The Canadian Dollar Offered Rate, a crucial benchmark for a broad range of financial products, will cease being published in June, 2024, marking Canada’s transition to a new reference rate system a decade after a major international rate-rigging scandal.
The decision, announced on Monday by financial data provider Refinitiv, amounts to a significant change to the country’s financial plumbing. The benchmark, referred to as CDOR, has been in use since the 1980s and underpins more than $20-trillion worth of financial contracts.
The end of CDOR is part of a global move away from reference rates derived from banker surveys and toward reference rates derived from market transaction data in a bid to make them more transparent.
This shift follows a scandal in Britain involving the London Inter-Bank Offered Rate (LIBOR). An investigation in 2012 found that a number of British and European banks – including Barclays, Royal Bank of Scotland, Deutsche Bank and UBS – had worked together to falsely report financial data, thereby manipulating LIBOR to their own benefit.
The revelations resulted in billions of dollars in fines, and set in motion a global effort to improve the quality of reference rates. Regulators began phasing out the use of LIBOR last year.
There is no evidence that CDOR was ever subject to manipulation. But the Canadian Alternative Reference Rate working group, which was established in 2018 to examine the future of CDOR, determined that there were several weaknesses to CDOR and that Canada would be better off shifting to another reference rate.
CDOR is calculated based on Bankers Acceptances (BA) – a type of short-term loan that banks offer commercial clients. It represents the rate that Canadian banks are willing to lend to existing clients through bankers acceptances. Refinitiv collects the data for CDOR by surveying Canada’s six largest banks.
While originally designed as a benchmark for BA lending, CDOR has become a reference rate for a wide array of financial contracts, mostly derivatives known as interest rate swaps.
The problem with CDOR is twofold, according to the working group, which published a white paper on the issue in December. It relies on the individual judgment of bankers who respond to Refinitiv’s surveys, which “means that it lacks transparency relative to other benchmarks,” the working group wrote.
Moreover, the BA market is shrinking in Canada owing to broader financial regulation changes. That means the reference rate is being generated from fewer and fewer data points.
“A small number of BA transactions are used to determine a benchmark that affects the valuations of trillions of dollars’ worth of exposure in the Canadian financial system. This situation will be exacerbated in the future as the number of bankers’ acceptances sold into the market shrinks,” the group wrote.
Refinitiv said Monday that it would stop publishing CDOR in June, 2024. Regulators expect the transition away from CDOR to happen in phases over the next two years.
Going forward, financial contracts will have to reference the Canadian Overnight Repo Rate Average (CORRA) instead of CDOR. CORRA is a market-based measure, calculated based on overnight loans between commercial banks. The Bank of Canada collects and publishes CORRA.
“CDOR has long been a core benchmark in Canada,” Bank of Canada Governor Tiff Macklem said in a statement on Monday. “The end of its publication is a significant milestone in the global migration to risk-free rates, which will help our financial system remain robust and resilient in the decades to come.”
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