On September 12, 2014, the Office of the Superintendent of Financial Institutions (OSFI) issued the final version of Guideline E-20 – CDOR Benchmark-Setting Submissions with respect to the submission process for the Canadian Dollar Offered Rate (formerly the Canadian Dealer Offered Rate) (CDOR) interest rate benchmark. The CDOR rate is the benchmark interest rate commonly used in the Canadian market to price Canadian-dollar-denominated loans (bankers’ acceptances) and Canadian dollar derivatives. CDOR is calculated on the rate at which specific reference entities (currently The Toronto-Dominion Bank, Royal Bank of Canada, The Bank of Nova Scotia, Bank of Montreal, Canadian Imperial Bank of Commerce, National Bank of Canada and HSBC Bank Canada) are willing to lend to their best corporate customers utilizing bankers’ acceptances.

Allegations concerning the manipulation of the London Interbank Offered Rate (LIBOR) raised integrity concerns about the setting of benchmark rates generally, including CDOR. Accordingly, in August 2012, the Investment Industry Regulatory Organization of Canada (IIROC) undertook a review of the CDOR rate-setting process to determine whether manipulation of the rate had occurred. In its January 2013 report (IIROC review of CDOR supervisory practices), IIROC found no evidence of CDOR manipulation, although it did identify potential weaknesses in the CDOR system. Following IIROC’s review, the reference entities developed a Code of Conduct in June 2014, setting forth standards for submitting rates for CDOR and requiring the CDOR reference entities to be banks rather than investment dealers. In January 2014, OSFI also announced that it would supervise benchmark rates going forward. The 2014 federal budget proposed corresponding amendments to the Bank Act (Canada) formalizing this change by granting OSFI rule-making authority over benchmark rates.

OSFI has now released Guideline E-20, first in draft form earlier this year and now in final form, setting forth standards relating to the submission of CDOR rates by the reference banks. Key points in the final Guideline E-20 are as follows:

• CDOR Name Change. CDOR’s name has officially been changed from “Canadian Dealer Offered Rate” to “Canadian Dollar Offered Rate,” because dealers are no longer acting as reference entities.
• Interaction with other OSFI Guidelines. Guideline E-20 is intended to be complementary to OSFI’s overarching Corporate Governance Guideline and Supervisory Framework, which continue to apply. Guideline E-13 is currently being reviewed in this context and any overlapping requirements will be addressed as part of this review. Guideline E-20 is intended to be more specific, given the particular concerns about the CDOR submission process.
• Principles-Based Approach. Guideline E-20 follows a principles-based approach, consistent with OSFI’s general approach. Accordingly the Guideline is relatively brief and flexible, allowing banks to meet the requirements in a manner that is appropriate to their size and complexity.
• Annual Reporting to Board. Guideline E-20 requires senior management of a submitting bank to be responsible for developing adequate governance controls with respect to CDOR submission, and to report to the board of directors of that bank at least annually that the CDOR submission policies, processes and controls are adequate and are operating appropriately with risk being appropriately controlled.
• Independent Oversight Function. Guideline E-20 stipulates that OSFI expects a submitting bank’s oversight functions over the CDOR submission process to be independent of operational management.
• Reporting of Breaches. In the Annex to Guideline E-20, OSFI clarifies that it expects any material breaches and associated remediation plans of internal processes to be disclosed to it on a timely and ongoing basis, including the reporting of any material breaches of the CDOR submission processes.
• OSFI Supervision of CDOR Submission Processes. OSFI confirms that it will be reviewing submitting banks’ controls with respect to CDOR submission as part of its supervisory assessments and may require that a bank provide copies of reports relating to its CDOR submission process.
• December 31, 2014 Deadline. Reference banks are expected to implement the Guideline no later than December 31, 2014.

The changes to the CDOR process that have been made following IIROC’s review have on balance been relatively limited, particularly in light of the changes that have been proposed or considered with respect to the LIBOR rate process. The main changes to CDOR have been a change in supervisory authority and in the nature of reference entities, as well as the introduction of greater corporate governance protection and reporting. In contrast to the case of the LIBOR rate, no discussions have taken place about alternative rates being considered to replace CDOR or of extensive reforms. The limited nature of the changes to the CDOR process should not be surprising given that the results of the IIROC CDOR review confirmed the fundamental integrity of the CDOR rate-setting process.

The measures taken by OSFI, including Guideline E-20, can therefore be seen as a proactive effort to reinforce and maintain the perception of the integrity of the CDOR rate in the wake of the LIBOR crisis. As stated by Superintendent Jeremy Rubin, “While there have not been any reports that CDOR, or other Canadian financial benchmarks, have been manipulated, OSFI and other domestic regulators are taking action to ensure confidence in and credibility of this important benchmark is maintained.”