The Province employs various risk management strategies and operates within strict risk exposure limits to ensure exposure to risk is managed in a prudent and cost-effective manner. A variety of strategies are used, including the use of derivative financial instruments (“derivatives”). Risk exposures are monitored daily and audited annually. The cost-effectiveness of borrowing and debt management programs are measured daily, while the effectiveness of the money market program is measured monthly against pre-established benchmarks.
As of March 31, 2017, the Province's consolidated derivative portfolio had a notional value of $156.6 billion, which consisted of $85.2 billion in interest rate swaps, $40.8 billion in cross-currency swaps and $30.6 billion in forward foreign exchange contracts. Notional amounts represent the volume of outstanding derivative contracts and are not indicative of credit risk, market risk or actual cash flows.
The table below details the limits and strategies employed to ensure that market, credit and liquidity risks are managed in a sound and cost-effective manner.
Risk Management Limits and Strategies (Excludes OEFC Debt)
|Foreign Exchange Risk||As per the Market Risk Policy, currency exposure on debt principal cannot exceed 5 per cent of debt.||Net foreign exchange exposure was 0.2 per cent of debt as at October 31, 2017. Foreign exchange exposure has remained within approved limits during the fiscal year.|
|Interest Rate Resetting Risk||This measure limits interest rate resetting risk arising from net floating rate exposure and fixed-rate debt maturing within a 12-month period, to no more than 35 per cent of debt.||The percentage of interest rate resetting exposure (net of liquid reserves) was 10.4 per cent of debt as at October 31, 2017. Net interest rate resetting exposure has remained within approved limits during the fiscal year.|
|Debt Maturities and Refinancing Risk||Term selection for new borrowing will be aimed for a smooth maturity schedule to diversify the interest resetting risk of refinancing debt maturities.||Debt maturities are estimated at $17.4 billion for 2017–18.|
|Credit Risk||Ontario only enters into transactions with highly rated counterparties.||As at March 31, 2017, over 99 per cent of Ontario’s credit exposure was to counterparties that are rated "AA minus" or better.|
|Liquidity Risk||Liquidity risk is controlled through the management of liquid reserve levels and short-term borrowing programs.||The average level of daily unrestricted liquid reserves from April 1, 2017 to October 31, 2017 was $31.7 billion, net of collaterals. The Province’s Treasury Bill and U.S. Commercial Paper programs have authorized limits of $33.0 billion and $15.0 billion, respectively.|
Province of Ontario bonds receive a zero per cent risk weighting in Canada under section 3.1.3, article 10 (I) of the Office of the Superintendent of Financial Institutions’ (OSFI) Capital Adequacy Requirements Guideline.
Ontario Bonds also qualify as Level 1 assets under section 2, article 43 C of OSFI’s Liquidity Adequacy Requirements Guideline.