As Canada’s benchmark interest rate shifts from CDOR to CORRA, CME Group is committed to continuing its collaborative approach to identify, understand, and create a plan to help facilitate this transition for cleared interest rate swaps.
Background and key considerations
On May 16, 2022, Refinitiv Benchmark Services Limited (RBSL) announced that the calculation and publication of all CDOR tenors will cease immediately after their final publication on June 28, 2024. At the same time, the Ontario Securities Commission and the Autorité des marchés financiers issued decisions authorizing RBSL to cease the publication of CDOR, and ISDA confirmed that the RBSL’s announcement constitutes an “Index Cessation Event” under the ISDA Fallbacks Supplement and Fallback Protocol.
For background, CME Group incorporated the ISDA IBOR fallbacks in January 2021. Based on the positive outcomes achieved from other recent benchmark transitions to risk-free-rates (RFRs), including for USD LIBOR cleared swaps, CME Group is proposing to leverage a similar playbook whereby any legacy in-scope CDOR swaps would be converted into CORRA overnight index swaps (OIS) prior to the June 2024 cessation event.
In line with the methodology CME Group used to convert cleared USD LIBOR swaps, a cash adjustment would be included as a part of the conversion process to compensate for any changes in valuation from the original, legacy CDOR swaps. This is intended to ensure that the conversion event would be a zero-sum event from a PNL perspective at the point of conversion as compared to ISDA fallbacks.
This conversion process benefits the marketplace by:
- Creating a single transparent liquidity pool for trading CORRA overnight index swaps.
- Providing participants certainty that their “legacy” and “new” contracts would be fungible with one another following the CDOR cessation.
- Market standard OIS are already widely supported by participants and market infrastructure today. This conversion approach removes the need to operationally support the “Observation Period Shift” defined in the ISDA Fallbacks.
Timeline and proposal
CME Group is proposing to convert all outstanding cleared CDOR swaps that contain fixings beyond the cessation date of June 28, 2024. Having considered relevant holidays across jurisdictions and keeping this cessation date in mind, CME Group would run a primary conversion on June 7, 2024, as shown in the below timeline:
It is important to note a few details as they relate to this timeline of events:
- CME Group began supporting the clearing of CORRA overnight index swaps in October 2016, which has allowed industry participants to move activity on their own accord ahead of any mandatory CCP conversion events if desired.
- The proposed June 7, 2024, primary conversion event would encompass all legacy cleared CDOR swaps that contain fixings beyond the June 28, 2024, cessation date.
- Following the primary conversion event, CME Group would continue accepting CDOR swaps for clearing.
- On the first good business day following the cessation (accounting for Canada Day), July 2, 2024, CME Group will run a secondary conversion to convert any outstanding CDOR swaps. This should be viewed as the beginning of daily conversion cycles to support the clearing of any CDOR swaps that are the result of bilateral swaption expiries, as well as a cleanup exercise for any CDOR swaps cleared between the primary conversion and the cessation date.
As outlined in the above visual, CME Group proposes the following conversion methodology, whereby any legacy cleared CDOR swaps that have fixings beyond June 28, 2024, would be terminated and replaced with the following:
- A short-dated CDOR replacement swap that is designed to capture any CDOR fixings scheduled to occur prior to the cessation date (the legacy swap’s economics would carry over).
- A forward-starting CORRA replacement overnight index swap (OIS) that would maintain the legacy swap’s fixed rate, replace the CDOR floating rate with daily compounding CORRA plus the ISDA fallback spread (32.138bps for 3M CDOR) and would apply a 1D payment offset to both the fixed and floating legs. This swap would become effective once the short-dated CDOR replacement swap expires and its maturity would match the original legacy swap.
- A cash adjustment in the form of an upfront fee would be included on the forward starting CORRA replacement OIS to account for any differences between the legacy CDOR swap valued under ISDA fallbacks and the corresponding replacement swaps booked by CME Group at the point of conversion.
- This proposal will be made publicly available, and CME Group intends to accept commentary and feedback through November 15, 2023.
- CME Group will then formalize its official transition plan and release more detailed operational resources (including information on dress rehearsal dates).
Request for feedback and contact information
Please contact us at ClearedSwapConversion@cmegroup.com by November 15, 2023, if you would like to raise any questions or provide feedback on the following key considerations:
- Is your firm supportive of the approach outlined in this proposal?
- Is Friday, June 7, 2024, a reasonable date to run the primary conversion?
- Conversion methodology for CDOR compounding swaps:
As demonstrated in the above visual, for compounding swaps, CME Group intends to respect representative CDOR fixings and calculation periods and in certain instances will be breaking payment frequencies on the fixed and floating payments. Specifically, when a CDOR swap contains a compounding period consisting of a combination of representative and non-representative fixings, CME Group will break both the fixed and floating payment. This would result in a single period fixed-float CDOR swap as well as a short initial stub on the forward starting CORRA replacement OIS. All periods beyond this initial compounding period will remain unchanged. Note, this is consistent with the logic applied during the USD LIBOR conversion events.
- Are you comfortable with this approach for CDOR compounding swaps?
- Conversion methodology for CDOR swaps containing the IMM CAD roll convention:
As demonstrated in the above visual, CME Group proposes to utilize the following conversion methodology, which involves adjustments to the replacement swap economics required to account for the IMM CAD roll convention changes post cessation. In-scope CDOR swaps that follow this roll convention would be terminated and replaced with:
I. A short-dated CDOR replacement swap that is designed to capture any CDOR fixings scheduled to occur prior to the cessation date. The maturity date will be set as the third Wednesday of the month corresponding to the last cash flow in the short-dated replacement swap.
II. A forward starting CORRA replacement overnight index swap (OIS) that would maintain the legacy swap’s fixed rate, replace the CDOR floating rate with daily compounding CORRA plus the ISDA fallback spread (32.138bps for 3M CDOR), and would apply a 1D payment offset to both the fixed and floating legs. This swap would become effective once the short-dated CDOR replacement swap expires, and its maturity would be updated to the third Wednesday of the month corresponding to the original maturity date.
III. A cash adjustment in the form of an upfront fee would be included on the forward starting CORRA replacement OIS to account for any differences between the legacy CDOR swap valued under ISDA fallbacks and the corresponding replacement swaps booked by CME Group at the point of conversion.
- Are you comfortable with this approach for CDOR swaps containing the IMM CAD roll convention?
- Are there any additional items your firm would like to comment on or request further clarity on?
All examples in this report are hypothetical interpretations of situations and are used for explanation purposes only. The views in this report reflect solely those of the author and not necessarily those of CME Group or its affiliated institutions. This report and the information herein should not be considered investment advice or the results of actual market experience.