OSFI moves to consolidate MCT and BAAT into one guideline

The Office of the Superintendent of Financial Institutions (OSFI) is proposing the consolidation of the Branch Asset Adequacy Test (BAAT) and the Minimum Capital Test (MCT) into one guideline.
OSFI released proposed changes to both the MCT and BAAT guideline in December 2010. Since that time, financial institutions in the property and casualty industry have complained to OSFI that they have experienced difficulties in finding all sources of guidance with regards to capital requirements, OSFI said in a memo.
“The consolidation of the MCT and BAAT Guidelines is appropriate to address this risk,” it said. OSFI refers to the updated guideline as the MCT Guideline.
The following changes were also suggested by OSFI in its latest draft of the consolidated MCT Guideline:
•Amend the MCT/BAAT calculations to apply the claims margin to the discounted best estimate claims liability only.
•Remove the capital factor on balances due from OSFI registered associated reinsurer.
•Revise the asset factors on bonds, preferred shares and commercial paper in order that they have greater granularity by rating and term to maturity.
•Introduce a capital factor on all collateral held as security for unregistered reinsurance.
•Initiate a methodology to determine margin requirements for interest rate risk under a standardized approach.
•Implement a foreign exchange risk capital requirement to the MCT.
OSFI is accepting public consultation on the draft guideline for a period of seven weeks, beginning in May 2011. The MCT Guideline will be finalized in September 2011 before implementation on Jan. 1, 2012.