End-of-Summer Brief on Canadian Overnight Repo Rate Average

Background – Summer Review

The Bank of Canada is in the process of phasing in the Canadian Overnight Repo Rate Average (“CORRA”) to replace the Canadian Dollar Offered Rate (“CDOR”). The transition to CORRA will bring Canada’s lending practices into better alignment with current global practices and will ensure that we have a more reliable and robust benchmark interest rate in the future. The transition process is well underway and, over the course of the summer, the Bank of Canada has been busy putting together the framework for implementation of CORRA and publishing guidance for completing the implementation process. There were two key announcements made over the summer which are explored in more detail below: (1) bankers’ acceptance (“BA”) and CDOR loans will no longer be issued as of November 1, 2023, and (2) the Term CORRA benchmark will launch as of September 5, 2023.

These recent changes mean that market participants will soon only be able to trade CORRA-based swaps and futures. Additionally, the Bank of Canada has released a list of definitions, best practices and guidelines to help Canadians swiftly move from CDOR to CORRA, which will put law firms and our clients in position to ensure that CORRA and the corresponding transition framework are well incorporated and addressed in every financing transaction.

1. BA and CDOR Loans Will No Longer Be Issued

On July 27, 2023, the Canadian Alternative Reference Rate Working Group (“CARR”) published a notice announcing there will be no new issuances of BA and CDOR loans as of November 1, 2023.^[1] This milestone is significant because it facilitates the switch to CORRA in the loan market and it will mean that new/renewed financing arrangements will need to consider this milestone in determining what types of loans will be offered on a go-forward basis. It is important to note that the November 1, 2023, milestone does not impact a borrower’s ability to avail themselves of BA or CDOR loan facilities that are currently in place or that have not matured before November 1, 2023. Following November 1, 2023, lenders must still meet their contractual commitments in existing credit agreements that reference either BA or CDOR.

The cessation of CDOR is expected to take place on June 28, 2024. Loans offered with reference to CDOR loans and BA-rate loans will be replaced by an overnight CORRA compounded in arrears, term version of CORRA or the applicable bank’s prime rate.^[2]

2. Launch of Term CORRA and Finalized Guidance on Use of Term CORRA

On August 10, 2023, CanDeal Benchmark Solutions and TMX Datalinx announced that they will officially launch the Term CORRA benchmark on September 5, 2023. On August 29, 2023, CARR finalized its guidance on the allowable use for Term CORRA, with the goal of ensuring that the size of the market referencing Term CORRA is appropriate to the size of the market used to determine Term CORRA. CARR’s effort devoted to Term CORRA (as opposed to CORRA) is consistent with its anticipated limited use, such as trade finance, loans or other extensions of credit that are primarily for business or commercial purposes, and derivates to hedge interest rates on business loans.^[3]

The impending implementation of Term CORRA highlights the importance of having clear transition and fallback language in each financing agreement. CARR has expressed that it expects any users of Term CORRA to remain agile to change by having robust fallback language in place, likely referencing overnight CORRA calculated in arrears, and that users build operational capacity to transact in the fallback rates, should the need arise.

For more information about the Term CORRA benchmark, please consult our previous article: CARR Confirms Development of Term CORRA Benchmark (airdberlis.com).

How to Prepare? Implement Robust Fallback Language

The Bank of Canada has released a list of recommended best practices to support market participants transitioning to CORRA. Some recommendations for CORRA readiness include: (a) evaluate each financing agreement you are party to in order to understand your exposure to CDOR loans or BA loans, (b) assess whether robust fallback language exists in your financing agreements and (c) ensure any forthcoming amendments reflect the introduction of CORRA, if applicable to your financing arrangements. The Bank of Canada has also provided a set of recommended definitions and provisions for financing agreements to further guide market participants in the transition from CDOR to linked overnight CORRA compounded in arrears, or Term CORRA.^[4]

Market participants are advised to amend their financing agreements to ensure each financing agreement has adequate fallback language to achieve its intended result. Failure to include adequate fallback language may impact the remaining payments or cash flows, lead to legal disputes and possibly frustrate the contract. As the timelines for transition from CDOR to CORRA approach, we would be pleased to assist you in preparing for this transition.

Kanika Sharma and Angela Oh are Associates with the Financial Services Group at Aird & Berlis, and Nayaab Bajwa is an Articling Student. The Financial Services Group regularly acts for a broad range of lenders and assists borrowers with lending matters. If you require assistance with any matter or question related to the transition to CORRA, please reach out to a member of the group.

[1] The Bank of Canada, “CARR publishes its recommendations for transitioning loans from CDOR to CORRA and provides a “no new CDOR or BA loan” milestone” (June 27, 2023), online: Bank of Canada <CARR publishes its recommendations for transitioning loans from CDOR to CORRA and provides a “no new CDOR or BA loan” milestone - Bank of Canada>.