A couple of milestones in the long-running global effort to reform financial benchmarks arrived Friday, with the death of U.S. LIBOR and the first phase of the Canadian dollar offered rate’s (CDOR) demise.
While CDOR won’t be fully phased out until June 28, 2024, as of June 30, all new derivative and securities transactions should be using CDOR’s replacement, the Canadian overnight repo rate average (CORRA), with limited exceptions. After Friday, banks can only enter into new transactions with clients that reference CDOR if the transaction hedges or offsets existing CDOR exposures.
“Although it will be technically possible for new CDOR derivative initiation after June 2023, liquidity in CDOR-related derivatives is likely to worsen,” said National Bank of Canada in a note, adding that banking regulators “will be closely monitoring any new use of CDOR after June 30” to ensure that it’s only being used to hedge existing exposure.
In phase two of the transition away from CDOR, banks must stop originating new loans or renewing loans that reference CDOR, and the benchmark will be fully phased out by mid-2024.
Separately, the Canadian Alternative Reference Rate working group published a paper Friday, which found that “the exposure and number of tough legacy securities [linked to CDOR] is comparatively small and, given this small size, that the legislative solutions seen in other jurisdictions are not necessary for the Canadian market.”
At the same time, the U.S. dollar version of LIBOR was also retired today, and is being primarily replaced with the U.S. Federal Reserve’s secured overnight funding rate (SOFR).
The demise of these and other traditional financial benchmarks represents the culmination of reforms that started in the aftermath of the 2012 LIBOR scandal, when it was first revealed that major financial firms were routinely manipulating the benchmarks to benefit their own derivatives trading positions.
In response, policymakers began scrapping benchmarks based on banks’ submissions in favour of alternatives based on actual transactions.
On Thursday, a handful of Canadian securities regulators announced the implementation of changes to the framework for designating and overseeing financial benchmarks that extends its requirements to commodity benchmarks in an effort to address concerns about market manipulation and market integrity in commodity indexes.
“Although not on the scale of the LIBOR scandal, there have also been examples of manipulation or attempted manipulation of energy price indexes to benefit positions on futures exchanges,” the regulators said in a notice detailing the reforms, which take effect Sept. 27.