Benchmark replacement in Canada: from CDOR to CORRA
Borden Ladner Gervais, Toronto, Ontario
Kevin J Lambie
Borden Ladner Gervais, Toronto, Ontario
While global markets have understandably been focused on the transition away from the London Interbank Offered Rate (LIBOR), Canadian banks and supervisors are working on the transition from a key survey rate of their own, the Canadian Dollar Offered Rate (CDOR). This article briefly highlights recent developments with respect to benchmark reform in Canada.
Canada's transition to a risk-free rate
In October 2020, the Canadian Alternative Reference Rate Working Group (CARR) began analysing CDOR's usefulness as a benchmark and making recommendations for its future. CDOR represents the average rate at which Canadian banks are willing to lend (rather than the rate that banks are able to borrow, as with other global rates) to corporate borrowers as bankers' acceptance (BA) issuances for certain tenors. The BA market is unique to Canada and allows borrowers to enter the money market through the credit rating of Canadian banks as BAs are bank-issued debt instruments. BAs represent approximately 20 per cent of the notional outstanding in the Canadian money market and are the second largest money market instrument after Government of Canada treasury bills.
CARR published its White Paper on 16 December 2021, which contained several recommendations, including the discontinuance of CDOR. Shortly thereafter, Refinitiv Benchmark Services (UK) Limited, the administrator of CDOR, announced that it would stop publishing CDOR after 28 June 2024.
Canadian alternative reference rate recommended language
To streamline the transition from CDOR to a new benchmark, the Canadian Overnight Repo Rate Average (CORRA), CARR published its recommended fallback language ('CARR Recommended Language’) in August 2022 for syndicated transactions. CORRA is a risk-free rate, published by the Bank of Canada, which measures the cost of overnight general collateral funding in Canadian dollars using Government of Canada treasury bills and bonds as collateral for repurchase transactions.
The CARR Recommended Language is similar but not identical to the hardwired fallback language for LIBOR developed by the Loan Syndications and Trading Association and Alternative Reference Rates Committee (‘ARRC Recommended Language’). One key distinction relates to the transition trigger in the CARR Recommended Language to reach the CDOR Cessation Date upon which applicable loan agreements will automatically transition from CDOR to the successor rate. There is a two‐step waterfall to determine the successor rate:
Step 1: Term CORRA + credit spread adjustment; and
Step 2: CORRA compounded in arrears + credit spread adjustment.
Unlike the ARRC Recommended Language, the CARR Recommended Language allows parties to 'flip forward' or 'climb the waterfall' in scenarios in which CDOR has initially been replaced by Daily Compounded CORRA because Term CORRA is not available at the trigger event. We note that Term CORRA is not currently available at this time.
Ahead of the cessation of CDOR, parties should consider amending existing loan agreements to begin their transition away from CDOR by incorporating the CARR Recommended Language or, eventually, replacing CDOR‐based loans with CORRA‐based loans.
 Overview of CARR's Transition Roadmap, Canadian Alternative Reference Rate Working Group, August 2022: www.bankofcanada.ca/wp-content/uploads/2022/06/transition-plan-roadmap.pdf accessed 16 November 2022.
 CARR's Review of CDOR: Analysis and Recommendations, Canadian Alternative Reference Rate Working Group, 16 December 2021: www.bankofcanada.ca/wp-content/uploads/2021/12/CARR-Review-CDOR-Analysis-Recommendations.pdf accessed 16 November 2022.
 Recommended fallback language for loans referencing CDOR, Canadian Alternative Reference Rate Working Group, August 2022: www.bankofcanada.ca/wp-content/uploads/2022/08/recommended-fallback-language-loans-referencing-cdor.pdf accessed 16 November 2022.