Third-Party Deposit Market Access for Small Banks

Distribution
Accessibility Issues
for Third-Party
Deposits
Competitive Issues for Small Bank Competition in
Canadian Retail Deposits Markets

July 2014

Distribution Accessibility Issues for Third-‐‑Party Deposits
• • •
1
Distribution
Accessibility Issues
for Third-Party
Deposits
About This Response
International Financial Data Services Canada is pleased to
respond to the Canadian Government’s request for perspective
on competition issues surrounding small banks, deposit
gathering and third-‐‑party distribution access. This document
builds on the analysis of “Third Party GIC Rate and Volume
Characteristics 2006-‐‑2013” presented by IFDS last August.
This document attempts to present a balanced review of the
complex issues impacting small bank access to dealer
distribution for their deposit products. This third-‐‑party deposit
market represents over $220 billion of Canadian savings. It is an
important source of liquidity for both small and large banks in
Canada.
Small banks refer to a variety of licensed trust, banking and
credit union companies engaged in deposit and lending
activities in Canada. Small banks constitute a diverse
constituency. It would be a mistake therefore to suggest all
small banks have the same agendas, challenges or competitive
frameworks. By and large, small banks do share the challenge
of competing for customers in an oligopolistic environment
where entrenched large banks have the advantages of scale,
distribution and integration of retail and wholesale capital
control. Small banks are very reliant on these large bank
competitors for distribution, capital structuring and
infrastructure. The nature of “co-‐‑opetition” creates frictions as
there are differing desires to cooperate and compete within the
Problem Statement
• • •
Retail deposits balances
gathered through investment
dealers surpassed $220 billion
in 2013.
Third-‐‑party deposits are highly
cost-‐‑effective, elastic and
efficient – benefits big and
small banks.
Third-‐‑party CDIC deposits,
because of elasticity and market
size, have proven to be vital to
all banks during liquidity
during crisis events.
Global regulatory changes have
increased the value of retail
deposits – and increased the
value of how those funds are
raised.
Some – but not all – bank
reactions to the proposed
regulatory frameworks have
been to exert influence over in-‐‑
house dealers to favor
proprietary deposit products
thus restricting the market.
If this behavior became the
norm, if the liquidity pool is not
maintained in normal times, an
important liquidity channel for
small banks would be
jeopardized.

• • •
2
industry. Deposits distributed through dealer channels is one such area where those frictions are
currently felt.
But the small bank view point, if indeed there is just one, is but one input to the problem. Various
individual stakeholders – banks, dealers – will have unique objectives and agendas when looking at the
issue of access for deposits. In order to drive a long-‐‑term solution for deposit access, efforts need to be
taken to understand the needs of the dealer community and to address the cost and revenue
opportunities that drive some of the behavior outcomes impacting their reaction to the small banks.
Our essential observation is that a vibrant and open third-‐‑party deposit market serves the public
interests, by: providing choice and higher rates for investors; serving the interests of competition by
enabling small bank funding; and, more importantly, by providing a proven liquidity pool in the event
of crises. Therefore the discussion how much should the industry encourage the market in normal
liquidity periods in anticipation of periodic crises.
About International Financial Data Services
IFDS Canada is a Toronto based provider of technology and processing services to the global financial
services industry.
IFDS is a Canadian technology success story. Employing 700 associates, IFDS Canada is a leading IT
technology and operations specialist in the competitive Toronto financial technology sector. For over
30 years, IFDS has driven industry efficiency and innovation through its development of shared IT
infrastructure. Our systems currently administer over 12 million customer accounts, and $260 billion
assets. We service over 50 financial clients – including Canada’s largest banks, insurance companies
and global mutual fund companies. Our systems also run global investment back-‐‑offices in Europe,
Middle East and Asia. IFDS is a joint venture between global financial technology leaders DST Systems
and State Street Bank.
IFDS is an innovator for the investment and banking industries. In 2006 IFDS was the first provider to
offer savings account administration services to banks in order to facilitate deposit gathering in the
Canadian dealer channel. In 2011, IFDS launched a service to improve GIC processing for issuers and
thereby standardize the product for the dealer community. Through the application of technology and
standardization, IFDS is positioned to bring new efficiencies and products to the Canadian banking
and investment dealer markets.
IFDS is channel agnostic. IFDS is a founder and part owner of the FundSERV network and is an
integration partner with the Cannex Financial Exchanges network – two principal networks impacting
third-‐‑party deposit facilitation. IFDS, with our affiliate companies, are also leaders in the creation of
controlled direct and facilitated order systems for deposit and investment instruments.

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3
Our objective is to facilitate the growth of a stable, efficient and effective deposits market in Canada through back-‐‑
office processing and standardization.

Accessibility and Competition Objectives
The following objectives are identified as desirable outcomes of the analysis and recommendations:
• Predictable and affordable issuer access to dealer desks
• Fair compensation and cost/risk mitigation for dealers
• Transparent dealer rules/activities related to proprietary and third-‐‑party
deposits
• Responsible infrastructure and participation rules
• Stability of deposit market
• Investor/regulator stakeholder trust

