Update on Benchmark Rate Reform

CDOR is a domestic benchmark reference rate that is administered by Refinitiv and is currently published in tenors of 1, 2 and 3 months. Each CDOR tenor is calculated and published daily at 10:15 a.m. ET Monday-Friday. Refinitiv calculates CDOR by using submitted rates from a panel of contributor banks that are active in the Bankers Acceptance (BA) market. Each contributor bank’s submission represents the rate at which they are contractually willing to lend funds to corporate borrowers with existing BA facilities for set terms. The highest and lowest quotes are dropped, and the remaining quotes are then averaged to set the daily CDOR benchmark for each tenor.

CDOR is closely linked to overall money market conditions but may be influenced by a number of other factors, such as regulatory costs; credit market conditions; seasonal funding pressures; and the supply-demand dynamics for BA. Currently, CDOR is used as the main interest rate benchmark to price a range of Canadian financial instruments, including certain over-the-counter and exchange-traded derivatives; floating-rate notes and other securities; and loans between corporate and commercial borrowers and banks. 

The Canadian Overnight Repo Rate Average – CORRA – has been identified as the recommended alternative to CDOR. CORRA is an overnight rate, that has been published since 1997 and it measures the cost of overnight general collateral funding in Canadian dollars using Government of Canada treasury bills and bonds as collateral for repurchase transactions.

The Canadian Alternative Reference Rate Working Group (CARR) was established in 2018 in response to recommendations published by the Financial Stability Board, which emphasized the need to both strengthen existing interbank offered rate benchmarks and to develop risk-free reference rates. CARR is a consultative group comprised of financial sector firms, large financial instrument end users and public sector institutions, with an initial mandate to enhance the CORRA and to analyze the need for, and potentially develop, a new Canadian dollar risk-free term rate. The CARR’s primary objectives will be to:

1. Support and encourage the adoption of, and transition to, the Canadian Overnight Repo Rate Average (CORRA) as a key financial benchmark for Canadian derivatives and securities; and
2. Analyze the current status of the Canadian Dollar Offered Rate (CDOR) and its efficacy as a benchmark, as well as make recommendations on the basis of that analysis.

Please refer to the CARR website for more information on the transition from CDOR to CORRA.

The CARR has recommended the following multi-staged CDOR transition: Refer to the CARR’s CDOR transition timeline here.

• After June 30, 2023, all new derivative contracts (bilateral, cleared, and exchange-traded) and securities (assets and debt liabilities) must transition to alternative reference rates such as CORRA with limited exceptions available for referencing CDOR
• After November 1,  2023, all new loans must reference Overnight CORRA, Term CORRA or Prime
• All contracts (loans, derivatives, securities) must be transitioned by June 28, 2024 to alternative reference rates such as CORRA

On January 11, 2023, the CARR released a market notice announcing certain important developments with respect to the advent of a Term CORRA rate, consisting essentially of the following publications:   

1. Consultation on a potential new term interest rate to replace CDOR in certain financial instruments: Summary of results
2. Term CORRA Methodology - CARR Recommended Approach
3. The administration of Term CORRA
4. CARR’s approved uses for Term CORRA

CanDeal Innovations Inc. the benchmark administrator of Term CORRA announced the production launch date of September 5, 2023, for the distribution of the Term CORRA (1-and 3-month). Reference Rates. Term CORRA is distributed by the TMX.

Term CORRA has been constructed to be compliant with IOSCO’s Principles for Financial benchmarks from its launch. It is expected that Term CORRA will be regulated by the OSC and AMF as an interest-rate benchmark under Multilateral Instrument 25-102.

A licensing agreement is only needed for those firms that issue financial instruments referencing Term CORRA (e.g. bilateral or syndicated loans). Users of instruments linked to Term CORRA do not need a license, however, they may be required to acknowledge that they abide by the terms and conditions for the use of Term CORRA.

A license may be required by market participants for access to Term CORRA in real-time. Term CORRA will be available to the public for free on a delayed basis. Specific licensing details will be provided by CanDeal. These will align with CARR’s recommendations.

