The Canadian dollar offered rate, a crucial benchmark for a wide range of financial products, will cease to be published in June 2024, marking Canada’s transition to a new benchmark rate system a decade after a major international price-rigging scandal. rate.
The decision, announced by financial data provider Refinitiv on Monday, amounts to a significant change in the country’s financial plumbing. The benchmark, called CDOR, has been used since the 1980s and underpins more than $20 trillion in financial contracts.
The end of CDOR is part of a global shift from benchmark rates derived from bank surveys to benchmark rates derived from market transaction data in an effort to make them more transparent.
This change follows a scandal in Britain involving the London Inter-Bank Offered Rate (LIBOR). A 2012 investigation found that a number of UK and European banks – including Barclays, Royal Bank of Scotland, Deutsche Bank and UBS – had worked together to release false financial data, manipulating LIBOR to their own advantage.
The revelations resulted in billions of dollars in fines and sparked a global effort to improve the quality of benchmark rates. Regulators began phasing out the use of LIBOR last year.
There is no evidence that CDOR has ever been manipulated. But the Canadian Alternate Benchmark Task Force, which was established in 2018 to examine the future of CDOR, determined that CDOR had several weaknesses and that Canada would be better off switching to another benchmark.
CDOR is calculated on the basis of bankers’ acceptances (BA) – a type of short-term loan that banks offer to business customers. It represents the rate that Canadian banks are willing to lend to their existing customers through bankers’ acceptances. Refinitiv collects CDOR data by surveying the six largest banks in Canada.
Although originally intended as a benchmark for BA loans, CDOR has become a benchmark for a wide range of financial contracts, primarily derivatives known as interest rate swaps.
The problem with CDOR is twofold, according to the working group, which published a white paper on the issue in December. It relies on the individual judgment of bankers who respond to Refinitiv’s surveys, which “means it lacks transparency compared to other benchmarks,” the task force wrote.
Additionally, the BA market is shrinking in Canada due to broader changes in financial regulations. This means that the reference rate is generated from fewer and fewer data points.
“A small number of BA transactions are used to determine a benchmark that affects valuations of trillions of dollars of exposure in the Canadian financial system. This situation will be exacerbated in the future as the number of bankers’ acceptances sold in the market declines,” the group wrote.
Refinitiv announced on Monday that it will stop publishing CDOR in June 2024. Regulators expect the transition from CDOR to occur in phases over the next two years.
In the future, financial contracts should refer to the Canadian Overnight Average Repo Rate (CORRA) instead of CDOR. CORRA is a market-based measure calculated on the basis of overnight lending between commercial banks. The Bank of Canada collects and publishes CORRA.
“CDOR has long been a basic benchmark in Canada,” Bank of Canada Governor Tiff Macklem said in a statement Monday. “The end of its publication is an important step in the global migration to risk-free rates, which will help our financial system remain robust and resilient in the decades to come.”
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