This information is meant to assist in updating you about the transition of key global benchmark interest rates, including LIBOR, and the impact on products that you may have with RBC Wealth Management Canada.
- What is LIBOR?
- What is changing?
- What does the transition to an RFR mean to me?
- What is RBC doing to prepare for the discontinuation of LIBOR and transition to other Risk Free Rates (RFR's)?
- Which rate will likely replace USD LIBOR for my credit products in Canada issued in USD?
- What rate will likely replace USD LIBOR for my investment products in USD?
- What is CDOR?
- What is happening to CDOR?
- What is CORRA?
- Will CORRA replace CDOR?
- What will happen to my bond positions that I own in Canadian dollars using CDOR?
- What else do I need to know about CDOR products in scope for transition?
- If I hold a Fixed/Floaters, how likely are Fixed/Floaters to be called?
- Are Strip bonds in scope for transition?
- What is ‘Fallback language’ and how does it apply?
- Should I make any changes due to IBOR linked bonds?
- What about my Fixed Income ETFs and Mutual Funds?
- Who should I contact for further information?
What is LIBOR?
The London Interbank Offered Rate (LIBOR) is historically the world’s most widely used interbank offered rate for short-term interest rates. LIBOR benchmarks are based on a daily quotation of rates by a number of leading banks regarding what it would cost the submitting bank to borrow unsecured funds from another bank.
The administrator of LIBOR produces daily rates for five different currencies, being: USD, GBP, EUR, JPY and CHF, each of which are provided for various terms ranging from overnight lending to a twelve month term. These are commonly referred to as ‘IBORs’ or by their currency, for example, ‘USD LIBOR’. IBORs are published daily and referenced in a wide variety of contracts including loans and other credit products, bonds and derivatives.
What is changing?
In July 2014, the Financial Stability Board (the FSB) (an international body that monitors and makes recommendations intended to promote financial stability in the global financial system) issued a report expressing concerns about the reliability and robustness of existing interbank benchmark rates, including LIBOR. The recommendations in that report are now being implemented to address the FSB’s concerns, in particular, that the existing benchmarks were based on reported borrowing cost and were not grounded in actual transactions. This has triggered a global, industry wide transition away from all interbank offered rates (IBORs) into alternative risk free rates (RFR’s).
What does the transition to an RFR mean to me?
The impact to you depends on what type of product you hold, the reference rate applicable to that product and the terms of that product.
RBC is monitoring market transition progress for any newly emerging market standard and will make every effort to ensure that you have adequate notice of the need for change.
What is RBC doing to prepare for the discontinuation of LIBOR and transition to other Risk Free Rates (RFR's)?
Royal Bank of Canada is working on the basis that LIBOR will no longer be available for use in new client transactions after 2021 and is actively participating in industry-wide discussions and monitoring market responses regarding the transition away from LIBOR. RBC is collaborating with various working groups in the jurisdictions in which it operates to track the development of alternative (or reformed) nearly risk free reference rates and consider their implementation across a number of markets and products.
Which rate will likely replace USD LIBOR for my credit products in Canada issued in USD?
RBC Wealth Management Canada has reviewed its existing credit contracts and considered which alternative reference rates are most appropriate in view of the analysis it has undertaken of a range of possible replacement rates for LIBOR, including how those benchmark rates have fluctuated over a five year period. RBC Wealth Management Canada have concluded that, for the credit products it offers, moving clients from US LIBOR to the Royal Bank US Base Rate is the most appropriate replacement for its credit clients.
What rate will likely replace USD LIBOR for my investment products in USD?
Currently, the replacement rate is still unknown, but it appears that USD LIBOR will most likely be replaced by a rate referencing the Secured Overnight Financing Rate (SOFR) published by the Federal Reserve Bank of New York. Loans or products in currencies other than US dollars will be replaced by different rates. RBC will provide further communication to clients prior to implementing the replacement rate. USD LIBOR will not officially be discontinued for legacy investment contracts until June 2023.
What is CDOR?