Term CORRA is regulated as a designated interest-rate benchmark by the OSC and AMF, which means that for the rate to be published the underlying market from which the rate is calculated from needs to be sufficiently robust. If the underlying market is not sufficiently robust then CanDeal, as the Term CORRA administrator, will need to adjust the calculation methodology to ensure a robust benchmark can be calculated, if this is not possible, they will need to cease its publication. Therefore, all users of Term CORRA are expected to have sufficiently robust fallbacks for Term CORRA in their contracts. In most cases this fallback would be to CORRA compounded-in-arrears.  

Term CORRA is a point in time estimate of the fixed rate on a 1-and 3-month CORRA based overnight index swap (OIS). CORRA-based OIS derivatives have existed since the early 2000s and indicative end of day rates for both tenors are available on Bloomberg going back daily to 2002. CanDeal Benchmark Solutions, as the benchmark administrator has announced the production launch date of September 5, 2023, for the distribution of the new Term CORRA (Canadian Overnight Repo Rate Average) 1-and 3-month Reference Rates.

For legacy contracts, use of Term CORRA is only permitted in bilateral and syndicated business loans and their corresponding derivative hedges. For new contracts including renewals, refer to the below approved and non-approved use cases.

Refer to the CARR's Term CORRA Use Cases.

The CARR has published recommended fallback language to ensure robust fallbacks are in place for loan contracts referencing CDOR. The Bank of Nova Scotia has also developed suitable fallback language for certain agreement types. By adding suitable fallback language, the CDOR rate will be replaced by the corresponding adjusted risk-free rate i.e. CORRA after the CDOR cessation date of June 28, 2024.

Credit spread adjustments (CSAs) are meant to account for the economic difference between the replacement rate and CDOR. While CSAs reflect the historic economic difference between CORRA and CDOR calculated as of the date of the RBSL announcement, they may not reflect the economic difference at a different point in time, and market standards may continue to evolve as we approach the CDOR Cessation Date. Once CDOR ceases to be published, CARR expects the market to transition to CORRA plus a spread, without the need for a credit spread adjustment.

The International Swaps and Derivatives Association (ISDA) published the IBOR Fallbacks Protocol (the Protocol) on October 23, 2020, a multilateral amending agreement that incorporates new fallback language into standard form ISDA documentation, as well as into certain specified non-ISDA agreements (together, Covered Agreements).  It ensures certain rates such as CDOR have appropriate fallback mechanisms in place upon the occurrence of a cessation event. The Protocol allows parties to amend ISDA Master Agreements as well as other agreements such as Global Master Repurchase Agreements (GMRAs) and Global Master Securities Lending Agreements (GMSLAs). For the full list of in-scope agreements, refer to the annex in the ISDA Protocol. 

If the interest rate swap referencing CDOR was entered into prior to January 25, 2021, and has a maturity beyond June 28, 2024, you will need to adhere to the ISDA IBOR Fallbacks Protocol to make sure those transactions reference the appropriate fallback language which is CORRA Compounding in Arrears with a 2-day observation shift. If you choose not to adhere to this protocol, you will need to bilaterally amend your transactions, restructure, or unwind the trade prior to June 28, 2024.

If the transactions were entered into after January 25, 2021, you are not required to sign the ISDA IBOR Fallbacks Protocol. The ISDA IBOR Fallbacks Supplement will apply the above-noted CORRA fallback language to your trades.

The ISDA Protocol adherence site can be accessed here.

Note: After June 30, 2023, all new derivative contracts (bilateral, cleared, and exchange-traded) and securities (assets and debt liabilities) must transition to alternative reference rates such as CORRA with limited exceptions available for referencing CDOR.

The recommended industry fallbacks and market conventions developed for loans and derivatives do not align. The market conventions for derivatives is CORRA Compounding in Arrears with a 2-day observation shift, while the first step in the waterfall for loans is Term CORRA.

Therefore, if you have a derivative which is intended to hedge a loan, our coverage team will coordinate the amendment of the benchmark rate in your credit agreement with the amendment of the benchmark rate in your derivative to ensure alignment. It will be critical that the replacement rates and spread adjustment, if applicable, are aligned to ensure the hedge remains intact after CDOR’s cessation.

