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Benchmark Replacement in Canada: From CDOR to CORRA

Canada's Transition to a Risk Free Rate

While global markets have understandably been focussed 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.

In October 2020, the Canadian Alternative Reference Rate Working Group (CARR) began analyzing 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% of the notional outstanding in the Canadian money market and are the second largest money market instrument after Government of Canada treasury bills.1

CARR published its White Paper2 on December 16, 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 June 28, 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 language3 (the 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 & Trading Association and Alternative Reference Rates Committee (the 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
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 where 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.

The authors Shane Pearlman is a partner and Kevin Lambie is an associate in Borden Ladner Gervais LLP's Financial Services Group in Toronto.

This article first appeared on the website of the Banking Law Committee of the Legal Practice Division of the International Bar Association, and is reproduced by kind permission of the International Bar Association, London, UK. © International Bar Association.

1 Overview of CARR's Transition Roadmap, Canadian Alternative Reference Rate Working Group, August 2022.

2 CARR's Review of CDOR: Analysis and Recommendations, Canadian Alternative Reference Rate Working Group, December 16, 2021.

3 Recommended fallback language for loans referencing CDOR, Canadian Alternative Reference Rate Working Group, August 2022.

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