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12Messages & ReportsWhat propels usforward is the collectiveambition to deliver afast, flexible and securepayments system thatpromotes innovation andstrengthens Canada’scompetitive position.Like our many global counterparts,Payments Canada continues to undergo a significant transformation tosupport these advancements for bothbusinesses and consumers. In 2017,transformation centred on our majorpayments Modernization initiative,considered to be one of the mostambitious in the world. We madegreat strides on the Modernizationjourney, with participants from acrossthe industry coming together tosupport the revised roadmap and planand align in preparation for programexecution.In 2017, we built the capacity of ourteam with the expertise requiredto support Modernization andonboarded Accenture as the partnerthat would help us establish theindustry program management office.We also secured financing for theprogram, began the procurementprocess for both high-value andreal-time payment systems, finalizednew rules for automated fundstransfer enhancements, developedand consulted on an interim creditrisk model for the Automated ClearingSettlement System, and releaseddetailed plans for the future in anindustry paper, the ModernizationTarget State.Payments Canada Annual Report 2017We have also been busy restructuringthe IT group for the future. We tookcritical steps to improve the safety,resiliency and reliability of our currentsystems, notably by implementingmajor enhancements to our paymentsystem operating environment. Thisinvolved the migration of our paymentsystems to a new and improved dataand network infrastructure.Alongside this work, the role thatPayments Canada plays in the changing payments landscape continued toevolve. Increased focus and interest inpayments from a variety of new ecosystem participants – from FinTechsand PayTechs to corporate Canadaand the small business community –has created a greater need to supportpayments education, engagement andinnovation. We saw this first-hand atour annual conference, the PaymentsCanada SUMMIT, with more thandouble the number of registrants fromthe year prior.In response to this growing need,Payments Canada became moredeeply engaged in the stakeholdercommunity in 2017, helping allparties to understand and navigatethe coming changes that will affecttheir businesses, organizations orhouseholds and increasingly actingas a voice for the payments industryin the media and at industry events.We also continued to participate inexploratory research concerning thefuture of payments. The successfulProject Jasper blockchain initiativeundertaken with the Bank of Canadais in its third phase, and we kicked offa series of proof-of-concept ventures,such as an ISO 20022 file validationservice, that are intended to support theindustry as a whole as we move forwardinto unchartered territory in payments.We could not have achieved any ofthis without the active support of ourmember financial institutions, theBank of Canada and the Departmentof Finance, whose commitment andinvestment have helped to drive muchof this work forward. Our members’representation at the Member AdvisoryCouncil and our many working groupshave proven to be invaluable.Likewise, the engagement of ourStakeholder Advisory Council –representing a variety of perspectivesacross the payments ecosystem –continued to help shape our decisionmaking. We see the voice of this groupbecoming even more important as theModernization journey continues.The guidance of our board ofdirectors cannot be overstated. Thisknowledgeable, experienced andengaged board continued to providePayments Canada management withsupport and direction critical to oursuccess. I would also like to thank theExecutive Leadership Team and theincredible staff at Payments Canadawhose hard work and dedicationcontributed vastly to what wasanother monumental year.As we look ahead to 2018, I amconfident that we have the team, theindustry support and the externalengagement required to deliver onthe increasingly challenging goalsof Modernization. What propels usforward is the collective ambitionto deliver a fast, flexible and securepayments system that promotesinnovation and strengthens Canada’scompetitive position. I look forward toanother exciting and productive year.

