IBOR Tranisition

What is IBOR/LIBOR?
Interbank Offered Rates (IBORs), including the London Interbank Offered Rate (LIBOR), are the rates at which banks can borrow in the interbank market on an unsecured basis. LIBOR is the most widely-used and well-known interest rate benchmark, and is calculated based on submissions from individual panel banks.

LIBOR was published daily in five currencies (British Pound Sterling (GBP), U.S. Dollar (USD), Euro (EUR), Swiss Franc (CHF) and Japanese Yen (JPY)) and seven maturities (overnight, one week, one month, two months, three months, six months, and one year). Other IBORs impacted by the transition include: the Tokyo Interbank Offered Rate (TIBOR), the EUR Interbank Offered Rate (EURIBOR), and the Canadian Dollar Offered Rate (CDOR).

Why is LIBOR Going Away?
LIBOR’s sustainability and integrity have increasingly been called into question for two reasons: (1) a decline in the interbank unsecured funding market has led to a lack of actual transaction data upon which to calculate the rates; and (2) the ease with which it has been manipulated, most notably during the 2012 LIBOR scandals, has led to a deterioration of the confidence in the rate setting process. The UK Financial Conduct Authority announced in July 2017 it would no longer compel banks to contribute to LIBOR after December 31, 2021.

What’s Next? Alternative Reference Rates
Regulators and global industry working groups have identified Alternative Reference Rates (ARRs) derived from transactional data to serve as IBOR replacements. Jurisdictions around the globe have since selected ARRs based on transactions in overnight funding markets. The following rates have been selected for the United States and Canada:

United States: SOFR
Canada: CORRA

Challenges
Firm’s will face significant operational and infrastructure updates, including technology, risk modeling, underlying legal documentation, volume of legacy contracts, hedging implications, and possible accounting issues. BMO established the IBOR Transition Office to ensure all areas of BMO were prepared for the transition and BMO’s clients are equipped for the industry and regulatory changes to come.

What Firms Should Start Thinking About
Despite industry efforts to guide market participants in this transition, individual firms will need to make their own plans for the transition. Key areas impacted by the transition include project governance/ management, exposure and impact analysis, risk management, contractual remediation and infrastructure/ technology readiness. 

The content of this webpage reflects BMO’s current understanding of the IBOR Transition and is for informational purposes only. This information does not constitute and shall not be construed to constitute legal, financial, tax, accounting, or regulatory advice by BMO or its affiliates. BMO makes no representation as to the accuracy, completeness, suitability or timeliness of such information, which may also be subject to change.

BMO has prepared numerous educational and informational materials tailored to specific aspects of the transition which can be found below.

LIBOR Transition Alternatives- Fallback Explainer (April 2023)

This fallback explainer outlines the ISDA Fallback Protocol Methodology and explain the nuances of relying on fallback provision.

Changes to Mandatory Clearing Requirement (August 12th, 2022)

In support of the transition from LIBOR to Alternative Reference Rates (ARRs), the U.S. Commodity Futures Trading Commission (CFTC) has published updates relating to their respective clearing requirements.

IBOR Transition Nov 3 Panel Discussion Recording (November 3rd, 2021)
November 3rd panel discussion on BMO’s transition strategy, current industry updates, timelines and overall impacts of the transition. The panel was moderated by Dave Casper, our U.S CEO. He was joined by other BMO Senior Leaders, as well as a key industry expert from the CME Group.

ISDA's RFR Conventions and IBOR Fallbacks (October 4th, 2021)
 This document covers a summary of the next steps for contract remediation, ISDA 2020 IBOR Fallbacks, the ISDA RFR Conventions and a IBOR Fallbacks Product Table for various different products, including certain non-linear products.

IBOR Transition: Moving Towards Alternative Reference Rate Benchmarks Recording (July 14th, 2021)
BMO hosted a webinar on July 14, 2021, for BMO employees and clients. The recording covers information on Alternative Reference Rates (including BSBY, Term SOFR), market liquidity, pricing, and hedging with ARRs.

FCA Announcement on the End of LIBOR (March 2021)
On March 5, 2021, the UK Financial Conduct Authority (FCA) made an official statement on the end of LIBOR. This letter serves to notify clients of the cessation dates for all LIBOR settings and the fixing of Spread adjustments which will be used in IBOR Fallback language.

Fallback Language Trigger Event Notice (March 2021)
 This letter serves to notify clients that may be a party to a loan agreement or note which reference LIBOR or CDOR where BMO is the sole lender or the administrative agent for a syndicate of lenders of the UK Financial Conduct Authority (FCA) official statement on the end of LIBOR.

