The beginning of the End of CDOR? And the SEC on the end of LIBOR

24 juillet 2019

On July 16, the Bank of Canada announced an intention to be the administrator (replacing Refinitiv) of the Canadian Overnight Repo Rate Average ("CORRA"). CORRA is a benchmark interest rate. It is the weighted average of the daily repurchase (repo) transactions. Certain refinements to the calculations of CORRA will likely be adopted, including that it will be based on unaffiliated counterparties, overnight term or same day transactions, as well as transactions that involve only Government of Canada bond or treasury bill collateral and are settled in Canadian dollars and weighted to eliminate the effect of transactions sourcing scare securities rather than funding transactions. These will be adopted in the second quarter of 2020. The basis of calculation has the effect of creating a rate that is based on actual transactions.

The Canadian Dollar Offered Rate ("CDOR"), on the other hand, was a consensus based rate published each morning based on a survey of known transactions. Back in 2014 the Office of the Superintendent of Financial Institutions of Canada had aimed for greater oversight of CDOR, particularly in light of the concerns around the transparency and possibility of manipulation of survey based rates like the London Interbank Offered Rate ("LIBOR"). Similar concerns had been expressed in respect of CDOR, most notably in a yet-unresolved class-action launched in 2018 against financial institutions alleging manipulation of that rate.

A leading contender to replace LIBOR in the United States is the Secured Overnight Financing Rate ("SOFR"). Published by the New York Federal Reserve, it is like CORRA in that it is based on actual lending and borrowing transactions in the US treasury repurchase market. Some hope that if SOFR finds more adoptees, the importance of LIBOR will diminish and the more transparently calculated SOFR will become the benchmark rate. CDOR is of course a primary rate in Canadian loan transactions, but the publication of CORRA by the Bank of Canada is analogous to the boosting of SOFR in the US. The Bank of Canada has explicitly stated in its announcement that it expects CORRA to be adopted more widely and perhaps become the dominant interest rate benchmark in Canada. This could only mean a diminished role for CDOR.

On a related note, the US Securities and Exchange Commission has issued significant guidance on the transition from LIBOR to other rates. It has directed market participants to consider whether their contracts contain effective LIBOR fallback (transitional provisions) language to deal with the end of LIBOR as a reference rate. In addition it suggests ensuring that companies have information technology ready to deal with rates and instruments not based on LIBOR and that they assess the "impact of financial, operational, legal, regulatory and other risks" associated with instruments moving off LIBOR. Guidance was also provided on disclosure to investors. Noting that even companies with no LIBOR based instruments may still be affected by the transition, the SEC suggests that "every company, if it has not already done so…begin planning for this important transition." This is detailed and helpful advice that would apply to companies and lenders domiciled in Canada as well.

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