13Messages & ReportsPayments Canada Annual Report 2017REPORT FROM THE CHAIR OF THE MEMBER ADVISORY COUNCILcommercially important projectsto create the capacity to executeagainst this program. We have doneso given the critical importance ofthis program to our customers, ourindustry and the complex range ofstakeholders involved in ensuringour payments system remains botheffective and secure.TODD ROBERTSMEMBER ADVISORYCOUNCIL CHAIRThe Member Advisory Council is a20-person council that is codified inthe Canadian Payments Act. It servesas a consultative and engagementforum for system participants who arealso members of Payments Canada.The members are pleased with theeffectiveness, over the past year, of theMember Advisory Council as a forumto drive collaboration, provide adviceand deliver productive outcomes.Modernization is a multi-yearinitiative to modernize the systemsand rules that are essential toCanada’s payments ecosystem. Thisindustry-wide journey includes anongoing dialogue with the members.In fact, consultation is key to theprogram’s success. Members haveworked closely with PaymentsCanada and provided feedback onthe Modernization Target State. Weare pleased with the consultationprocess and are supportive ofthe overall Modernization TargetState. Members are making verysignificant investments behind thisprogram and have shifted out otherThere remains much work ahead for allparties to deliver against this ambitiousplan, which is well aligned with thegoals that all parties are committed to:the creation of a fast, flexible, secure,innovative and competitive paymentssystem. As members, we remainfocused to ensure that we can collectively proceed with Payments Canadain a prudent manner that balances therisks of execution and changes to theexisting system while making cleargains against the objectives as noted.We would reiterate the need for allparties to continue to work in an open,collaborative and agile manner to adaptour plans and sequencing of activitiesas we make progress through theimplementation of the ModernizationTarget State. As key decisions aremade, business models are confirmedand solution designs are secured,we fully expect that the specifics ofthe implementation plan, particularlytiming, cost and scope, will adjust asrequired. Our collective success willbe dependent on our effectivenessin adapting our plans to changingconditions while remaining focused onthe objectives of the program.The Members remain highly engagedin the governance model that has beenput in place. Members continue to actively support governance by providingaccess to business, operational andtechnical expertise to PaymentsCanada. As we move into execution,we will need to collectively managethe delivery risks, understanding andmitigating risks associated with newoperating models and staging changewhere risks are significant or unclearin our view. This will require a goodbalance of optimistic objective settingand realistic course correcting alongwith a deliberately risk averse approachto testing in order to ensure that we donot subject Canadians to unintended /negative outcomes as we modernizethe payments rails on which we all rely.Members are makingvery significantinvestments behindthis program andhave shifted outother commerciallyimportant projects tocreate the capacity toexecute against thisprogram.As we continue to support PaymentsCanada in its initiatives to underpinthe Canadian financial system andeconomy, we look forward to anotheryear of providing counsel and adviceto the board on the rapidly changingneeds and expectations of theCanadian marketplace and the requirements for the successful execution ofthe activities required to achieve theModernization Target State.

14Messages & ReportsPayments Canada Annual Report 2017REPORT FROM THE CHAIR OF THE STAKEHOLDER ADVISORY COUNCILBRENT MIZZENSTAKEHOLDER ADVISORYCOUNCIL CHAIROVERVIEWThroughout 2017 the StakeholderAdvisory Council continued tofocus its work efforts on PaymentsCanada’s initiative to modernize itspayments systems. In this regard,the Stakeholder Advisory Councilhas advocated for and supporteddevelopment of a more competitiveand innovative payments system thatdelivers timely benefits to users.While Modernization is a long-terminitiative, there have been someimportant developments that theStakeholder Advisory Council has beenpleased with in 2017 and that will havenearer term benefits. This has includeda move to improve the AutomatedFunds Transfer (AFT) batch systemthat will see a third daily exchangeadded and two-hour funds availabilityeffective October 2018. These changeswill allow transactions to be clearedfaster and more frequently. This willenable new features such as same-daypayroll, expedited bill payments,faster settlement of invoices and moreuniform service across the country invarious time zones.As in previous years, ISO 20022 hasbeen a focus for the StakeholderAdvisory Council, and it has continued to advocate for moving forwardin a timely manner. The ability tomove data with electronic transactions brings about the opportunity toeliminate paper cheques, which willlead to significant efficiencies forthe payments system and its users.The Stakeholder Advisory Councilhas continued to advocate for a firmdeadline as to when ISO 20022 willbe required for financial institutions.There were two key issues—thereal-time rail and Lynx (to replace theLarge Value Transfer System)—thatwere less of a focus in 2017 for theStakeholder Advisory Council relativeto 2016. This does not reflect that thereal-time rail and Lynx are viewed bythe Stakeholder Advisory Council asbeing less important relative to otherissues. Rather, Lynx has been a focusmore for financial institutions as it isa designated systemically importantpayment system. As a result, it mustmeet the Bank of Canada’s riskSAC has also been pleased that Payments Canadais examining how to expand connections to thepayments system to corporates, small businessesand retailers. We believe this will lead to a morecompetitive system, which will benefit usersthrough a greater level of choice.This is based on the fact that thefull benefits of ISO 20022 will not berealized until it is in broad use. As ameans to support the initiative, theCouncil has identified corporates thatcould be early adopters of ISO 20022and is committed to supportingcommunications of the benefits,including use cases, for ISO 20022.The Stakeholder Advisory Councilhas also been pleased that PaymentsCanada is examining how to expandconnections to the payments systemto corporates, small businesses andretailers. We believe this will lead to amore competitive system, which willbenefit users through a greater levelof choice.standards for systemically importantfinancial market infrastructuresthat are based on the Bank ofInternational Settlements Principlesfor Financial Market Infrastructures.The Stakeholder Advisory Councilrecognizes the importance of Lynx tothe ecosystem and supports changesthat will enhance its reliability androbustness for users.In 2017, Payments Canada undertooka review of the incumbent retailpayments provider to assess itspotential as the provider for thereal-time-rail. This was followed bya period of confidential negotiation.While this limited the discussions onthe real-time rail for the StakeholderAdvisory Council during much of