• • •
4
Deposit and Third Market Environment
When many Canadians think about deposits – GICs, Savings,
Chequing – they think about bank branches and bank accounts.
Canada’s banking industry strength has been long built on their
retail banking operations. Through their branches, the banks
have extensive, stable and profitable loan and transaction
revenues. Deposits are the base of that stability, they are the
funding from which loan revenue is derived.
Deposit, Loan Mismatch
Canadian banks lend more through consumer mortgages, loans,
and credit cards than is available through purely consumer
deposit sourcesi. This mismatch is made possible in part due to
the successful investment alternatives in the Canadian market
and the long success of bank treasurers to fund their retail and
commercial lending book through alternative sources of
deposits, borrowing, asset securitization, and other forms of
funding.
With Basel III’s impending introduction changes are coming to
how regulators rank different sources of funding in order of their
perceived stability through times of financial stress means that
Canadian banks must reconsider how they manage the
mismatch between retail deposits and retail lending. As a result,
the treasurers have become more focused and more aggressive
on protecting and growing their liquidity sources; and notably
through proprietary channels.
Small banks feel this competition more directly as they do not
have the distribution resources to compete with larger banks for
deposits, and indeed often pay bank-‐‑owned dealers sales
commissions to source deposits through their channels.
The Third-Party Deposit Market
It surprises many that over 18% of deposit funds are gathered
through intermediaries outside of the branch. The $140 billion
GICs held in investment channels are now the single largest
category of fixed income investments in Canadaii. Investment-‐‑
based savings accounts represent $65 billion in outstanding
Third-Party Deposit
Market
• • •
• Over 80 banks/CU/Trust
companies offer GICs and
Savings accounts through
dealers.
• Rates adjusted daily and
listed publicly and with
dealers.
• Highly liquid, elastic and
rational ~$80 million a day
bought.
• 90% volume is CDIC
insured… 5% provincial …
<5% not insured.
• Cannex is the primary order
and settlement network for
GICs; FundSERV for
Savings Accounts.
• 75% of deposits sold
through 5 bank-‐‑owned
dealers… dealers and
issuers make discrete
distribution agreements.
• 22 dealers drive 90% of
deposit sales volumes.
• Deposits compete with
other investment products
(rate, transaction cost,
guaranty, redeemability).

• • •
5
balances and are the fastest growing investment category in Canadaiii. A further $50-‐‑ $60 billion
(advised-‐‑but-‐‑directly-‐‑held) deposits (i.e., funds held in direct savings accounts in President’s Choice
Financial, ING Direct, ICICIB, et al.) may also be included in this channel according to some sources
such as Investor Economics.iv
Through dealer listings and published rates, deposit issuers compete with other forms of investments
(bonds, mutual funds, stocks, etc.) for deposit dollars that they use to fund loans. In exchange,
investors receive access to high-‐‑yield, secure and flexible savings instruments for their investment,
RSP/TFSA/RESP, et al., accounts.
Unique and Important System
Canada has a unique system of gathering banking deposits through registered investment brokers,
dealers and advisors (third-‐‑parties). No other country operates a retail focused deposit system for
investment dealers. It is a critical component of systemic strength for the Canadian banking
community. At any time, deposit institutions with CDIC coverage can quickly raise deposits, if
required, through third-‐‑party channels, particularly dealers.
Third-‐‑party deposit investors are more affluent and sophisticated than branch investors. It is estimated
that the third-‐‑party investor market represents less than 10% of the total Canadian households but 80%
of deposit holdings. Average deposit investments are approximately five times larger than branch
average account size (average third-‐‑party deposit is $59,000). Since 2006, average deposit interest rates
in the third-‐‑party channel are approximately 40% higher than branch rates. Investors are charged no
transaction fees or commissions when purchasing a deposit account.
The third-‐‑party deposit channel grew as a result of two forces. First, investment customers have
increasingly desired deposit products (initially GICs, but recently savings accounts) as part of their
investment portfolio holdings. Second, the introduction of branchless and specialist banks in the 1990s
identified dealers as a potential sales channel and sought to develop the infrastructure to sell their
products.
Deposit product holdings in the dealer channel are expected to grow, driven by competitive pricing
trends and underlying needs of an aging Canadian investment population for flexible fixed income
investment alternatives. Individuals who establish advice-‐‑based relationships with investment dealers
are, in general, sophisticated and affluent. They look to diversify investment holdings with CDIC
coverage and seek advisors who offer the best yielding products.
Dynamic Strategic Environment
Dealers and the banks make active choices in defining their third-‐‑party distribution strategy. Dealers
choose issuer-‐‑banks based on capacity to consistently drive rate offers to customers, on their operations
sophistication, capacity to accept deposit flows and on issuer risksv. Issuers choose dealers based on

• • •
6
their funding expectations, marketshare, and process/willingness to board new deposit products. If an
issuer seeks to distribute its deposits through a particular dealer, the two parties endeavor to negotiate
a bi-‐‑lateral agreement that sets out the terms and conditions under which the issuer’s deposits will be
sold.vi Although the business model for distributing and settling deposits is substantially similar
throughout the industry, each issuer/dealer agreement is negotiated individually. Negotiations with
the largest bank-‐‑owned dealers are typically the most time-‐‑consuming and complex, even though the
distribution process is no different from other dealers.
The dealer decision process impacts the issuer-‐‑bank funding strategies, costs and risks. Issuers compete
and jostle for access to large dealers as a source of predictable funding. Furthermore, issuers are also
concerned about over-‐‑exposing themselves to dealer deposit sales volumes as the current deposit
model works without funding limits – issuers must accept the entire amount of daily purchases made
for them at the rate they posted. This exposure creates a risk for smaller issuers who cannot lend or
match deposit exposures appropriately, requiring them to choose to establish relationships with dealers
whose sales volumes are an appropriate match to their needs. Lastly, dealers prefer issuers to maintain
a constant competitive pricing strategy, not those who come and go from the market on an intermittent
basis. If issuers cannot (or do not) match a dealer’s funding and rate expectations over time, the
distribution relationship may be terminated.
Third-Party Deposits: Two Instruments
The third-‐‑party GIC and Savings accounts operate quite differently and offer different funding
strengths and weakness for issuer-‐‑banks treasurers.
The $65 billion in third-‐‑party Savings product leverages FundServ mutual fund infrastructure. As a
mutual fund, the Savings product is very cost effective as it leverages existing dealer operations and
settlement infrastructure. There are also several providers of low-‐‑cost outsourcing solutions to enable
the bank back-‐‑office savings solution, including services offered by IFDS, Citi, RBC Investor Services
and CGI.
Issuers of savings accounts still require distribution agreements with dealers, but once online with
FundSERV the savings account rates are accessible to all FundSERV participants. The product was
initially designed to compete with Money Market Mutual Funds, and commissions and funding rules
generally follow money market fund principles.
Savings products, however, are not generally seen as preferred funding by small banks because
liquidity and capital rules penalize savings as “hot money” (that is money that can be withdrawn at
any time, and that is subject to competitive pressures for returns). Savings products have had
significant distribution restrictions placed on them by the big bank dealers, who were seeking to
protect existing proprietary money market and savings balances. As of writing, the only dealers

