CSA adopts benchmark oversight regime

The move to regulate financial benchmarks in Canada and elsewhere comes in the wake of widespread market manipulation, largely centred on various LIBOR benchmarks. While efforts were made to rehabilitate LIBOR, it’s now in the process of being phased out.

Historically, benchmarks have not been formally regulated in Canada, but regulators were prompted to action by the LIBOR scandal which alerted them to the risk of manipulation and investor harm.

“As the importance of benchmarks continues to increase in Canadian capital markets, and because misconduct involving benchmarks has led to significant negative impacts on capital markets… we are of the view that it is appropriate to adopt a securities regulatory regime for benchmarks and their administrators, contributors and certain of their users,” the CSA said in a notice.

The new regime allows the regulators to set specific requirements for designated critical benchmarks, the firms that administer them, contribute to them and use them.

Once the rules for financial benchmarks take effect, the CSA will name the Canadian Dollar Offered Rate (CDOR) as a designated benchmark, and its administrator, Refinitiv Benchmarks Services Ltd., as its administrator.

“This intention is based on the significant reliance placed by users and other market participants on CDOR, which is used in various financial instruments with a notional value of at least $10.9 trillion,” the CSA said.

Given the importance of CDOR, the CSA said it should be regulated to minimize the risk of abusive activity, or administrative interruption, that could harm Canadian markets.

“If one of these events were to occur, the loss of confidence that Canadian capital markets would suffer and the costs that would be borne by Canadian financial markets (including investors) could be significant,” the CSA noted.

However, the CSA won’t regulate the benchmark that’s now administered by the Bank of Canada, the Canadian Overnight Repo Rate Average (CORRA).

The CSA initially intended to oversee CORRA when it was run by Refinitiv, but decided against that action once the central bank took over the benchmark.

As well, the CSA said that while it won’t immediately designate any other benchmarks under the new rules, it may do so in the future.

“With the adoption of these rules, the public can be confident that Canadian financial benchmarks remain robust, reliable, and aligned with international standards,” said Louis Morisset, chair of the CSA and president and CEO of the Autorité des marchés financiers (AMF), in a release.

The Canadian regulators noted that they are seeking to have their new regime recognized by European regulators as “equivalent” under the European Union’s (EU) benchmark regulation.

At the same time, the CSA is also proposing a new regulatory regime for commodity benchmarks, which is based on principles established by the International Organization of Securities Commissions (IOSCO). Those proposals are out for comment until July 28.

“The proposed framework would codify international best practices with respect to designated commodity benchmarks,” Morisset said.