The announcement today confirms that efforts are underway to develop a 1- and 3-month Term CORRA benchmark with the objective of making such benchmarks available for use by the end of Q3-2023. On October 7, 2022, CARR announced that it would begin the process of developing a Term CORRA benchmark that would be compliant with both the International Organization of Securities Commissions (IOSCO) Principles for Financial Benchmarks and Canadian benchmark regulation.
Based on the responses to CARR’s May 16, 2022 public consultation on the need for a Term CORRA benchmark, the results showed significant interest from Canadian companies for a forward looking term rate to replace CDOR in loans and associated derivative hedges. Since that time CARR has worked on the feasibility, construction and parameters of Term CORRA with broad industry input and representation.
Notwithstanding this specific need, CARR expects that the vast majority of the financial products (or exposure) currently referencing CDOR will transition to overnight CORRA calculated in-arrears. This is consistent with the practice in other jurisdictions.
Working with subject matter experts across the various stakeholders in the financial industry, CARR has developed its “recommended methodology” for calculating a robust Term CORRA benchmark. The benchmark will be derived from transactions and executable bids and offers from CORRA interest rate futures traded on the Montréal Exchange. The benefit of using futures for the calculation of Term CORRA is that the futures market is both transparent and regulated. This methodology is also consistent with the approach taken in Term SOFR.
Term CORRA will be produced and managed, subject to all necessary regulatory approvals, by CanDeal Innovations Inc. as the benchmark administrator and with TMX Datalinx, TMX Group’s information services division, providing the licensing and distribution capabilities.
CARR has designed Term CORRA to be a robust benchmark that adheres to IOSCO’s Principles for Financial Benchmarks. One of IOSCO’s key principles is that the design of a benchmark should take into account the relative size of the underlying market from which the benchmark is created compared to the exposure that references the benchmark. Accordingly, the use of Term CORRA will be restricted through its licensing agreement 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.
Although CARR has endeavoured to create a robust and sustainable benchmark, there are certain dependencies underpinning Term CORRA that mean its long-term sustainability is not guaranteed. In particular, the ongoing viability of Term CORRA will depend on the liquidity of the underlying CORRA futures contracts that are used to derive Term CORRA. If the depth of liquidity in these contracts is not sufficiently robust, the Term CORRA administrator will be required to amend the methodology. If changes to the methodology do not result in a sufficiently robust benchmark, the benchmark administrator will be required to either (i) take steps necessary to ensure that the benchmark accurately and reliably represents that part of the market or the economy that it is intended to represent or (ii) cease the publication of the benchmark with appropriate notice. CARR therefore expects any users of Term CORRA to have robust fallback language in place, in most cases referencing overnight CORRA calculated in-arrears. Users also need to build the operational capacity to transact in these fallback rates should Term CORRA cease to be published in the future.
Bank of Canada Governor Tiff Macklem issued the following statement about CARR’s announcement:
“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.”
Canada established CARR, a working group sponsored by the Canadian Fixed-Income Forum, to coordinate Canadian interest rate benchmark reform. CARR’s mission is to ensure Canada’s interest rate benchmark regime is robust, resilient and effective in the years ahead. Over the coming transition period, CARR will support the transition from CDOR to CORRA as a key financial benchmark, including working to potentially create an IOSCO-compliant Term CORRA rate.
Visit CARR’s webpage for up-to-date information on the transition, including all of CARR’s key documents, and to sign-up to receive email updates from CARR.
Financial Markets Department
Bank of Canada
Managing Director and Vice Chair
CIBC Capital Markets
Bank of Canada