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. 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's 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, CORA. 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. I mean, it feels like the derivative market's going one way, maybe cash markets, bond markets could potentially go another way. Do you see a scenario where derivatives start using CORRA, but maybe non-derivative products in Canada could stay on CDOR?
That's the big question globally, on whether there is a need for credit-based benchmark in addition to a risk-free rate benchmark. It's not just a question for Canada. It's being discussed in other jurisdictions. In some jurisdictions, the answer seems to be no. For example, in the UK, they seem to be moving only to having a risk-free rate, SONIA, and don't see any need for a credit-based benchmark. The same is true for Switzerland, where they're relying on their risk-free rate, which is SARON.
However, there's been a lot of discussions south of the border, in the US, with respect to a credit based benchmark. Obviously there's been developments. We've got a few administrators globally looking at a US benchmark. The IBA is looking at a bank yield index, Bloomberg is developing one. We have an overnight credit-based benchmark being developed in the form of Ameribor. I think you're going to see some jurisdictions live with just one benchmark, which is the risk-free rate. Others will potentially have multiple benchmarks. But I would say that in general, the discussion for the need for a credit-based benchmark really relates to banking products, specifically loans, including revolving credit facilities.
This is most probably true for CDOR or Canada as well. It's not clear that you necessarily need a credit-based benchmark for floating-rate notes. You've seen in the UK, they're using SONIA and they are using SONIA in arrears. I think the one big question, again, that CARR will be looking at is if you don't have a credit-based benchmark, do you need a term rate for the risk-free rate as well as the overnight rate?
Right. And extension of that topic, but I think one that has to be asked, do you see that CORRA is replacing CDOR as the benchmark for interest rates in Canada?
Yes, I do. I do believe that CORRA will eventually replace CDOR as the predominant benchmark in Canada. Currently, there's roughly 85 to 90% of the exposure that relates to CDOR, the balance to CORRA, and here I'm excluding any exposure to the various bank primes. I expect this to fully flip, so that CORRA will account for 85 to 90% of the exposure. Most of this obviously is derivatives, i.e. interest rate swaps, then the CDOR or some other credit-based benchmark making up the balance, but primarily in loan products.
Obviously the speed at which this happens is somewhat dependent on how quickly the US flips from the US dollar LIBOR to SOFR, because that's going to be driving the transition globally, not only in Canada. But even in Euros, where they're continuing to have Euribor as the credit-base benchmark, they will also start using their Euro short-term rate much more actively, as US dollar LIBOR disappears.
Well, thank you, Harri. I appreciate you joining me for today's discussion on an IBOR transition. There's a tremendous amount of interest in the topic. We'd love to have you back for another conversation at some point in time.
Thanks for including me in this. Happy to come back at any point in time. I think this is the biggest thing that's happened in my career in the financial markets. We are changing the plumbing, not only in Canada, but globally in the financial system. This is important. Happy to come and speak at any point in time. I would just like to encourage market participants to go and follow what's happening in Canada on the CARR's website, which can be found at the Bank of Canada's website.
Great, will do. We'll push that ourselves. If anybody has any follow up questions, I'd encourage you to reach out to your RBC Capital Markets sales person. Just want to say thank you to everybody for listening. Hope you found this session useful.
This content is based on information available at the time it was recorded and is for informational purposes only. It is not an offer to buy or sell, or a solicitation, and no recommendations are implied. It is outside the scope of this communication to consider whether it is suitable for you and your financial objectives.