IBOR Transition Client Communication: ISDA Fallbacks Protocol (January 2021)
The International Swaps and Derivatives Association (“ISDA”) published the ISDA 2020 IBOR Fallbacks Protocol and Supplement to the 2006 ISDA Definitions on October 23, 2020.

The content of this webpage reflects BMO’s current understanding of the IBOR Transition and is for informational purposes only. This information does not constitute and shall not be construed to constitute legal, financial, tax, accounting, or regulatory advice by BMO or its affiliates. BMO makes no representation as to the accuracy, completeness, suitability or timeliness of such information, which may also be subject to change.

Disclosure

IBOR Risk Disclosure - Derivatives Transactions

Questions on SOFR (April 13th, 2021)
This document provides answers to questions related to SOFR.

Questions on Contractual Fallback Language and the ISDA Protocol (April 13th 2021)
This document provides answers to questions related to fallback language and the ISDA Protocol.

General Questions on IBORs and LIBOR (March 24th, 2021)
This document provides answers to some general questions on IBORs and LIBOR.

 Questions on SONIA €STR and Enhanced CORRA (March 24th 2021)
This document provides answers to questions related to SONIA, €STR and CORRA. 

BMO US Business Banking LIBOR Transition FAQs (December 15th, 2020)
This document provides answers to questions related to BMO's US Business Banking products.  

The content of this webpage reflects BMO’s current understanding of the IBOR Transition and is for informational purposes only. This information does not constitute and shall not be construed to constitute legal, financial, tax, accounting, or regulatory advice by BMO or its affiliates. BMO makes no representation as to the accuracy, completeness, suitability or timeliness of such information, which may also be subject to change.

Disclosure

IBOR Risk Disclosure - Derivatives Transactions

The Canadian Alternative Reference Rate Working Group (CARR) was created to ensure Canada's interest rate benchmark regime is robust, relevant and effective in the years ahead. Find more information on CARR's background, key documents, market notices, meetings and membership

To monitor benchmark transition in Canadian derivatives markets, please follow CARR’s weekly derivatives monitor

Relevant Industry Links:

1.CARR Notice to Issuers regarding fallbacks for securities referencing CDOR and template when giving direction to CDS regarding the fallback rate for CDOR referencing securities (May 3, 2024) 

2.CARR Market Notice - Prepare for CDOR Cessation (May 2, 2024)

3.CDOR Transition Approach and Fallback Methodology for Linear Interest Rate Derivatives (May2, 2024)

4. PricewaterhouseCoopers (PwC) and CARR hosted a panel discussion on “Changing lanes: The road ahead post CDOR and BAs” (February 29, 2024)

5. CARR updates CDOR transition FAQs (February 29, 2024)

6.CDOR Transition Roadmap and Milestones (October 16, 2023)

7.Updates from the BA transition Virtual Network (September 15, 2023)

8.CARR's allowable use cases for Term CORRA (August 29, 2023)

9.The launch of Term CORRA on September 5, 2023 (August 10, 2023)

10.CARR publishes CDOR transition FAQs (August 2, 2023)

11.CARR's recommendation for transitioning loans from CDOR to CORRA and a "No New CDOR or BA loan" Milestone (July 27, 2023)

12.Transitioning Loans from CDOR to CORRA- Best Practices (July 27, 2023)

13.CARR's recommendation for legacy Securities tied to CDOR (June 30, 2023)

14.Implications for transactions as stage 1 ends and stage 2 begins in the CDOR transition (June 9, 2023)

15.Transition-impact assessment checklist published by CARR (March 28, 2023)

16.CARR and TMX Webcast Series on CDOR Transition

• • Transition Roadmap (January 30, 2023)
  • The transition of Canadian derivatives to CORRA (February 22, 2023)
  • The transition of Canadian cash securities to CORRA (March 20, 2023)
  • Creating an IOSCO compliant Term CORRA rate (May 3, 2023)
  • The transition of Canadian loans market to CORRA and Term CORRA (August 24, 2023)
  • Unlocking Term CORRA - Methodology, Use Cases, Licensing and More  (December 6, 2023)

17.CDORs impact on Bankers' Acceptance

• • White paper published by CFIF (January 2023)

18.Developing a Forward-looking Term CORRA benchmark (January 2023)

19.Recommended Conventions

• • Recommended Conventions for Term CORRA swaps and basis swaps (November 16, 2023)
  • CORRA FRN conventions Contractual terms for floating notes referencing CORRA (November 16, 2021)
  • Inter-bank swap conventions for CDOR-SOFR and CORRA-SOFR Contractual terms for swaps between two banks that reference CORRA and either CDOR or SOFR (November 16, 2021)
  • CORRA Loan conventions A worked example of these conventions and a comparison to conventions in other jurisdictions (November 16, 2021)
  • Methodology for CORRA compounded-in-arrears Overview of the methodology (November 2021)

20.Recommended Fallback Language

• • CDOR-based loans
  • FRNs referencing CDOR
  • FRNs referencing CORRA
  • ISDA’s Fallbacks Supplement - Legal language that describes what happens to derivatives written under ISDA’s standard definitions. 

