The Canadian Alternative Reference Rate working group (CARR) is providing guidance to market participants with respect to CDOR-linked loans, derivatives and securities that do not have adequate fallback language to address the cessation of CDOR following the final publication by Refinitiv Benchmark Services (UK) Limited on June 28, 2024 (the “Cessation Date”). This CARR guidance is provided to industry to identify a best practice approach in the event that the options previously outlined by CARR (“Prior Guidance”) have been unsuccessful or otherwise not yet resolved.
This guidance is consistent with CARR’s recommended fallbacks as well as fallbacks previously recommended by the International Swaps and Derivatives Association (ISDA) and CARR as a result of industry consultations. CARR guidance, including this market notice, does not constitute legal advice. CARR recommends that market participants seek independent legal advice with respect to their specific contracts.
Loans
Loan agreements must be amended by the parties to ensure that CAD draws that previously referred to CDOR or Bankers’ Acceptances refer to an alternative rate (such as Daily Compounded CORRA or Term CORRA).1 In support of that, CARR reiterates its Prior Guidance.
Derivatives
CARR recommends that all CDOR-linked derivatives transition to Fallback Rate (CORRA),2 ISDA’s robust fallback rate for CDOR developed and consulted on in 2019-2020, unless agreed to otherwise by the counterparties to the contract.
CARR recommends that the Calculation Agent use Fallback Rate (CORRA) as the replacement for CDOR.
Cash Securities
CARR recommends that all CDOR-linked cash securities without a robust fallback, except NHA MBS, transition to Fallback Rate (CORRA), with consequential changes to interest determination and observation dates, unless agreed to otherwise by the issuer and investors. This aligns with the CARR recommended fallback published on July 6, 2021, which has already been incorporated into the vast majority of existing securities.
Issuers are also encouraged to provide CDS Clearing and Depository Services Inc. (or through any other public means) the necessary information to publish summary details, through the CDS Bulletin Service (or equivalent), which may include their specific CDOR fallback methodology, spread and other adjustments that will be incorporated to implement the replacement reference rate for each issued security.
Issuers and investors also should be aware that many capital securities that convert from a fixed rate to a floating rate at a specified reset date in the future may contain contingent CDOR exposure post-Cessation Date. CARR reiterates its Prior Guidance with respect to proposed approaches to address such securities that do not have robust fallback language.
For NHA MBS, the issuers should calculate and pay the coupon on the CDOR NHA MBS by applying One-Month Daily Compounded CORRA as defined in CORRA NHA MBS with 0.29547 % spread adjustment as the basis to calculate the CDOR fallback rate in the same way as how the coupon is calculated and paid after July 1, 2024 for a CDOR NHA MBS containing such CDOR Fallback Language as outlined in the November 30, 2023 document published by CARR.
General
CARR views the above approaches as commercially reasonable and in line with best market practice.
Please also see the supervisory guidance on the CDOR transition provided by the Office of the Superintendent of Financial Institutions in October 2023 to federally regulated financial institutions and federally regulated private pension plans. The Canadian Securities Administrators have also highlighted the importance of market participants being prepared to transition from CDOR, including adhering to the ISDA 2020 IBOR Fallbacks Protocol.
About CARR
Canada established CARR, a working group sponsored by the Canadian Fixed-Income Forum, to coordinate Canadian interest rate benchmark reform. CARR’s mission is to ensure Canada’s interest rate benchmark regime is robust, resilient and effective in the years ahead. Over the coming transition period, CARR will support the transition from CDOR to CORRA as the key Canadian interest-rate benchmark.
Visit CARR’s webpage for up-to-date information on the transition, including all of CARR’s key documents, and to sign-up to receive email updates from CARR.
Market inquiries
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Senior Policy Director
Financial Markets Department
Bank of Canada
CARR co-chair
Managing Director and Vice Chair
CIBC Capital Markets
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Bank of Canada