• • •
7
accepting new savings issuers were the small dealers, representing about 15% of the available deposit
market.
The $140 billion third-‐‑party GIC market primarily relies on a network called Cannex for rate and order
fulfillment – although there is no one standard for GIC order fulfillment and order and settlement
information may flow through a variety of methods depending on dealer preferencevii. The Cannex
network connects dealers to the various back-‐‑office systems of issuers on a virtual one-‐‑to-‐‑one basis
driven by distribution agreements. Cannex is currently only used for GICs, therefore the operations,
process and controls and people driving those are unique to the dealer operations environment.
In addition to the lack of formal network standards, the GIC environment is notable for the fact that
each issuer-‐‑bank currently operates their own back office and product definitions for their GICs. As a
result every issuer has small differences in how they process GIC interest, customer allowances, fees
and processing window deadlines. This creates costs and risks for dealers in how they handle deposit
accounts. And many dealers have argued that the revenues earned from deposit sales do not cover
these extra costs. So addressing these cost issues are an important consideration for the dealer
community.
These differences make GICs unique and opaque from a dealer perspective, further increasing costs,
uncertainty and therefore risk. Risks associated with customer information, retention and disaster
recovery protocols are also perceived as a risk for GIC dealer. The small bank industry often utilizes
third-‐‑party banking software but is inconsistent with their outsourcing practices, data hosting and
disaster recovery regimes. Given the investor reputation risk concerns by dealers, the transaction,
operations and stability risks with issuers are not fully unrealistic – although dealer choices on
implementation and processing are mostly at the root of these costs.
Following the example of the role of common outsourcing solutions to drive standardization in the
third-‐‑party Savings market, IFDS launched a GIC focused processing solution in 2013. The outsourcing
solution, together with innovations, and robust data center infrastructure address many of the dealer
concerns associated with issuer-‐‑derived choices on GICs that create difficulties for dealers.
Outside of the nuances mentioned above, the products offered by third-‐‑party GIC issuers are generally
standardized from an investor perspective, CDIC compliant and transparent. That means GICs are
highly comparable on a rate basis. GIC pricing is set daily by bank treasurers. Approximately 50% of
$84 billion in annual GIC transactions are issued by the large banks, mostly to their own dealer
networksviii. The most common GICs are 1, 3 and 5 year non-‐‑redeemable, although other term, interest
and redemption characteristics are also processed. Banks have different strategies on GIC pricing
depending on their treasury needs and preferences. Generally small banks are pricing GICs as a spread
to their loan book – while larger banks will have more complex pricing models and channel
alternatives. The pricing is sent via Cannex to their dealers. Once rates are sent out, the issuer is obliged

• • •
8
to fulfill all orders for those rates for 24 hours, which if banks are not careful can either generate not
enough daily funding or too much funding.
Depending on the dealer, GICs may be issued in either Nominee (registered in the name of dealer in
trust for client) or in Client Name (registered directly in name of client) form. Nominee represents 90%
of the overall third-‐‑party GIC market. Client Name is the preferred form for dealing with small dealers,
deposit brokers and others. This distinction, and impacts, will be discussed further below.
Positions on Deposit Access
Deposit Access is a Public good: Positions Against increased Deposit Access:
• Third-‐‑party deposits pay substantially higher rates
for deposits because of operations and channel
savings (consumer benefit).
• Third-‐‑party deposits are a vital liquidity source
during a liquidity crisis and therefore need to be
maintained (systemic).
• Third-‐‑party deposit investors are wealthy,
sophisticated and seeking deposit investments.
• Third-‐‑party deposits are a primary source of
funding for loans, generally for underserviced
elements of the society (consumer benefit).
• Deposits are a very low cost, generally insured
investment (consumer benefit).
• Economic value for dealers through commissions
of $330 million per year.
• Creates competition between branch-‐‑based
advisory channels and investment advisors.
• Third-‐‑party deposit banks are regulated and
insured.
• Unfairly subsidizes small banks at the expense of
big banks (channel rent).
• Third-‐‑party distribution diminishes power of
large-‐‑bank brand and service.
• Third-‐‑party deposits create operations costs and
settlement risk for dealers.
• Third-‐‑party deposits artificially inflate deposit
rates and cannibalize from other channels.
• Third-‐‑party deposits cannibalize investment assets
from other proper investment alternatives like
mutual funds and stocks.
• Small banks are riskier because of their lending
activities and constitute a greater risk on CDIC
and the bank because the bank has agreed to
distribute them (preferred partner risk).