15Messages & ReportsModernizationis one of themost, if not themost, significantpayments reformsfor Canada to date.2017, these discussions have nowconcluded and the StakeholderAdvisory Council is keen to re-engageto ensure that the real-time rail is aplatform for innovation in Canada.In December 2017, Payments Canadareleased a document that sets outthe target end state for paymentsmodernization in Canada, including theinfrastructure, rules and standards thatwill benefit Canadians and businesses.This document reflects views thatPayments Canada has heard frommany different parties. For its part,the Stakeholder Advisory Council hasPayments Canada Annual Report 2017actively provided its advice regardinghow the payments system can improvethe way Canadians pay for goods andservices, transfer money and exchangedata about their payments.Over the course of 2017, the PaymentsCanada Board of Directors has demonstrated an active interest in the viewsand perspectives of stakeholders. Inaddition, the Stakeholder AdvisoryCouncil has had the opportunity toengage with the board, which hasprovided the opportunity to discuss theviews of stakeholders on modernizingthe payments system. The StakeholderAdvisory Council looks forward tohaving similar opportunities in 2018,which are of great benefit.Modernization is one of the most, if notthe most, significant payments reformsfor Canada to date. It is comprised ofa number of initiatives and will touchon all segments of the paymentsecosystem. As a result, there has beencollaboration and input from manydifferent parties on Modernization.This has included the work being led byCONCLUSIONWhile Modernization is a long-term initiative, we arereaching the point where benefits will begin to berealized. The Stakeholder Advisory Council willcontinue to be active and constructive in providingcounsel and advice to the Payments Canada Boardof Directors as well as collaborating with interestedparties with the objective of supporting a paymentssystem that will serve Canadians well into the future.Payments Canada with collaborationfrom financial institutions, users,potential providers, governmentsand independent experts, amongothers. There has been increasingcollaboration as Payments Canadahas conducted its work, which SACsupports and would like to see groweven further. The Stakeholder AdvisoryCouncil believes that bringing partiestogether will lead to the best solutionspossible and the Council looks forwardto being an active contributor ineffective collaboration in 2018.In 2017, there was also collaborationbetween the Stakeholder AdvisoryCouncil and the Member AdvisoryCouncil. The Stakeholder AdvisoryCouncil has found this collaborationto be highly beneficial in terms ofsharing information on perspectivesto issues and discussing possiblesolutions. As Payments Canadacontinues its work on Modernization,the Stakeholder Advisory Councilwill look to build on this positivecollaboration in 2018.

PAYMENTSCANADAMANDATE &STRATEGY

17Mandate & StrategyPayments Canada Annual Report 2017PAYMENTS CANADA MANDATE AND STRATEGYThe Canadian economy depends on the exchange of billions of dollars each day. PaymentsCanada is responsible for the clearing and settlement infrastructure, processes and rulesessential to those transactions.We are responsible for supporting avibrant economy by helping to meetthe payment needs of consumers andbusiness, and by empowering a newera of modern payments.our Automated Clearing SettlementSystem is where the vast majorityof day-to-day Canadian commerceis cleared by financial institutionparticipants.We provide Canada’s nationalpayments systems. Our Large ValueTransfer System enables financialinstitutions and their customers tosend large payments securely, andIn 2017, Payments Canada clearedand settled transactions totalling 50.45 trillion, averaging 199.39billion each business day.In 2017, PaymentsCanada cleared andsettled transactionstotalling 50.45trillion, averaging 199.39 billion eachbusiness day.

18Mandate & StrategyPayments Canada Annual Report 2017OUR MANDATEOUR STRATEGYOur legislated mandate, as set out inthe Canadian Payments Act, includesthe following objectives:We are well on our way to realizingour vision of a thoroughly modernizedpayments infrastructure that willbenefit all Canadians. To fulfill ourvision and deliver on our mandate,Payments Canada follows andimplements an annual CorporatePlan. In 2017, this included threelong-term desired outcomes:A. Establish and operate nationalsystems for the clearing andsettlement of payments and otherarrangements for the making orexchange of payments.B. Facilitate the interaction of itsclearing and settlement systemsand related arrangements with othersystems or arrangements involved inthe exchange, clearing or settlementof payments.C. Facilitate the development of newpayment methods and technologies.In fulfilling its mandate, PaymentsCanada has the public policyobjective to promote the efficiency,safety and soundness of its clearingand settlement systems and take intoaccount the interests of users.1. MODERNIZEModernize the core paymentssystems, including the policies,rules, standards and technologyinfrastructure.2. OPERATE & ENHANCEStrengthen management andoverall performance in the key areasof payment systems resiliency,addressing regulatory requirements,and operational excellence.3. CREATE NEW OPPORTUNITIESExplore and develop non-competitiveofferings that provide value to ourmembers, stakeholders and users.MEMBERSHIPMembership in PaymentsCanada includes the Bank ofCanada, domestic banks, andauthorized foreign banks. Otherdeposit-taking institutions(credit union centrals, trustand loan companies, andprovincial savings offices) havebeen eligible for membershipsince 1980. The amendmentsto the CP Act in 2001 openedmembership to life insurancecompanies, securities dealers,and money market mutualfunds, among others. PaymentsCanada is funded by itsmembership, which stood at110 at the end of 2017.