In addition to the FAQs below, the Canadian Alternative Reference Rate (CARR) working group publishes a list of questions frequently sent to CARR here.

How has Canada approached interest rate benchmark reform?

The Canadian Alternative Reference Rate Working Group (CARR), sponsored by the Canadian Fixed-Income Forum, was established to coordinate Canadian interest rate reform. CARR’s primary objectives include:

• analyze the current status of the Canadian Dollar Offered Rate (CDOR) and its efficacy as a benchmark, as well as make recommendations on the basis of that analysis; and
• support and encourage the adoption of, and transition to, the Canadian Overnight Repo Rate Average (CORRA) as a key financial benchmark for Canadian derivatives and securities.

What is CDOR?

CDOR is a benchmark reference rate for bankers’ acceptance (BA) borrowings denominated in Canadian dollars that is administered and posted daily by Refinitiv Benchmark Services (UK) Limited (RBSL).

CDOR is based on a survey of the principal market-makers for Canadian dollar BA (currently, the six largest Canadian banks) who are asked to provide rates at which they would be willing to lend (offer) funds against primary BA market issuances to clients with existing credit facilities that reference CDOR plus a fee. CDOR is quoted for terms to maturity of:

• up to and including May 14, 2021: one, two, three, six and twelve months
• from May 17, 2021 onwards: one, two, and three months.

What is CORRA?

The Canadian Overnight Repo Rate Average (CORRA) is a measure of the average cost of overnight secured funding.  It is the trimmed median repo rate comprised of both inter-dealer and dealer-to-client trades where data can be obtained. The lower volume-weighted 25th percentile is trimmed with the intent to exclude “specials” and just include general collateral.

In July 2018, CARR, aligning with international benchmark reform, identified CORRA as the rate “best meeting its criteria for a domestic risk-free rate (RFR)”.

Transition from CDOR to CORRA

All contracts indexed to CDOR and maturing after cessation will need to be renegotiated or transitioned on or before cessation of the index.  Market participants are encouraged to review their contracts and assess the need for fallback language to help prepare for the Transition.

When will the transition start and what is the timeline?

CARR outlines the processes and timelines needed for the transition from CDOR for Canadian market participants in the Transition Roadmap

While CARR has presented its recommendations, the decision to cease publication of CDOR ultimately lies with RBSL. Only a notice from RBSL announcing the cessation of CDOR would trigger the start of the CARR recommended stages of transition.

• Stage 1: will run until June 30, 2023. By the end of stage 1 all new derivatives contracts and cash securities can only use CORRA, with no new derivatives or cash CDOR-based transactions after June 30, 2023, except in limited circumstances. 
• Stage 2: will run until June 30, 2024, to provide firms with incremental time to transition their loan agreements and allow for more existing CDOR-based cash securities exposures to mature prior to cessation. CDOR will cease to be published after June 30, 2024.

What are the key differences between CDOR and CORRA?

CORRA is fundamentally different in nature than CDOR.

• CDOR
  • Unsecured rate at which banks are willing to lend
  • Canadian BA market participants
  • Based on submissions solely from major Canadian banks
  • Forward-looking rate with term rates
  • Built-in credit component based on credit conditions in the Canadian BA market
  • Monthly volume of CAD $200-250 billion
• CORRA
• • Secured borrowing rate (nearly risk-free)
  • Broad array of market participants (multiple industries)
  • Fully based on repo transactions
  • Currently a backward-looking overnight rate
  • No credit component; comparing relative value will need an adjustment
  • Expected to be based on CAD $10-20 billion of underlying daily transactions

Do I need to wait until CDOR is permanently discontinued to replace it with CORRA?

No, you do not need to wait until CDOR is permanently discontinued to replace it with CORRA. Some market participants may choose to voluntarily amend CDOR-linked transactions without waiting for the actual cessation of CDOR. In some cases, it may be more efficient for market participants to execute new transactions to transition a contract or portfolio from CDOR to CORRA. Alternatively, some market participants may choose to undertake various bilateral or multilateral portfolio compression exercises to reduce the number of transactions on their books.

CDOR Transition FAQs- This document provides answers to more general questions on CDOR transition.