Costs are Driven by Distribution Choice
Banks that raise deposits through dealers have a measurable cost advantage compared to banks that
gather deposits primarily through physical branch networks or through direct channels. Branch
systems are generally old and costly to maintain.
The typical operating cost of a third-‐‑party deposit – including commission – is about 1/5 of the cost of a
branch or direct banking operating cost according to industry analysisix. The savings in operating costs
results in increased returns / interest for the deposit holder, and presumably better returns for the bank
and its shareholders. Direct deposit channels are similarly costly to establish (marketing cost) and to
maintain (systems, call centre, etc.). These operational savings allow third-‐‑party deposit issuers pay
measurable higher interest rates and still have overall lower costs that traditional providers as

• • •
9
illustrated below. It is not a surprise therefore, that many small banks have seized on third-‐‑party
deposits to give them a competitive advantage in the market.

Figure 1 -‐‑ Example of Estimated Deposit Costs by Distribution Source (February, 2014)
Issuers pay third-‐‑party Dealers through commissions based on the annual value of deposits under
administration. The standard industry deposit commissions is 0.25%/1$ per year (or $25 p.a. for a
$10,000 deposit). This commission is equivalent to the commission earned through money market
funds. The commissions are split by the dealer to also compensate the specific advisor and cover
operating costs. The specific commission split varies by firm.
The commissions paid by issuers to dealers for deposits surpassed $500 million in 2013x.
Complex Operating and Regulatory Environment
Various deposit taking institutionsxi – including banks, trust companies, insurance companies and
credit unions – participate in this system through the issuance of GICs and savings accounts. Likewise,
various dealers are involved – be it large national investment dealers, small investment dealers, mutual
fund specialist companies, insurance agencies, deposit specialists, and recently even mortgage
brokerages. As a result, depending on the province and registry of the organizations involved, there
can be up to nine regulatory, supervisory or self-‐‑regulated organizations involved in a deposit sale.
A part of this regulator process involves the requirement for dealers to vet deposit issuers participating
on their desks. The risk assessment is based on principals associated with the individual distribution
agreement and the risk of appropriate investment recommendation to customers.
In reality, the risk of a deposit issuer – who is regulated and insured – is no different than any bank.
This issue reflects both the competing regulatory overlaps inherent in the industry and of dealer self-‐‑
defined risk cultures that has evolved since 2008.
A large component of potential costs for deposit issuers are the regulatory requirement to conduct
thorough customer identification, validation and retention of information for purposes of Anti-‐‑Money
Laundering and Know Your Customer compliance. Since regulated dealers perform this service, bank
regulators allow banks to rely on dealers to execute this responsibility on their behalf, thus saving
banks approximately $25 per transactionxii. This is a key factor that drives cost efficiencies in the third-‐‑
party deposit distribution model. However, many dealers and non-‐‑dealer deposit brokers in Canada
Nominal(Yield((Rate)+
Incentive(
Yield(+
Channel(
Cost(+
Origination(
Cost(+
Servicing(
Cost(+
Redemption(
Cost(+ Total
Branch'GIC'w/Bank'1 90 30 100 45 5 5 275
Direct'Bank 225 116 341
Cannex'Nominee'w/Bank'1 155 25 4 0 0 184
Client'Name'GIC'w/'Bank'1 145 25 10 20 5 205
(BPS)

• • •
10
do not qualify for this regulatory allowance, and as a result, banks who offer deposits through this
channel accrue higher costs – resulting in lower interest rates for those customers (and less compelling
products compared to larger dealers).
Dealer Concerns: Profitability, Revenue, Growing Wealth Market
The Canadian investment industry encompasses over 200 firms and 39,000 employeesxiii. Investment
firms advise and facilitate customer investments in stocks, bonds, mutual funds, etc. Additionally there
are other firms and individuals that provide similar financial advice/products in concert with other
banking, mutual fund, insurance, financial planning and other related services, and these (while not
strictly dealers) are of interest as distribution sources for third-‐‑party deposits.
Dealer management in general favors open desk policies that allow them to find the best investment
product and rates for their customers. However, dealers are particularly concerned with the profit of
those transactions both in both actual and opportunity cost forms as industry profitability is down
significantly from the norms. Revenue and cost considerations have become paramount, as the
industry has struggled with the financial market issues since 2008xiv. Dealers are facing escalation of
costs associated with global regulatory changes and costs of legacy infrastructure. Furthermore,
investor volumes and retail investor market growth have been relatively flat since 2008. Therefore
dealer strategy has been to maximize revenues through addition of high volume advisors, focusing on
high revenue investment products and driving down operating costs while minimizing investments.
Complicating investment has been the legacy of many dealers evolving from or remaining in a
partnership model, and due to lack of capital they have under-‐‑invested in technologies to lower costs.
The value of earnings from deposits pale in comparison to trailer fees from equity-‐‑based mutual funds
of 1-‐‑2% ($100~$200 p.a. / $10,000); or, for buy/sell commissions on stocks and bonds ($29 <) per trade.
As a result, there is a certain opportunity cost for dealers and advisors when an investor chooses to buy
a GIC versus a mutual fund or bond. Add further the previous conversations about GICs being odd-‐‑
ball product for many dealer processing environments – because they are essentially a “bank account”
in a “securities” processing environment – and the dealer concerns about deposit profitability become
clearer.
Dealer Concentration and Erosion of Chinese Walls
The investment dealer industry is highly stratified and increasingly concentrated with over 80% of
investable assets and earnings concentrated with the bank-‐‑owned dealersxv. These integrated
organizations additionally provide services and influence investment banking, debt origination, stock
issuance, mortgage backed bonds and other sophisticated services impacting investors, corporate and
small bank participants. Increasingly, integrated investment dealer organizations working with retail
accounts are evolving to become full service wealth managers, in concert with parent company growth
strategies to serve the affluent investor markets.

