An industry working group confirmed the development of a pair of new forward-looking financial benchmarks as part of the ongoing effort to replace the Canadian dollar offered rate (CDOR) by mid-2024.
The group, known as the Canadian Alternative Reference Rate working group (CARR), announced it is working on one-month and three-month term Canadian overnight repo rate average (CORRA) benchmarks. The new benchmarks are expected to be available by the end of the third quarter.
“CARR’s work on developing a term risk-free benchmark for the Canadian loan market represents an important milestone to support the transition from CDOR to CORRA by June 2024,” Bank of Canada governor Tiff Macklem said in a statement.
Last year the CARR carried out a consultation on the need for forward-looking term benchmarks, alongside the new overnight CORRA.
That consultation found support for the idea, and in October 2022 the CARR said it began work on the development of a term CORRA that would comply with both the principles of the International Organization of Securities Commissions for financial benchmarks and with the Canadian benchmark regulations.
“Since that time CARR has worked on the feasibility, construction and parameters of term CORRA with broad industry input,” it said in a release.
That process has produced a proposed methodology for the new term benchmark that “will be derived from transactions and executable bids and offers from CORRA interest rate futures traded on the Montreal Exchange.”
“The benefit of using futures for the calculation of term CORRA is that the futures market is both transparent and regulated,” it said.
However, the group also noted that the long-term sustainability of the term benchmarks is not guaranteed.
“In particular, the ongoing viability of term CORRA will depend on the liquidity of the underlying CORRA futures contracts,” it said, adding that if liquidity doesn’t prove to be adequate, the benchmarks’ methodology may have to be revised, or they may be terminated altogether.
Additionally, the CARR said use of the term CORRA will be limited to trade finance, loans and derivatives associated with loans.
“Limiting the use of term CORRA to these products aligns with the consultation results and will help ensure that the majority of Canadian financial products reference overnight CORRA rather than term CORRA,” it added.
Subject to regulatory approvals, the benchmark administrator for the term CORRA will be CanDeal Innovations Inc. TMX Datalinx will provide licensing and distribution.