IBOR Transition: The ISDA Protocol Transcript

Hello. My name is 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 just 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. You sort of mentioned this tangentially earlier. At the end of November, the IBA, the ICE Benchmark Administration, the administrator of LIBOR, announced that they're going to consult on its intention to cease one week and two month dollar LIBOR at the end of 2021, but that they will not cease publication of the remaining US dollar LIBOR benchmarks till the end of June 30th, 2023. What are your thoughts on this announcement and how is it changing this transition going forward?

In my opinion, I think its good news since it allows the next 18 months to deal with the tough US dollar LIBOR legacy issues. And what I mean by tough legacy issues is I'm talking about specifically cash products. I mean, the derivatives are taken care of by the ISDA fallbacks and the protocol process. But there's a lot of cash products, floating rate notes, securitizations, loans, et cetera, that need to be renegotiated or re-papered. And that takes a lot of time.

So what this allows the market to do, is it allows an extra 18 months to basically take care of that. It also allows people to focus this year on making sure that they have new products that reference alternative reference rates, not LIBOR, allows you to focus on getting the systems up to date so you can really start transacting in these new rates.

The other aspect obviously is by extending the date by 18 months, it reduces the amount of legacy transactions because every day, there are contracts that mature. However, given this change, I think it's important that market participants don't also take their foot off the gas. There's still a lot of work that needs to be done, but it really allows the market to focus on creating those new products and starting to transact away from LIBOR. It is expected that no new products or no new US dollar LIBOR exposure will be entered into past the end of 2021. So that date, in fact, has not changed. It's really focusing on the legacy book.

I understand. I think the whole market spends a lot of time talking about the LIBOR currencies. Canada's kind of been a little bit lost in the shuffle. So how are these ISDA IBOR fallbacks impacting organizations with exposure to CDOR?

Well, I would say that the good news is that ISDA included CDOR in their fallback work. And what I mean by its good news is that should CDOR ever cease to be published, we have robust fallbacks in place. So currently, it's not necessarily that we need them, but they will be there. However, as you're aware, Refinitiv has announced that the six and 12 months CDOR settings will be stopped as of May of this year. So in fact, the fallbacks will be used, the ISDA fallbacks will be used for those tenors, although the exposure, the derivative exposure is minimal.

So this is really a test run for LIBOR. But I would say that Canadian market participants should be aware, firstly, that they do have new ISDA fallbacks and over time, making sure that the systems are capable of handling those fallbacks, should the key one, two and three month CDOR tenors disappear.

Okay. So does that mean that the shorter dated CDOR tenors will continue to be published beyond the end of '21 or even the end of '23 or middle of '23, we'll say?

Well, there's no timeline at the moment for CDOR publications to cease. And here I'm talking about the ones, twos and three month CDOR. As I mentioned, the six and twelve month tenors will  disappear. But as I mentioned earlier, CARR's mandate has been expanded to include a review of CDOR and make recommendations based on that review to make sure that Canada has a robust benchmark regime. So we still have to do the review and we hope to have that completed with recommendations by the end of Q2 of this year.

And then, depending on the recommendations, we'll have a white paper out by the end of the summer of this year. So it's not clear that those tenors will continue to be published, but it's also not clear that they will not. So let's do the work and do the full review and then see what happens. But just looking at other jurisdictions, they are also looking at the same thing. The market has evolved. Some of these benchmarks are well past their best-by date. They've been around for 20, 30 plus years and they need to be reviewed because the underlying market has changed.

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