• • •
11
Small dealers themselves face extreme pressures in the post-‐‑2008 environment with escalating
regulatory costs, diminishing revenues and complex/dated back office systems and aggressive
competition for advisors and investors. Profitability for small dealers upcoming changes to trailer fees
for mutual funds are also seen as a major threat, and could result in the hastening of large dealer
concentration and/or loss of business to emerging financial planning models from bank-‐‑branch or
insurance providers.
The nature of bank ownership of investment dealers is fairly recent (since the 1990’s). While the intent
was to ensure “Chinese walls” existed between dealers and banks the informal separation of
management and administrative strategies between banks and dealers has arguably diminished.
Particularly since the 2008 global financial crisis, regulators, legislators and shareholders have
demanded that bank leaders become more involved and integrated with dealer operations and
activities.
Stakeholder Objective Analysis of the Third-Party Deposit Market
Large Bank Small Bank
• Target Canadian wealth market with
integrated solutions
• Global regulatory pressures
• Scarcity of Canadian retail deposits
• Minimize deposit costs/channel conflicts
• Maximize enterprise
• Shareholder demands for growth
• Grow niche lending businesses, by
growing deposits
• Protecting deposit flows (too much, too
little)
• Predictable and reasonable access to dealer
deposit market
• Compensate for “last mile” access
• Cost effective distribution
• Regulatory pressure to diversify liquidity
sources
Large Dealers Small Dealer
• Grow profit through efficiency of
operations
• Grow revenues/profit
• Attract advisors (investor clients)
• Offer compelling/differentiated product
• Execute bank strategies
• Attract and retain advisors and customers
through service and product offers
• Reduce costs of Client Name Accounts
• Manage cost of change/profit
• Risks to revenue due to trailer fee
disclosure and change

• • •
12
Small Bank Concerns: Access, Predictability, Fairness
Small bank anxiety over access to large dealers has increased since 2007. Prior to 2007, access to dealer
desks was seen (generally) as a formality. There were fewer small banks seeking deposit access. Dealers
were open to new products, and deposit yields were not priced above competing fund and bond offers.
Access to third-‐‑party deposits is not just a small bank issue – it is a critical issue to all deposit taking
issuers in Canada regardless of their size.
Since 2009, the regulatory risks for banks and dealers have changed significantly. First, other sources of
small bank liquidity have evaporated (i.e. uninsured mortgage securitization, changes in regulatory
treatment capital treatment of lines of credit, off balance sheet assets, etc.). Second, the regulatory
environment has emphasized the value of matching retail sources of deposits to retail loan portfolios;
the matching of term of deposits to term of loans; and, further emphasizing the value of deposits
originated through proprietary deposit channels. Lastly, there has been a marked increase in the
number of companies seeking to apply for, and who have attained, a banking license in Canada – and
therefore, there is more activity to access dealer desks than there has been in recent history.
The size of the market for insured third-‐‑party deposits has increased by 120% since 2007 because of the
market environment and turmoilxvi. These funds have been cannibalized from other investment
alternatives (i.e. mutual funds) and attracted into the investment channel from Branch and Direct
sources, reducing revenues or, in the case of banks, driving up cost of funds in a very tight margin
environment.
As a result, dealers and traditional banks are looking to the third-‐‑party market with concern. As a
larger bank, one could look to the growth of the third-‐‑party market in one of three ways. First, one
could ignore the market and leverage other channels to drive deposit growth. Second, one could choose
to compete in the market. Third, one could try and foil – or more correctly limit the growth – of the
market through actions of its dealer arms.
Lastly, Canadian banks as a strategy are increasingly focused on competing with each other for wealth
management customers – arguably with indirect casualties being small banks and small dealers. This
focus on product and services has further incorporated the retail investment arms of their dealer
organizations – resulting in better product choices for customers. But it also means there is a tighter
integration of large bank strategy with day-‐‑to-‐‑day dealer administrative and product choices – and
viewing dealer operations as integral elements of the banks competitive strategies.
Recent Events that Cause Competitive Concern
We have seen all three responses formally (senior management endorsed strategy) and informally
(daily administrative decisions) espoused by banks, as evidenced by the following recent actual
examples in the market:

• • •
13
• Large bank decides to only sell its own Savings product through its dealer channel – cuts off
pre-‐‑existing suppliers – other large banks follow suit.
• Removal of small issuer from dealer board based on dealer failure to win investment-‐‑banking
contract from issuer for separate debt/equity deal.
• Dealer “cleans up” issuers from board who have not done enough volume with them.
• Threats to impede or/restrict access to large bank-‐‑sponsored CMHC bond agency programs if
small bank escalates to regulators.
• Dealers lagging in technology enhancements – or forcing technology enhancements – to impede
small bank dealer access.
• Direction to advisors by dealer leadership to use FCAC disclosure statements to overstate risk
of buying small bank GIC in favor of large bank proprietary savings products.
• Passive resistance to discussing new issuer offers (i.e. failure to discuss, return calls).
• Fast tracking some issues / failure to follow own issuer boarding rules for some issuers, while
others are admitted by informal process (CEO favors).
• Erratic legal and contract posturing.
It is important to note that not all dealers, (including bank owned dealers) acted in this fashion.
But the perception by small banks of arbitrary and high-‐‑handed behaviors at administrative levels of
some bank-‐‑owned dealers are fact. Furthermore, there remains a concern by small banks that those
large-‐‑banks that have provided access to date will continue to restrict access to their dealers in the near
future.
Considering large bank dominance of the branch distribution system, acquisition of the primary
dealers in the 1990’s, acquisition of the largest direct banking providers in 2011/2012 (ING Direct, Ally,
MRS, AGF Trust), the importance of access to dealer deposit distribution takes on greater concern for
many small banks. The concentration of power with bank-‐‑owned dealers has not gone unnoticed in the
market or by regulator stakeholders. For example, the Minister of Finance addressed some of these
concerns while consulting with senior bank leadership in 2011,although these discussions have had
little impact on deposit access issues identified above.

