Regulators greenlight CDOR benchmark reform

The move followed a recommendations from the Canadian Alternative Reference Rate Working Group (CARR), which published a whitepaper in December 2021 calling for the discontinuation of CDOR as part of global efforts to reform major interest rate benchmarks.

The reform effort arose in the wake of the Libor scandal that exposed misconduct in the wholesale financial markets, including firms manipulating key benchmarks to benefit their derivatives trading positions.

After initially seeking to reform those existing benchmarks, regulators have instead sought to replace interbank offered rates with risk-free reference rates based on actual transactions.

In Canada, this means replacing CDOR with the Canadian overnight repo rate average (CORRA).

In January, Refinitiv launched a consultation on the impact of discontinuing CDOR, and now, with the regulators’ approval, has now confirmed plans to scrap the benchmark in mid-2024.

“Today’s announcement from [Refinitiv] provides a clear direction for market participants to transition their activities away from CDOR,” said Karl Wildi and Harri Vikstedt, CARR co-chairs, in a statement.

“It sets in motion the two-staged transition timeline that CARR had outlined in its December whitepaper with derivatives and securities transitioning to CORRA by the end of June 2023, with an extra year for loan products to transition before CDOR ceases to be published,” they said.

Alongside the announcement, the CARR published a transition roadmap that outlines the steps that Canadian market participants must take to plan for CDOR’s withdrawal.

It also launched a consultation on a potential “forward looking term CORRA benchmark to replace CDOR in certain types of loan facilities.” That consultation will run until June 13.

“CDOR has long been a core benchmark in Canada. 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,” said Tiff Macklem, governor of the Bank of Canada, in a release. “The transition to CORRA will be led by CARR, but its success will require a collaborative effort by all Canadian institutions with CDOR exposure.”

In a letter to the industry, the Office of the Superintendent of Financial Institutions (OSFI) said replacing CDOR “will elevate Canadian benchmark standards and align Canada with other jurisdictions which are adopting similar standards.”

“With confirmation of CDOR cessation dates, we are entering into a critical phase in the transition to alternative reference rates in Canada,” OSFI said.

To that end, the regulator said that it expects federally regulated financial institutions and pension plans with transactions linked to CDOR to “make every effort to ensure a seamless transition to new reference rates, prior to the respective cessation dates.”

Specifically, OSFI said it expects all new derivatives contracts and securities to transition to alternative reference rates by June 30, 2023, “with no new CDOR exposure being booked after that date.” Firms are also expected to transition all loan agreements referencing CDOR by mid-2024.

OSFI also said it recognizes that the cessation of CDOR will have implications for funding and lending instruments, including Banker’s Acceptances. “Considering this, OSFI will review capital and liquidity guidance to ensure any specific references to, and treatments for, Banker’s Acceptances remain appropriate after CDOR’s cessation,” it said.

The transition will also be incorporated into its supervisory work over the next couple of years.

“For [financial institutions] with material exposure to CDOR, OSFI will be considering CDOR transition efforts and project delivery within its supervisory risk assessments and will take supervisory actions, as appropriate, based on its evaluation of transition preparedness,” it added.