MANAGEMENTDISCUSSION &ANALYSIS

KEY ACCOMPLISHMENTSMODERNIZEOPERATE & ENHANCECREATE NEW OPPORTUNITIESENTERPRISE RISK MANAGEMENTOUR PEOPLESUMMARY OF FINANCIAL OPERATIONS2017 PERFORMANCE AT A GLANCECORPORATE PLAN FOR 2018

21Management Discussion & AnalysisPayments Canada Annual Report 2017MODERNIZEIn 2017, our major payments Modernization initiative kicked into high gear. The mostimportant milestones included aligning the industry on the revised roadmap and target statefor Modernization, building capacity on the team and securing funding for the program.Details of these 2017 achievements—which could not have been accomplished without thededicated engagement and participation of a multitude of representatives from our memberfinancial institutions and key stakeholder groups—are outlined below:SELECTING ANDONBOARDINGINDUSTRY PARTNERDEFINING NEWSYSTEMS ANDENGAGING SUPPLIERSTo better manage the scope of theModernization program and thenumber of participants involved,Payments Canada chose to partnerwith global consulting firm Accenture.In 2017, Accenture was selectedfor their excellent track record ofsupporting payments modernizationinitiatives around the world andtheir in-depth payments expertise.Together, we established the IndustryProgram Management Office in 2017that will help to support financialinstitution participants throughoutthe transition over the next three tofour years.Payments Canada invited a shortlist of suppliers to participate in acompetitive procurement processfor the country’s new high-valuepayment system, Lynx. This followeda Request for Information, researchand analysis of payments systemmodernization initiatives around theworld and consultation with otherinternational market infrastructureproviders. The competitive dialogueprocurement process set in motiondetailed work on requirements,proof-of-concepts, alternative designsolutions and testing throughout theyear and will result in a final vendorselection in 2018.This selection process also involvedthe onboarding of more than 50 newteam members, including consultantsand contractors, the expansion of ourToronto office; and the reorganizationof our new headquarters in Ottawa tosupport the growth.After defining requirements for a newreal-time / faster payments capabilityin Canada, we also began a rigorousassessment of Interac to betterunderstand its core utility platformand whether it had the potential to address the real-time needs identified inthe Vision for the Canadian PaymentsEcosystem. That assessment led to adesign services agreement to supportthe creation of detailed specificationsand blueprint for real-time paymentsin Canada. Following completion ofthis exercise, we will move to decideon the approach for building thesolution.

22Management Discussion & AnalysisDEFINING INTERIMCREDIT RISK MODELFOR THE AUTOMATEDCLEARING SETTLEMENTSYSTEMFollowing the designationof Canada’s retail paymentsystem, the Automated ClearingSettlement System, as aprominent payment system, webegan preparations to align withinternational best practices andrisk management standards.This started with deep credit riskresearch to determine sufficientcollateral for the system. Thatwork informed the developmentof an Interim Credit Risk Model,which was supported throughconsultation with our memberfinancial institutions in 2017.Following approval of by-lawamendments, the model is beingimplemented in 2018 and will enhance the safety and soundnessof the retail payment system.Payments Canada Annual Report 2017NEW RULES TO ENHANCEAUTOMATED FUNDSTRANSFERDETAILING THEMODERNIZATIONTARGET STATEAutomated Funds Transfers—alsoknown as batch payments—moveroughly 1.7 billion payments inCanada every year and representthe greatest value of payments inCanada’s retail payments system.Around the world, batch paymentsremain a staple of most paymentssystems because they are costeffective and efficient.Together with our member financialinstitutions, we provided a moredetailed view of the Modernizationprogram with the ModernizationTarget State paper, which includescomprehensive descriptions ofmodernized systems and theirfundamental support structures suchas risk and regulatory considerations,access mo

Payments Canada has much to be proud of in 2017. The organization built internal capabilities by growing its workforce and improving the resiliency of its systems, made great strides on its mission to facilitate payments innovation and set the stage to usher in a new era of modern payments. The payments modernization journey in 2017 is marked .