Based on when your loan contract is maturing, please see the recommended approach outlined below.

Market participants that already have loan facilities tied to CDOR can hedge their CDOR exposure using CDOR based derivatives until CDOR is no longer published after June 28, 2024. Market participants who actively hedge their exposure may consider moving to CORRA based loan facilities earlier as liquidity in CDOR based derivatives may decline after June 30, 2023 (the end of Stage 1 of CARR’s two-staged transition from CDOR).

Whether the CDOR derivative hedge continues to match the exposure that is being hedged depends on the fallback language in the underlying hedged instrument as well as the date at which the respective instruments transition. Therefore, please consult your accountant regarding your specific exposures and the effectiveness of any hedging transaction.

Note that after CDOR ceases to be published, derivative transactions subject to ISDA documentation that have been entered into post-January 25, 2021, or that are subject to the ISDA fallback protocol, will move to CORRA compounded-in-arrears plus the published ISDA spread adjustment unless otherwise agreed to. After June 30, 2023, all new derivative contracts (bilateral, cleared, and exchange-traded) and securities (assets and debt liabilities) must transition to alternative reference rates such as CORRA with limited exceptions available for referencing CDOR.

With the cessation of CDOR’s publication, the BA based lending model which creates the BAs that are issued will be discontinued and therefore BA issuance will cease after June 2024. Canada is the last major jurisdiction to retain this type of lending structure developed in the 1960s, with many having modernized their lending structures decades ago away from BAs. Based on discussions with the CDOR panel member banks, BA issuance is expected to remain relatively robust until the end of CDOR. As a result, there will be no or very limited BA issuance taking place after June 2024, however, issuance is expected to remain relatively robust until the end of 2023. BA issuance is expected to progressively drop as we approach the CDOR cessation date.

No, the BA based borrowing option will no longer exist after the end of CDOR and you will either need to remediate your existing lending facilities or rely on any robust fallback that is already in place. CARR’s recommendation is for borrowers to remediate their contracts before the June 28, 2024 end of CDOR instead of relying on any fallback. Please reach out to your banker(s) to discuss your specific situation.

Yes, after CDOR’s cessation BAs will cease being issued, and hence BA rates will no longer be available to determine a discount rate. These types of facilities will need to move to another rate such as overnight CORRA or Term CORRA. Please reach out to your banker(s) to discuss your specific situation. 

It is expected that the all-in borrowing rate will be roughly equivalent noting the bank's current funding costs and current market conditions. However, since CORRA (Term, Overnight) comprises a risk-free rate and does not include a bank funding/credit spread, it is much lower than CDOR. Therefore, banks will need to adjust borrower-specific credit spreads higher to account for this difference. 

The Canadian Fixed Income Forum (CFIF) has formed a working group to assess potential options to replace BAs as an investment product and has also developed a white paper assessing the impact of CDOR cessation and discussing potential options to replace BAs. CFIF also recommends the path for winding down the BA market as follows:

• Canadian banks to taper off their BA issuance starting in November 2023 to coincide with CARR’s “no new CDOR or BA loan” milestone
• The outstanding stock of BAs sold into the market is expected to decline to approximately $70 billion by the end of January 2024, and to $35 billion by the end of April 2024, with between $10 and $20 billion of BAs to be issued in June 2024
• Canadian Banks to stop issuing new BAs after the end of June 2024 when their loan facilities will no longer offer the BA draw down option

The CARR has developed a set of Frequently Asked Questions (FAQs) on its website to provide clarity on various aspects of the CDOR transition. In addition, you can visit the CDOR Transition page where you will find key updates and insights on the transition. Lastly, the CARR and TMX Group Limited (TMX) have launched CDOR to CORRA Transition Webcasts to inform the market of important facts and dates relevant to investors, issuers, borrowers and financial institutions, which you can register here.

You can reach out to your Scotiabank Relationship Manager with any additional queries on the CDOR transition and the potential impact to your products.

View the Benchmark Rates Regulatory Disclosure.