Cessation of the 6-month and 12-month CDOR Tenors
On November 12, 2020, Refinitiv Benchmark Services (UK) Limited (“Refinitiv”), the administrator of Canadian Dollar Offered Rate (“CDOR”), announced that it will cease publication of the 6-month and 12-month CDOR tenors effective May 17th, 2021 (the “Effective Date”). This announcement comes after Refinitiv issued a consultation on September 4, 2020 requesting feedback from CDOR stakeholders on the potential impact of certain proposed changes to the publication of CDOR.
CDOR is a reference rate for determining the rate at which banks are willing to offer credit to companies based on the discounting and purchase of bankers’ acceptances (“BAs”) and is, in effect, a committed base lending rate at which banks are willing, with the addition of a margin specific to the borrower, to offer credit to corporate borrowers with existing credit facilities that reference CDOR for 1, 2, 3, 6 and 12 months terms. CDOR is published daily at 10:15 a.m. ET by Refinitiv. The 1-month, 2-month and 3-month CDOR tenors will continue to be published after the Effective Date.
In the September 2020 consultation, Refinitiv requested feedback from CDOR stakeholders on the potential impact of the cessation of the 6-month and 12-month CDOR tenors. Based on the feedback received from that consultation, Refinitiv found that activity in the BA maturities that underlie the 6-month and 12-month CDOR tenors is very minimal. Specifically, from November 2016 to 2019, the daily average dollar value of BAs created in the primary market accounted for 0.3% and 0.1% of the overall BA dollar issuance for 6-month and 12-month BAs respectively. In the secondary BA market, the 6-month and 12-month BAs made up for around 1% of the average daily trading volume since 2015.
As a result of the cessation, the Canadian Securities Administrator (the “CSA”) published a staff notice that advised market participants to consider the use of a replacement rate if they were planning to use the 6-month or 12-month CDOR tenors for new instruments.
For existing instruments that reference the 6-month or 12-month CDOR tenors which might extend past the Effective Date, the CSA advised market participants to make appropriate transition arrangements which might include:
Adopting a replacement rate;
Reviewing the fallback provision which might specify a replacement rate or how a replacement is to be selected. In cases that the fallback provision does not contemplate the cessation of the 6-month or 12-month CDOR tenors, issuers may need to renegotiate a contractual provision that allows for a replacement rate or removing the option to reference the 6-month or 12-month CDOR tenors; and
Updating information technology systems to cease lending at the 6-month and 12-month CDOR tenors after the Effective Date.
Market participants utilizing the 6-month and 12-month CDOR tenors are encouraged to consider and make these transition arrangements well in advance of the Effective Date to avoid any business or market disruptions.