• • •
14
What are the small bank issues in the third-party market?
Bank-Owned Dealer Smaller Dealers Others Financial
Planners
Deposit Competitive
Issues
• Largest source of
deposits
• Favour given to own
bank deposits
• Arbitrary and high-
handed approach
• Disconnect versus
formal rules and
administration
• Small funding flows
• High origination costs
(“named accounts”)
limit issuer pricing
competitiveness
• Nascent market
• Highly fragmented
• Very high origination
costs due to replication
of AML validation
Dealer Challenges • Perceived low
revenue/profit from
deposit products
• Assumed regulatory
pressure for proprietary
deposits
• Perceived treasury and
channel conflict
pressures to sell
proprietary product
• Regulatory treatment
and costs for “named
accounts”
• Inconsistent access to
order systems
(Cannex/GICSERV)
• Cost of regulatory
changes and decreasing
market share
• Lack of common
operating/back office
environments
• Regulatory treatment
and costs for “named
accounts”
• Access to electronic
order systems
(Cannex/GICSERV)
Available Response • Standardize issuer
application process
• Standardize issuer
removal
• Standardize issuer
operating, settlement
and product
environment
• Explore alternative
commission/ transaction
fee models
• Implement technology
to reduce costs and
increase profitability
• Enable Nominee remote
KYC/AML by small
dealers
• Standardize
dealer/issuer back office
• Explore revenue model
alternatives
• Regulatory rules to
allow Nominee remote
KYC/AML by small
dealers
• Standardize
dealer/issuer back office
• Explore revenue model
alternatives

• • •
15
Recommendations
The challenge for the government to consider as it examines options for ensuring small bank
competitiveness in the third-‐‑party deposit market is to understand decision complexities and
ramifications of actions. The interests of the individual banks and dealers are not necessarily aligned by
size or ownership. Therefore we would expect that a successful resolution of the question of bank
access to the third-‐‑party market would involve several trade-‐‑offs between dealer revenues, regulator
policy, bank cost and improvement of the underlying deposit instrument to make it friendlier to dealer
systems.
The objectives at the start of the document were:
• Predictable and affordable issuer access to dealer desks
• Fair compensation and cost/risk mitigation for dealers
• Transparent dealer rules/activities related to proprietary and third-‐‑party deposits
• Responsible infrastructure and participation rules
• Stability of deposit market
• Investor/regulator stakeholder trust
We have learnt that:
ü Canadian retail deposits are scarce and that there is significant competitive and regulatory
pressure to attain them for all bank treasurers.
ü Dealers want deposit product offers as part of their retail investor offering to maintain assets in
their portfolios and as part of a low fee/low risk investment alternative to bonds.
ü Dealers are essentially apathetic to deposits because they cannibalize other revenue
opportunities, and of themselves are expensive to administer.
ü Dealers are generally in a period of economic and regulatory stress, their capacity to move
independently from their parent companies are increasingly limited.
ü Small banks use deposits to fund loans that serve markets not generally served by large banks.
ü Bank-‐‑owned dealers dominate the deposit market because of their size and because they
present issuing banks with a cost advantage associated with processing deposits more
efficiently, because of favorable regulatory treatment of Nominee registry.
ü Not all dealers pose access challenges to small banks; that the problem of access is not with the
majority of dealers but the informal/administrative actions of a few bank-‐‑owned dealers.
ü The deposit market is important to the Canadian banking market and consumers – and
maintaining that trust is vital to everyone concerned.
ü The existing dealer deposit distribution model is seen by some small bank issuers as a
competitive and funding risk advantage – while others view access as unfair, arbitrary and
dealer actions in granting access high-‐‑handed.

• • •
16
Response to Request for Consultation
On June 25, 2014 the government issued a request for comment seeking a response from industry
stakeholders on measures to require bank-‐‑owned investment dealers to distribute deposit products
from non-‐‑affiliated deposit-‐‑taking institutions (DTIs).
It is IFDS’s understanding the government is seeking to implement measures that help small DTIs to
enter and compete can improve competition in the market. It is further our understanding that small
DTI entry and growth helps competition by introducing new and improved products and services,
serving additional market segments, and motivating existing DTIs to improve their products, pricing,
and service. Further, we have observed that a vibrant brokered-‐‑deposit market provides valuable and
stable funding source for all participating DTIs, and acts as an important fire-‐‑wall in the event of a
liquidity crisis.
We further understand and support the governments’ goal of encouraging DTI entry and growth and,
by making brokered deposits a more robust source of funding, promote the safety and soundness of
the financial sector. We further support the notion that Canadian investing consumers would benefit
from greater choice, as this may provide better rates to savers. And with improved access, we would
support the notion that existing brokered deposit arrangements between DTIs and investment dealers
would continue on the same or better terms and that additional arrangements would occur as a result
of the measure. In short, improved access should create a larger, more stable liquidity market –
assuming arrangements create greater fairness, parity and transparency for all involved players.
Through our discussions with finance we have advocated that DTI entry and growth requires access to
robust sources of funding distribution, among other things. For smaller banks, brokered deposit
products are a significant portion of total deposits representing approximately $200 bn in balances in
2012. Brokered deposits are deposit products that are issued by a DTI and distributed by a third-‐‑party,
principally through investment dealers, to investors. Brokered deposit products consist of Guaranteed
Investment Certificates (GICs) and savings accounts and are eligible for deposit insurance by the
Canada Deposit Insurance Corporation (CDIC). Small DTI deposit products typically offer higher
interest rates to investors. Brokered deposits are also a compelling investment alternative for Canadian
retail investors as they offer higher than government rates for low risk. It is no surprise therefore that
GICs are the single largest product category in Canadian retail fixed income investment holdings.
Access Challenges
Given the importance and size of the brokered deposit market, and bank general need for retail
deposits, there is significant competition for DTIs to access dealer distribution. Large bank dealers
control ~75% of the balances for third party issuers. Some large bank dealers have limited the
distribution of deposit products from non-‐‑affiliated DTIs. These restrictions have taken the form of

