Benchmark Reform

The Canadian Dollar Offered Rate (CDOR) is a recognized Canadian financial benchmark and represents the rate at which banks are willing to lend to companies. CDOR is also used as the rate in Canada for bankers’ acceptances (BAs). The rate is determined through a daily survey of 6 principal market-makers, which consist of the major Canadian banks.

The Canadian Overnight Repo Rate Average (CORRA) measures the cost of overnight general collateral funding in Canadian dollars using Government of Canada treasury bills and bonds as collateral for repurchase (repo) transactions.

CDOR

• Credit-based measure that incorporates both term and bank credit risk premium.
• Measures the rate that Canadian banks are willing to lend to clients with existing credit agreements via bankers’ acceptances.
• Survey-based rate.
• Submitted rates lack transparency.
• Forward-looking term rate (payment is known in advance) published for 1-, 2- and 3-month tenors.
• Administrator: Refinitiv.
• Publication delay for free usage.
   

CORRA

• Risk-free measure that reflects the overnight risk-free rate, which closely tracks the Bank of Canada’s Target Rate.
• Measures the cost of overnight lending via general collateral repo transactions secured by Government of Canada debt.
• Transparent and transaction-based (i.e., reflects actual market transactions).
• Overnight rate.
• Credit-based measure that incorporates both term and bank credit risk premium.
• Administrator: Bank of Canada.
• No publication delay for free usage.

_{Source:  CARR White Paper on the recommended future of CDOR [PDF].}

On January 11, 2023, the Canadian Alternative Reference Rate Working Group (CARR) released a market notice announcing certain important developments with respect to the advent of a Term CORRA rate. See the following publications for further details:

1. Consultation on a potential new term interest rate to replace CDOR in certain financial instruments: Summary of results [PDF]
   
   
2. Term CORRA Methodology - CARR Recommended Approach [PDF]
   
   
3. The administration of Term CORRA [PDF]
   
   
4. CARR’s approved uses for Term CORRA [PDF]
    

Term CORRA is now available in tenors of 1 month and 3 month and CARR has released guidance on the allowable use cases for Term CORRA on August 29, 2023.

The CDOR transition timeline and key milestones can be found on the CARR website here.

On August 2, 2022, CARR published recommended fallback language to remediate loan contracts referencing CDOR. By amending existing credit agreements with the recommended fallback language, the CDOR rate will be replaced by the corresponding adjusted risk-free rate (i.e., Term CORRA with a credit spread adjustment) on the relevant CDOR cessation effective date (i.e., June 28, 2024). Otherwise, we will replace the CDOR rate by the corresponding adjusted risk-free rate (i.e., Term CORRA with a credit spread adjustment) or by CORRA compounded in arrears (which is recommended if you hedge your floating rate with a swap) when your credit agreement comes up for annual review prior to the cessation of CDOR. On July 27, 2023, CARR published its recommendations for transitioning loans from CDOR to CORRA and provided a “no new CDOR or BA loan” milestone (November 1, 2023).

If you have an interest rate swap with us to hedge the CDOR exposure of your loan, we will coordinate the amendment of the benchmark rate in your swap contract with the replacement of the benchmark rate in your credit agreement. It will be important that the two instruments be modified in a synchronized fashion to avoid creating a mismatch. The CARR working group recommends to convert both instruments (the loan and the swap) to CORRA compounded in arrears as there will be more liquidity in the overnight CORRA rate so it should be less expensive to hedge than Term CORRA.

If you have a swap with us but your credit agreement is with another financial institution (including a syndicated loan where we are not acting as the agent), you will need to contact your derivatives specialist at NBC to coordinate the conversion of your swap with the amendment of your credit agreement.

Along with the cessation of CDOR, bank funding is migrating away from bankers’ acceptances (BAs) within the same timeframe. Borrowers will be able to replace their bankers’ acceptances by drawing on CORRA or Term CORRA.

The International Swap and Derivatives Association (ISDA) has put in place a protocol to which market participants can adhere to inform their counterparties with derivative contracts that they agree to apply the rate replacement methodology determined by ISDA, which is to use the RFR compounded in arrears with a credit spread adjustment.

In short, if both parties to a rate swap concluded before January 25, 2021, have signed the ISDA protocol, the ISDA replacement methodology will apply to the transaction upon the discontinuation of the relevant IBOR rate.

For any rate swap concluded after January 25, 2021, the ISDA replacement methodology is integrated into the transaction and refers to the ISDA definitions amended on January 25, 2021. The protocol doesn’t need to have been signed by both parties.

If you have stand-alone swaps (not related to a loan or other cash product) executed before January 25, 2021, or if you are replacing the rate applicable to your credit agreement by CORRA compounded in arrears and you have associated CDOR swaps executed before January 25, 2021, it could be beneficial for you to sign the ISDA protocol to adopt the fallback to CORRA compounded in arrears which will take effect after June 28, 2024. Otherwise, if you are replacing CDOR in your credit agreement by Term CORRA and you want your outstanding swaps to be converted to Term CORRA to avoid basis risk between the two instruments, it should be done in coordination with the replacement of CDOR in the credit agreement through a bilateral negotiation process between you and NBC (and any other financial institution in charge of your credit agreement, as the case may be).

Our Economics and Strategy team has written a detailed background document on the broader global Benchmark Rate Reform [PDF]. This document, which is regularly updated, provides a comprehensive picture of past, current and future issues surrounding the transition of benchmark rates, including CDOR, and the broader reform of benchmark rates underway in international financial markets. You'll find a list of links to external content from relevant sources that we recommend for your review. Also, on January 11, 2023, CARR and TMX launched a series of CDOR to CORRA Transition Webcasts to inform the market of important facts and dates relevant to investors, issuers, borrowers and financial institutions, which we encourage you to register to here.

Your account managers and derivatives specialists are available to answer your questions, so please don’t hesitate to contact them. They will be able to direct any question requiring greater expertise to a group of experts at NBC.