Bank of Canada to take over administration of reference rate for swaps

TORONTO: The Bank of Canada announced on Tuesday its intention to become the administrator of the Canadian Overnight Repo Rate Average (CORRA), a reference rate for financial market transactions,

when enhancements to CORRA take effect next year.

The central bank will take over the administrator role from Refinitiv, echoing moves by other central banks to take charge of overnight risk-free benchmark rates, which tend to track closely their policy rates. The Federal Reserve Bank of New York publishes the Secured Overnight Financing Rate (SOFR).

CORRA, which measures the average cost of Canadian dollar overnight collateralized funding, will be based on a wider set of transaction data provided by the Investment Industry Regulatory Organization of Canada, with the aim of making it more representative of the repurchase agreement (repo) market, the central bank said.

Currently, CORRA is based on the relatively small number of repo transactions conducted through inter-dealer brokers. Under new methodology, scheduled for the second quarter of 2020, transactions used in the calculation will include both trades between dealers and between dealers and their clients, the bank said.

"The Bank expects that, over time, CORRA will be further adopted across a wide range of financial products and could potentially become the dominant Canadian interest rate benchmark, particularly in derivatives markets," said Bank of Canada Deputy Governor Lynn Patterson.

CORRA is the reference rate in more than C$1 trillion in financial instruments, such as swaps, according to the central bank. That is only about one-tenth of the value of instruments referenced by the Canadian Dollar Offered Rate (CDOR), a rate at which banks are willing to lend to corporate clients.

But because CDOR includes a credit component it could become less appealing to market participants than a risk-free rate, such as an enhanced CORRA, central bank officials said.

The planned enhancements to CORRA were proposed in a consultation paper in February by The Canadian Alternative Reference Rate Working Group (CARR).

CARR was started in March 2018 by the Canadian Fixed-Income Forum to review and enhance CORRA and to consider the creation of a term risk-free Canadian dollar interest rate benchmark. It is co-chaired by a senior representative of the Bank of Canada and a member of the forum.

CARR will form a new subgroup that will develop a publishing process for CORRA and a comprehensive governance structure, the Bank of Canada said.