Bank of Canada to Take Over Administration of Key Risk-Free Rate

(Bloomberg) -- The Bank of Canada is taking over a new risk-free overnight rate that could become the dominant benchmark for the country’s C$12 trillion ($9.2 trillion) market for loans and derivatives.

The Ottawa-based central bank said Tuesday it will become the administrator of the Canadian Overnight Repo Rate Average when enhancements take effect in the second quarter next year. It will provide the rate at no cost and for the “public good.”

Refinitiv Benchmarks Services currently oversees Corra, as well as the Canadian Dollar Offered Rate, or CDOR. Regulators and market participants around the world are pushing ahead with plans to develop their own domestic funding-rate alternatives as the London interbank offered rate is phased out by the end of 2021.

“The private sector has been really motivated in helping this transition, there is a common objective to see this move happen,” Bank of Canada Deputy Governor Lynn Patterson said in a briefing to reporters. “Having the central bank being the administrator helps with the transition process as it adds a level of robustness.”

The Canadian dollar Libor rate was discontinued in 2013 in the aftermath of the rigging scandal surrounding Libor. CDOR has come under increased scrutiny in recent years amid allegations of collusion among Canadian and foreign banks.

Bloomberg LP, the parent company of Bloomberg News, competes with Refinitiv in providing news, data and information to the financial industry.

Alternative Benchmarks

The U.S. created an alternative benchmark called the Secured Overnight Financing Rate, which is set daily based on overnight repurchase agreement transactions secured by Treasuries and is already generating $800 billion in daily transactions.

In Canada, the central bank set up a working group last year to determine whether Corra needed enhancements, or whether to create a separate benchmark. Corra is the reference for about 10% of financial instruments linked to benchmark rates. Most of the rest are tied to CDOR.

While the central bank expects Corra to be more widely adopted, and to eventually become the main benchmark rate in Canada, this transition may take a number of years, Patterson said.

Andrew Kelvin, a strategist at TD Securities, said in a May research note he expects CDOR to remain the “dominant” reference benchmark for some time, since almost 90% of financial instruments referencing a floating rate rely on one-month or three-month CDOR.

Corra, published since 1997, is currently calculated using overnight repo market transactions. One main advantage of the rate over some other benchmarks is that it’s a so-called risk-free rate, based on actual transactions. It’s calculated using repurchase agreements in which one party sells government securities settled in Canadian dollars overnight and buys them back the following morning. The enhanced methodology calls for transactions that are conducted between two counterparties that are not affiliated, which could be banks, pension funds or brokers.

The final rate will be computed as the daily trimmed volume-weighted median, removing 25% of the lower volume weighted transactions.

To contact the reporter on this story: Paula Sambo in Toronto at psambo@bloomberg.net

To contact the editors responsible for this story: Theophilos Argitis at targitis@bloomberg.net, Chris Fournier, Jacqueline Thorpe

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