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 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 plans to leverage a similar playbook whereby any legacy in-scope CDOR swaps will be converted into CORRA overnight index swaps (OIS) prior to the June 2024 cessation event.
In line with CME’s methodology used to convert cleared USD LIBOR swaps, a cash adjustment will 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 will 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 will 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 plans to convert all outstanding cleared CDOR swaps that contain fixings beyond the cessation date of June 28, 2024. Having considered relevant holidays across jurisdictions, the timing of adjacent CCP conversion events, and keeping the cessation date in mind, CME plans to run a primary conversion on May 17, 2024, as shown in the below timeline:
It is important to note a few details as they relate to this timeline of events:
- CME 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 May 17, 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 would continue accepting CDOR swaps for clearing.
- On the first good business day following the cessation (accounting for Canada Day), July 2, 2024, CME 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 plans to utilize the following conversion methodology, whereby any legacy cleared CDOR swaps that have fixings beyond June 28, 2024, will operationally 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 will 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 will apply a 1D payment offset to both the fixed and floating legs. This swap will become effective once the short-dated CDOR replacement swap expires, and its maturity will match the original legacy swap.
- A cash adjustment in the form of an upfront fee will 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 at the point of conversion.
Conversion Methodology for CDOR Swaps Containing the IMM CAD Roll Convention
- Based on feedback from market participants, CME plans to convert IMM CAD CDOR swaps into IMM CAD CORRA utilizing the standard CME conversion methodology outlined in the prior section.
- CME will communicate additional details on its plan to address the IMM CAD roll convention as further resources are published.
Conversion Methodology for CDOR Compounding Swaps
- As demonstrated in the above visual, for compounding swaps, CME will 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 will break both the fixed and floating payment.
- This will 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.
CME Group will publish detailed operational resources and documentation in late December, providing additional information on the conversion methodology, operational timelines (including processing timelines and dress rehearsal dates), and trade reporting.
The contents of this document are for informational purposes only and provide an overview of CME’s plan to facilitate the transition from CDOR to CORRA in the cleared CAD interest rate swap market. The plan is subject to change at any time without prior notice. Any implementation of any final plan is subject to regulatory review and to any necessary internal and external approvals.