Bank of Canada to scrutinize Cdor
Robust ‘Cdor’ system essential to economy, deputy governor says
TORONTO — Until recently the Canadian version of Libor was just an obscure acronym known only to a handful of traders, but it is “probably the most important benchmark” in the country and the Bank of Canada is taking steps to rein it in, the central bank’s second-in-command said Monday.
Cdor, short for the Canadian Dealer Offered Rate, is used to price an enormous amount of financial products, everything from consumer loans to complex interest rate swaps. This means it underpins a huge portion of the Canadian economy, over $10 trillion in total, said Timothy Lane, deputy governor of the Bank of Canada. It was the first time an official from the Bank of Canada, or any other regulator, has produced such an estimate.
“We will examine how these posted rates are currently used by market participants to see how any possible changes could affect market functioning,” Lane said in a speech Monday in Toronto. “Given Cdor’s importance, making sure it is robust is essential to the whole Canadian financial system.”
Since 2012, a string of international lenders such as Barclays PLC, Citigroup, JPMorgan and the Royal Bank of Scotland have paid more than $6 billion US in settlements and fines over allegations they manipulated Libor. Now investors have begun launching civil suits and experts predict that by the time the dust settles, the total amount paid will be close to $35 billion US.
Like Libor, the Canadian rate is calculated by a group of banks with scant regulatory oversight. After Libor was exposed, policy-makers around the world started working together to shore up confidence on major financial benchmarks that are viewed as linchpins of the financial system.
Still, concern is starting to spread to other benchmarks including foreign exchange and gold.
Though the issues around benchmarks generally has sparked much worry in this country, it’s Cdor that has the biggest potential for problems because its use is almost entirely restricted to the Canadian market.
Lane said it is used to price some $130 billion of floating rate notes, about $9.3-trillion US in Canadian-dollar interest rate swaps, and over $750 billion of exchangetraded derivatives.
The rate is set daily at 10:15 a.m., through submissions by Canada’s six big banks and HSBC Bank Canada. Unlike Libor, the rate at which a group of lenders think they can access funding, Cdor is more grounded in the market because banks are committed to lending based on Cdor. As a result it is “less likely” to be manipulated, Lane said.
However, he acknowledged problems exist. A review by the Investment Dealers Regulatory Organization of Canada published a year ago revealed a number of issues with Cdor, including lack of clear regulatory oversight and “inconsistencies” among submitting banks in procedures used to calculate Cdor.