• • •
17
explicit product shelf reductions, negative regulatory and sales incentives, and artificial costs /
technology charges that impede fair competition.
We generally support the government’s desire to ensure that non-‐‑affiliated DTIs can access the bank
owned brokered deposit channel to seek funding and liquidity, but we are also concerned that the
government’s actions put in place an equitable distribution and issuer landscape that would include
access for provincially regulated DTIs and Dealers.
Legislative Actions
To enact the policy objectives defined above, we understand that the government intends to amend the
Bank Act to require DTIs that have investment dealer operations to offer certain deposit products (e.g.
CDIC insurable) from non-‐‑affiliated DTIs. We further understand that this requirement could be based
on whether financial institutions and deposit products meet certain criteria or standards
IFDS GIC and HISA offer
IFDS currently operates brokered-‐‑deposit GICs and HISAs for Canada’s banking industry. Our
customers include CIBC, Manulife, Home Trust, B2B Bank, ATB and Scotiabank.
The essential challenge facing the dealer and banking industry is that GICs are a bank account – while
dealers desire a security to be compliant with their systems. IFDS’s operating thesis is based on the
Mutual Fund industry framework of a shared services Transfer Agency acting as a standardized book
of record for various investment funds operating in Canada. A transfer agency acts as both product
technology platform as well as predictable operations environment, thereby reducing costs and risks
for dealers. In effect, through IFDS the deposit issuing community can create GICs that are securities –
thereby creating efficiencies and operational liquidity in the market.
Common technology and transfer agency for GICs / HISAs will make the industry more efficient by
allowing dealers to hold GICs as securities rather than bank account. In theory, individual banks could
enable much of the IFDS offer by recoding their back office choices and systems. However, this
coordination between 50+ institutions is unlikely, making a industry shared solution preferable.
Our technology and services link to existing order and rate systems (CANNEX), banking back-‐‑office
and accounting systems, and settlement functions to enable money transfer between organizations on a
daily basis. We operate a 7/24 real time processing environment for multiple DTIs. Our data
environment remains fully in Canada and we have class-‐‑leading business continuity resiliency.

• • •
18
Response to Government Consultation Questions
International Financial Data Services Canada
July 24, 2014
1. How should the policy measure be structured? In particular:
a. Which financial institutions (DTIs and bank-‐‑owned investment dealers) and deposit products
should be included (e.g. CDIC insurable deposit products)?
IFDS Response
1) IFDS supports the access policy explicitly includes both brokered GICs and FundServ
Savings accounts (so called HISA’s). The government may wish to consider opening dealer
distribution generally to other deposit, savings, transaction and lending programs in order
to further drive competition with this valuable market segment.
2) Ideally, we would counsel that the policy measures envisioned by the government would
impact all DTIs and Dealers equally. The government may wish to consider the risk that the
access measures the bank-‐‑owned dealer channels could become comparatively more cost
effective than other smaller dealers – resulting, possibly, in similar concentration and
competition issues that this measure is intended to correct. Therefore, the government
should consider policy and regulatory options to encourage DTIs to drive efficiencies with
all dealers to affect maximum liquidity stability goals.
3) We have no opinion of CDIC insurance versus other provincial insurance offers. By
implication an OSFI regulated DTI will have CDIC coverage. The government has
announced its intention to review deposit insurance in Canada. We would welcome further
clarification and discussion of coverage related to broker deposits and the nominee
instrument coverage model now in common practice with dealers.
b. Should financial institutions and deposit products have to meet certain standards and, if so,
what should be the standards and what should be done to ensure transparency and fair outcomes?
IFDS Response
1) IFDS’s position is that DTIs have a responsibility to create products that are efficient and
effective for the dealer environment. As discussed above, we believe that the essential
paradox of the industry is that DTIs are systemically creating bank accounts for dealers and
investors that want securities. DTIs that have pursued individual books of records, product
choices and who have non-‐‑transparent and ineffective operations environments should be
forced to upgrade their delivery systems over a period of time.

• • •
19
2) IFDS would support minimum infrastructure requirements on to the industry as a
requirement for connectivity to dealers. This would ensure that the dealers are not forced to
assume additional costs or risks when supporting a broad range of deposit taking
institutions.
3) The deposit market is a very low margin environment and increases in operating, system
and/or product costs would impede investor objectives and could replace informal
restrictions as a real barrier to access. Therefore, the government should consider
monitoring bank-‐‑owned dealer infrastructure requirements to ensure that requirements are
based on efficient operating needs and not of itself another barrier to competition.
c. How can a potential over-‐‑reliance on a single source of brokered deposit funding be avoided?
IFDS Response
1) There are two main policies that can prevent an over-‐‑reliance on a single source of brokered
deposit funding; the first is to provide broad and unfettered access to the range of dealers
for all deposit taking institutions that meet established infrastructure standards and second
is to establish a system or processes to limit the daily originations for a given DTI from each
dealer. By providing a DTI with a range of dealers to distribute deposits through and then
ensuring that daily origination limits are established, deposit taking institutions will never
become reliant on one dealer as a single source of funding.
2) In addition to the above, the government could consider expanding access policy guidelines
in the future to include non-‐‑identified financial distribution channels including bank
branches and proprietary insurance networks.
3) The government should continue to drive the dealer industry to support prudent alternative
capital arrangements from smaller banks such as asset securitization, syndication, bankers
acceptances, et al.
d. Is a transition necessary and, if so, what should be the transition measures?
IFDS Response
1) We would counsel a 12 month transition policy for bank owned dealers with allowances for
specific need extensions.
2) This period would allow the industry to come up with pragmatic private sector solutions to
some of the sales, operational and dealer challenges identified in our conversations.
3) Longer time lines for transition could encourage higher costs through scope creep, solution
over-‐‑engineering and infrastructure power plays.