Industry groups have been established globally to assist market participants in the transition away from IBORs.  The below are industry groups that have been established in different jurisdictions.

Alternative Reference Rate Committee (ARRC)
The ARRC was convened in 2014 by the Federal Reserve to identify alternative reference rates to replace USD LIBOR and recommended the Secured Overnight Financing Rate (SOFR) as it preferred alternative rate. SOFR is an overnight, secured referenced rate administered by the Federal Reserve Bank of New York that broadly measures the cost of overnight borrowing with U.S. Treasuries as collateral. It is firmly based on transaction data and is calculated as a volume-weighted median of tri-party repo transactions.

Canadian Alternative Reference Rate Working Group
The Canadian Alternative Reference Rate Working Group (CARR) was created to identify and seek to develop a new term risk-free Canadian dollar interest rate benchmark. CARR has decided to enhance an existing rate, the Canadian Overnight Repo Rate Average (CORRA).

International Swaps and Derivatives Association (ISDA)
ISDA has published a central hub on its website with information on the transition from LIBOR and the adoption of alternative risk-free rates. This hub features updates on ISDA’s work on fallbacks and other benchmark initiatives, as well as research and analysis. The benchmarks hub serves as a one-stop shop for information from ISDA on benchmark reform.

Working Group on Sterling Risk-Free Reference Rates
The overall objective of the Working Group is to accelerate a broad-based transition to SONIA by end-2021 across sterling bond, loan and derivative markets, in order to reduce the financial stability risks arising from widespread reliance on LIBOR. The Working Group recommended the Sterling Overnight Indexed Average (SONIA) as the preferred sterling risk-free rate as it has capability to evolve over time, tends to be predictable and tracks Bank Rates closely. SONIA is already referenced in the sterling OIS market, making the transition easier. It measures the rate paid by banks on overnight funds and is calculated as a trimmed mean of rates paid on overnight unsecured wholesale funds.

Working group on Euro Risk-Free Rates
The European Central Bank (ECB), the Belgian Financial Services and Markets Authority (FSMA), the European Securities and Markets Authority (ESMA) and the European Commission launched a private sector working group on euro risk-free rates. The working group was tasked with identifying an alternative RFR to serve as a basis for an alternative to the current benchmarks used in a variety of financial instruments and contracts in the Euro area. The Working Group recommended €STR as its preferred nearly risk-free rate for the Euro area.

National Working Group on Swiss Franc Reference Rates (NWG)
The NWG on CHF Reference Rate is the key forum to reform reference interest rates in Switzerland. The Working Group selected SARON, which is an overnight reference rate of the secured funding market for Swiss franc and is based on transactions and quotes posted in the Swiss repo market.

Canadian Alternative Reference Rate Working Group
The Canadian Alternative Reference Rate Working Group (CARR) was created to identify and seek to develop a new term risk-free Canadian dollar interest rate benchmark. CARR has decided to enhance an existing rate, the Canadian Overnight Repo Rate Average (CORRA).

The content of this webpage reflects BMO’s current understanding of the IBOR Transition and is for informational purposes only. This information does not constitute and shall not be construed to constitute legal, financial, tax, accounting, or regulatory advice by BMO or its affiliates. BMO makes no representation as to the accuracy, completeness, suitability or timeliness of such information, which may also be subject to change.

Disclosure

IBOR Risk Disclosure - Derivatives Transactions

The BMO IBOR Transition Newsletters are sent out quarterly to clients. The purpose of this newsletter is to provide the latest updates and industry developments regarding the transition from IBORs to alternative nearly risk-free rates (RFRs).

The newsletter provides summarized jurisdictional highlights from the global regulatory community, industry working groups, and various industry news sources.

If you would like to receive these quarterly newsletters, please email IBOR.TransitionOffice@bmo.com to be added to the distribution list.

The content of this webpage reflects BMO’s current understanding of the IBOR Transition and is for informational purposes only. This information does not constitute and shall not be construed to constitute legal, financial, tax, accounting, or regulatory advice by BMO or its affiliates. BMO makes no representation as to the accuracy, completeness, suitability or timeliness of such information, which may also be subject to change.

Disclosure

IBOR Risk Disclosure - Derivatives Transactions

CDOR

LIBOR

Key Dates updated as of May 25, 2023. 

The content of this webpage reflects BMO’s current understanding of the IBOR Transition and is for informational purposes only. This information does not constitute and shall not be construed to constitute legal, financial, tax, accounting, or regulatory advice by BMO or its affiliates. BMO makes no representation as to the accuracy, completeness, suitability or timeliness of such information, which may also be subject to change.

Disclosure

IBOR Risk Disclosure - Derivative Transactions