Global financial markets are in the process of transitioning from survey-based credit-sensitive benchmarks to risk-free rates. These risk-free rates are expected to become the predominant benchmark in most major jurisdictions, including Canada. Risk-free rates, however, may not be the optimal benchmark for all types of financial products (e.g. committed revolving loan facilities) so having robust credit-sensitive benchmarks may also be desirable.
CDOR is Canada’s survey-based credit-sensitive benchmark and it is used widely across Canadian financial markets. While CDOR has not been subject to the same frailties as LIBOR, there are factors unique to CDOR that have yet to be analysed in detail. For example, regulatory changes have impacted the effectiveness of Banker’s Acceptances (BAs) as a short-term funding product for banks, and BAs are the instruments upon which CDOR is constructed. Reforms to CDOR following the financial crisis have focused on the submission process, but to date no formal analysis has been conducted on the efficacy of CDOR as a credit-sensitive benchmark, including its architectural underpinnings.
As a result, CARR’s mandate has been expanded beyond its focus on risk-free rates to include an in-depth analysis of CDOR and to make recommendations based on that analysis. To accommodate for this change to its Terms of Reference, CARR will be reconstituted to deliver on its two primary objectives: 1) Supporting the adoption of, and transition to, CORRA as a key financial benchmark for Canadian derivatives and securities; and 2) Analysing the current status of CDOR. This work will ensure that Canada’s financial benchmarks remain robust, relevant and effective.
“As global work on financial benchmark reform continues ahead of LIBOR’s cessation, it is crucial that the Canadian public and private sectors work together to ensure Canada’s framework of interest rate benchmarks remains robust and appropriate,” said Bank of Canada Governor Tiff Macklem. “The broadened mandate of the Canadian Alternative Reference Rate working group is a key step towards making this possible.”
CARR is a group of financial sector firms and public sector institutions working to promote the use of CORRA as a key interest rate benchmark in Canada. CARR was established under the auspices of the Canadian Fixed Income Forum.
For further information, please contact:
Financial Markets Department
Bank of Canada
Managing Director and Vice Chair
CIBC Capital Markets
Bank of Canada