canada and complies with Payments Canada’s operational, business continuity, risk-related obligations, including the requirements for individualized connections to the CPA Services Network (CSN) and the Society for Worldwide Interbank Telecommunication (SWIFT). 

Non-members of Payments Canada will not be eligible to be Lynx participants on the basis of the Canadian Payments Act.  Payments Canada can only enforce compliance for member institutions and therefore, only these entities will be eligible to become Lynx participants.

Finality

The finality of a payment is currently governed by sections 43-51 of By-law No. 7 Respecting the Large Value Transfer System. Currently, upon receiving a payment message, the receiving participant must make the amount of the payment message, finally and irrevocably available to the payee either at the end of the LVTS cycle or upon reasonable request by the payee for the payment amount.  The Lynx Policy Framework proposes that these requirements be continued under the Lynx system.

Currently, the timeline for when funds must be credited to the payee after the LVTS cycle has ended varies depending on whether an exception to the requirement for full, final and irrevocably funds availability applies. Generally, funds must be credited to the payee’s account before the next business day or as soon as practicable in the given circumstances.  The Lynx Policy Framework proposes continuing these requirements, but  suggests that Lynx will offer greater timing flexibility than today’s  LVTS system.  The Guideline for Misdirected LVTS Payments will continue to apply in the Lynx system.

Service Charges

The existing industry best practice regarding the deduction of charges for receipts of LVTS payments is for Payments Canada members to credit the recipient’s account with the full amount sent by the originator.  Fees or service charges are handled as a separate transaction.  Payments Canada proposes that this practice be continued in the new Lynx system.

Where do we go from here?

The Lynx Policy Framework is meant to be adaptable to Canada’s payments system’s future needs.  For example, Lynx will allow for the eventual migration to the ISO 20022 standard and be adjusted pending Payments Canada’s review of existing Best Practice for the Uniform Treatment of Wire Payments in the context of on-us transactions (Inter-financial institution wire payments).  Lynx is also intended to be flexible enough to accommodate any future legislative changes that may be introduced by the Government of Canada.

Key Takeaways

The Lynx Policy Framework sets out important considerations for the future of Canada’s payments infrastructure.  Interested parties can provide comments regarding the proposals contained in the Lynx Policy Framework by emailing [email protected] until November 15, 2019. 

For more information about our firm’s Fintech expertise, please see our Fintech group’s page.

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