Hello. My name's Jim Byrd. I'm the head of rates trading at RBC Capital Markets. Today we're going to discuss the topic of LIBOR transition and I'm very lucky to be joined by Harri Vikstedt, senior policy director in the financial markets department at the Bank of Canada. In his current role, Harri is focused on financial market related issues, including global and domestic benchmark reform.
He is a member of the financial stability board's Official Sector Steering Group and co-chair of the Canadian Alternative Reference Rate working group or CARR, as it's known. CARR is responsible for helping to transition the Canadian financial system from the Canadian Dollar Offered Rate CDOR to the Canadian Overnight Repo Rate Average, CORRA. Harri, I want to thank you for joining me today.
Before we get started, I wanted to clarify that the comments and views are my own and do not necessarily represent those of the Bank of Canada or the Official Sector Steering Group, which I'm a member of.
Noted. Tell me a little bit about CARR. Why was it created? What's it mandate?
The bank has been involved in the global benchmark effort since day one with the formation of the Official Sector Steering Group. But since Andrew Bailey's speech, it was clear that with US dollar LIBOR disappearing, the world would be moving to a risk-free rate basis. Even in those jurisdictions that were multi-rate like Canada. This was due to products like cross currency basis swaps, multi-currency loans et cetera. So we created CARR in the spring of 2018. And the focus there was really to make sure that Canada had a robust risk free rate.
CORRA, which is the Canadian Overnight Repo Rate Average has been around since the late 1990s and the group thought that it was the right risk-free rate. But that the calculation methodology should be enhanced to include a larger set of underlying transactions, which we did. And the Bank of Canada took over the administration of CORRA this past June.
The work of CARR also includes making sure that the Canadian market is ready to transition to using CORRA across a range of Canadian financial products over time. One of the things that we did with CARR's mandate last year in the fall, was to expand the mandate to include a review of CDOR.
While there have been multiple reviews of CDOR in the past several years, most have focused on the submission process. And we really wanted to do a review of the architectural underpinnings of the rate. Part of the reason for that is that bank funding has fundamentally changed because of the Basel regulations introduced since 2008, 2009. And CDOR is based on the BA market. And it's not clear that it is the most effective funding that the banks can have. And therefore, we wanted to look at the efficacy of CDOR as a benchmark. With the change in the mandate we also reconstituted CARR to include a broader set of stakeholders.
Let's change gears a little bit here and talk about the ISDA protocol. I think most of the people who'd be listening to this have probably at least heard of the ISDA protocol. And it was published at the end of October. It goes into effect at the end of this month, the end of January, what is it? What's its significance of its publication?
So ISDA's work on the fallbacks and the protocol are significant developments in my opinion. And we've been working, when I say we, the OSSG has been working with ISDA since 2016 on these, both the new fallbacks and the protocol. And I've been very much involved in that work. The issue as I mentioned earlier, is that the fallbacks were weak and needed replacing. So ISDA worked on making these fallbacks more robust for a range of IBORs including CDOR. So any derivatives that are written under ISDA documentation as of January 25th will incorporate these new fallbacks. But that leaves a huge amount of legacy exposure that will not have these new fallbacks. And that's where the protocol comes in.
It basically allows any two counterparties that signed the protocol to incorporate the new fallbacks, the new robust fallbacks, into the legacy portfolio. This is extremely important because what it means is that for the existing huge legacy exposure, basically by getting most market participants to sign the protocol, you minimize disruption. You have certainty, you have contract certainty for when LIBOR stops. So this is very, very important. It really allows participants to have clarity on the outcome. So that's why it's important that market participants sign the protocol if possible. Obviously you need to fully understand your exposure and risks before doing so. It's good news that over 5,200 counterparties globally have signed since it went into effect, including the six biggest Canadian banks.
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