The Bank of Canada, seeking to establish an alternative to the commonly used Libor interest rate benchmark, will publish the Canadian Overnight Repo Rate Average, or CORRA, starting Monday.
Publishing duties of CORRA passed to the Bank of Canada, as the country’s central bank took a major step in establishing its replacement to the London Interbank Offered Rate, commonly known as Libor. From its initial publishing in September 2018 through Friday, CORRA was published by Refinitiv Benchmark Services, a financial intelligence and services company.
CORRA is derived using the median rate on repo trades submitted to the Investment Industry Regulatory Organization of Canada, after the lowest 25% of rates from that day have been excluded. This trimmed median methodology came about in an update to CORRA’s derivation, sometimes referred to as “enhanced CORRA,” which is purportedly less volatile than its predecessor. Like other overnight repo rates, CORRA is published every day, and is publicly available.
The change to a new benchmark is not without peril. The sheer quantity of financial assets based on Libor makes the transition off the rate a potential source of chaos. Libor underpins nearly $350 trillion in derivatives, mortgages, corporate and student loans and other financial assets and products.
In coordination with the publishing transition, the Montreal Exchange began offering three-month CORRA futures on June 12. This offering is meant to provide a product that will smooth the transition from Libor to CORRA. Futures of other risk-free Libor alternatives, such as the European Central Bank’s benchmark €TER and the Federal Reserve Bank of New York’s SOFR, which has been used for short-term debt transactions since August 2018, are also available on various exchanges.
Libor relied on banks to self-report the interest rates they paid on overnight loans, opening up the possibility for manipulation. This allowed banks to report loans that were higher or lower than what they were actually paying, and to make a profit off the difference. In June 2012, criminal settlements by Barclays Bank revealed that banks regularly colluded to manipulate Libor rates. Libor is used in the U.S. derivatives market, and manipulating derivatives is illegal under U.S. law. The collective legal fallout from the scandal resulted in around $9 billion in fines and several convictions.
The Bank of Canada takes over CORRA publishing duties at a time of instability for overnight loan rate benchmarks. With Libor being phased out by the end of next year, there are few certainties as to which rate will replace it, and if it will be one rate or several.
With Libor’s credibility in doubt, a handful of potential replacements based on real trading data have sprung up. The central banks of the United States (via the New York Fed), Great Britain, the European Union, Japan and Switzerland’s SIX exchange have all issued their own Libor replacements.
Each of these are “risk-free rates,” a key differentiator from Libor, meaning they are meant to quantify the return rate of a loan with a 0% chance of defaulting.
Though most of these alternatives sprung up once it was clear that Libor’s days were numbered, the Bank of Japan’s TONAR, an overnight rate based on information provided by money market brokers, has been published since 1992, and Switzerland’s SARON, an overnight loan rate that deals with transactions in Swiss Francs, began publishing in 2009.