The transition from CDOR to CORRA: An urgent priority for Canadian businesses

Samantha Paisley Wholesale Banking and Capital Markets Consulting Leader, PwC Canada 31 August, 2022

The path towards financial benchmark reforms has become clearer in Canada, with the recent announcement that the Canadian Dollar Offered Rate (CDOR) will cease publication by June 28, 2024. This is a very significant change requiring organizations to assess to what degree and how they’ll be impacted by the transition, especially those with financial contracts or instruments that reference CDOR. While many financial institutions will be aware of the change and have taken steps already, a broad range of other players—from corporate treasury departments and financing organizations to government agencies such as business development banks and workers’ compensation boards— have financial contracts that reference the Canadian benchmark.

A major change as CDOR cessation approaches

The transition will take place in a two-phased approach spanning June 2023 to June 2024. Some organizations will have previous experience with the transition away from the London Interbank Offered Rate (LIBOR) in other currencies, but the coming replacement of CDOR with the Canadian Overnight Repo Rate Average (CORRA) is a much bigger impact for Canada’s financial system. And for those that weren’t as significantly impacted by the LIBOR transition, there’s a lot they need to be thinking about—and doing—now. The first phase is coming quickly, with the majority of all new derivative products shifting from CDOR to CORRA by June 30, 2023. The next phase, in which all remaining products will transition from CDOR, is just a year later.

To get a sense of the magnitude of the transition, consider the size of the CDOR market: $20 trillion. That’s about 10 times Canada’s annual gross domestic product and a reflection of how widespread the use of CDOR is in transactions involving derivatives, bonds, loans and securitizations. In short, CDOR underpins a very wide range of transactions, including some that organizations may not be aware of. The shift creates impacts in many areas, from cash management to technology to tax, legal and accounting matters. And when you add on top of that the removal of the Bankers Acceptance product, it becomes even clearer how significant this is. So what can you do?

Key considerations for the CDOR-CORRA transition

Everyone is impacted. CDOR is ubiquitous—it’s everywhere and is embedded in everything. While organizations with LIBOR exposures will have a playbook to follow, it’s important to consider the wide ranges of issues all participants will need to address.

Some of the key considerations include:

As with previous LIBOR transitions, we expect the move to CDOR will present an evolving mix of new products and market innovations. Unlike LIBOR transitions in other currencies, CDOR cessation will bring the end of the Bankers Acceptance market in Canada. No clear substitute is identified to take its place, and all of the alternatives bring new complexities that will require an enhancement to technology and risk models. Firms will need to prepare for a wider product set that may include a highly anticipated term CORRA rate that’s yet to be defined.

The end of CDOR will have significant impacts on your technology and processes, particularly given the need for more dynamic cash flow management and the implications for your models. And with the long lead times required to implement technology changes, organizations need to move quickly since they have less than two years to transition.

Financial institutions and other CDOR-linked issuers are informing clients of the upcoming transition and will be educating them about the impacts on market developments more broadly as well as their own portfolio of products. The transition is also an opportunity to differentiate relationships with clients and evaluate their strategic portfolio needs. It will require continuous communications with clients to avoid adverse impacts.

With the transition of lending instruments away from CDOR, hedges that primarily use derivatives will need to be aligned to avoid slippage. Natural and synthetic hedges need to be reassessed due to differences between CDOR and CORRA.

The impacts can be immediate, with the cash flows of certain derivatives having already been affected because the announcement triggered certain fallback provisions. Additional financial disclosures will be necessary if the exposures are material. As firms assess their exposure and plan the transition to alternative rates, it’s important to identify linked hedges and assess the modification and termination options available to minimize tax implications and preserve hedging status for these positions.

Review what your rights are in your contracts, including whether you have the ability to negotiate new terms. And in the absence of proactive measures, it’s important to look at language in the contract setting out what the fallback or alternative reference rate should be.

What should you do now?

Stop adding new exposures to CDOR

A key initial step is to stop adding new positions linked to CDOR to allow exposures to expire over the next two years.

Solve for the remaining contracts

For the exposures that mature post cessation, assess your options, which could include relying on fallback language as well as proactive amendments and terminations. Key considerations include understanding linked positions and preserving their hedging status, minimizing tax implications and navigating a rapidly evolving interest rate environment.

Establish a new product strategy

Reassess your investment strategy and cash management approach in light of product developments in the market and evolving practices enabled by new technologies. This can help you move towards a more dynamic liquidity management function.

Helping you ensure sustained outcomes from your CDOR cessation journey

We’ve helped financial institutions of all sizes and footprints transition away from LIBOR and CDOR in areas including program mobilization and management, technology modernization, operations assessment, new product strategies, digitally enabled contract discovery and remediation and addressing tax and accounting implications.

These developments are also an opportunity to go beyond responding to the challenges presented by the CDOR transition to also update your product strategy and operating model for a dynamic interest rate environment.

Please reach out to discuss how we’ve helped organizations in the past as well as how you can use this opportunity to accelerate digital transformation and ensure sustained outcomes for the future.