• • •
20
2. What is the expected impact of this measure on your organization (as a DTI and investment
dealer, as applicable) and the financial services sector? In particular:
a. Are there any negative consequences on your business? How can this be mitigated?
IFDS Response
1) Increased access for DTIs should increase volumes and rational competition. IFDS welcomes
the impact of this change.
2) The risks of this measure, as identified above, would be if:
a. Provincially regulated dealers (therefore investors) were significantly disadvantaged
as a result of technology savings created specifically for large bank owned dealers,
impacting largely smaller dealers in rural markets.
b. Provincially regulated DTIs were impeded from access to low cost deposit
distribution.
c. That dealers reacted to this measure by seeking new barriers of entry by imposing
high-‐‑cost and burdensome technology and operating requirements on small DTIs.
b. How important is brokered deposit funding?
IFDS Response
• IFDS estimates that $1 in $5 are originated through brokered deposit channels in
Canada.
• GICs are the single largest class of retail fixed income product holdings in Canada’s
investment market.
• Brokered deposit access was pivotal to the liquidity survival of at least 2 larger DTIs in
2008/2009 crisis.
• Brokered deposits are the lowest cost source of funding for small FIs.
c. How accessible is brokered deposit funding and how would accessibility improve?
IFDS Response
• IFDS does not directly source brokered deposits. We work with clients to identify
distributors and process orders on behalf of the DTIs.
d. How stable is the brokered deposit market and how would stability improve?
IFDS Response
• Market stability of the GIC market would be improved through the following:
o Reduced barriers to distribution access to investors (dealers);

• • •
21
o Enablement of GIC secondary markets (fees, consistency of interest calculations,
etc);
o Commoditization of compliance, deposit insurance and purchase eligibility rules
across institutions, between regulatory bodies, and brokers.
o Common, consistent and standardized application processes, dealer boarding
processes and DTI back-‐‑office processes.

• • •
22
Notes

i
For example, in Q4 2013 all Canadian banks had individual loans outstanding for $2.1 trillion. Total individual
deposits were $1.7 trillion. Or 78% retail deposit to retail loan coverage. Source: http://www.osfi-‐‑
bsif.gc.ca/Eng/wt-‐‑ow/Pages/FINDAT.aspx. Consolidated Balance Sheets. Total All Banks.
ii Source: Investor Economics. 2013.
iii Ibid.
iv Investor Economics (www.investoreconomics.com) is a Toronto based market research firm specializing in
investment dealers and wealth management. They provide an annual Deposits and Fixed Income Report that
identifies market dynamics annually.
v
Dealer risks are nominally linked to the issuer bank capacity to remain solvent, as investor concerns about
access to deposits and investment recommendations are intertwined. While real risks of insolvency are minimal,
the perceptions of “hassle factor”, costs, and investment advice of dealing with a risky issuing bank and the CDIC
process would impede dealer desire to list an issuer.
vi
This model is consistent with how dealers and mutual fund companies contract for distribution, but different
than how the stock and/or bond market works which is as an open exchange model.
vii There is no formal industry standard for GICs. FundSERV has proposed a GIC order system GICSERV but this
standard has yet to be adopted by the dealer and issuer market. As of writing, several large bank dealers facilitate
orders through spreadsheets, faxed order forms and by retyping lists. There is also no agreed on protocol for
daily financial settlements – with wires, direct deposit, net settlements and physical cheques in common use.
Confirms and reconciliations are further dependent on dealer choices and issuer capabilities. This is a stark
comparison to the highly regimented order, settlement and reconciliation process securities and mutual fund
world.
viii
Cannex Estimate.
ix Third Party GIC Rate and Volume Characteristics 2006-‐‑2013. IFDS. August 2013.
x Third Party GIC Rate and Volume Characteristics 2006-‐‑2013. Assuming $220 bn in deposit assets and full
commissions paid the value of commissions would be $550 million. However, depending on dealer and advisor
preferences, commissions are frequently waived.
xi
Currently, only regulated Canadian financial institutions who are members of a deposit insurance program can
participate. Depending on the issuer, deposits can be insured by CDIC.
(http://www.cdic.ca/Coverage/Pages/default.aspx) or provincial deposit insurance plans. CDIC insures savings
and generic GICs for up to $100,000 per person, per institution and is backed by the federal government. Some
provincial plans have unlimited balance coverage – although the deposit insurance company may not be backed
by the province.
xii Costs for named transaction processing vary with issuer compliance rules and rejections due to field error rates
in supplying information Client Name transactions have a 20-‐‑40% NIGO (Not in Good Order) occurrence.
Additional costs for cheese, not-‐‑sufficient funds and special customer service has resulted in all but the most
needy issuers to leave the Client Name environment for Nominee.

• • •
23

xiii Securities Industry Performance. The Investment Industry Association of Canada (IIAC). Q3 2013.
xiv
Securities Industry Statistics. IIAC. Q3 2013.
xv
Securities Industry Statistics. IIAC. Q3 2013.
xvi $85 billion à $220 billion in 2013. Source IFDS and Investor Economics. 2013.

Third-Party Deposit Market Access for Small Banks

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