CDOR (Canadian Dollar Offered Rate) is the recognized financial benchmark in Canada for bankers’ acceptances (BAs) with a term of maturity of 1 year or less. It is the rate at which banks are willing to offer credit to companies utilizing BAs. In Canada, RBC uses BAs as short-term, fixed rate vehicles for qualifying clients.
CDOR is administered by Refinitiv Benchmark Services (UK) Limited (“RBSL”), which is responsible for collecting input data and publishing the CDOR benchmark.
What is happening to CDOR?
Based on the recommendation from the independent CDOR Oversight Committee led by the Office of the Superintendent of Financial Institutions, RBSL has announced that the calculation and publication of the 6-month and 12-month CDOR tenors ceased effective May 14, 2021. As a result, RBC will not be offering 6 or 12-month BA or CDOR tenures after May 14, 2021. Clients will be offered only 1-month, 2-month and 3-month tenors after that date.
What is CORRA?
The Canadian Overnight Repo Rate Average (CORRA) is a measure of the cost of overnight general collateral funding in Canadian dollars using data submitted to the Bank of Canada. The Bank of Canada took over the calculation and publication of CORRA from Refinitiv Benchmark Services (UK) Limited on June 15, 2020. CORRA data can either be retrieved directly from the Bank or from data distributors.
Will CORRA replace CDOR?
The Canadian Alternative Reference Rate Working Group (CARR) was created to ensure Canada’s interest rate benchmark regime is robust, relevant and effective in the years ahead. At this point in time, the CARR has not made any recommendation or official determination on the termination of CDOR or its appropriate replacement.
What will happen to my bond positions that I own in Canadian dollars using CDOR?
The majority of Canadian Fixed Income products are NOT impacted by this transition.
The following products are potentially impacted if they are maturing/callable AFTER the CDOR transition date:
- Floating Rate Notes
- Fixed to Float subordinated bonds (Fixed/Floater)
- Strip bonds created from Fixed to Float bonds (Principal portion only, not the Interest portion)
- Structured Products linked to CDOR
The following products are not impacted by the changes to CDOR:
- Conventional Fixed Rate bondsi
- Preferred Shares
- Instruments that mature or are called before the CDOR transition date
- Fixed Rate GICs
What else do I need to know about CDOR products in scope for transition?
Any floating rate bonds maturing after the CDOR transition date will be subject to the Fallback provisions outlined in the original bond indenture. This also applies to Structured Products (more on that below).
Fixed to Float Subordinated bonds require further evaluation due to their call feature. Most bonds offer a fixed rate until a given call date. If the bond is not called by the issuer on that date, it then floats at a spread to CDOR until final maturity. Bonds that are called will not have a chance to float and will not be subject to any of the uncertainties surrounding the new RFR.
If I hold a Fixed/Floaters, how likely are Fixed/Floaters to be called?
Regardless of the IBOR transition, issuers are incentivized to redeem these issues at their first opportunity (call date) as they will begin to lose capital treatment if extended.
A trend in the market should give investors some comfort: to date, every fixed/floater bond issued by a Canadian Bank or Insurance company has been called on the first call/reset date, meaning that they would not be subject to any of the uncertainties surrounding the new RFR. There is no guarantee that all Fixed/Floaters will be called going forward, but in light of the uncertainty regarding IBOR reform, the loss of capital treatment and the potential reputational risk to the issuer, we anticipate that this trend will continue.
Are Strip bonds in scope for transition?
Strip bonds in Canada are created from an underlying bond, as the components from the one bond are ‘stripped’ away to create a new set of securities. Virtually all strip bonds from a financial institution (bank or insurance company) are created from existing Fixed/Floater bonds, so the dynamics mentioned above would apply to these products as well. Note that only the Principal (“Residual”) portion is potentially in scope. The Interest (“Coupon”) portion is out of scope.
Strip bonds created from conventional fixed rate bonds are not in scope. This would include all Government strip securities.
What is ‘Fallback language’ and how does it apply?
Bond indentures will generally contain some form of fallback language which outlines what steps would be taken if IBOR is temporarily or permanently discontinued. Fallback language is considered adequate when it is contractually clear and actionable by the terms of the instrument on how the temporary and permanent alternative reference rate will be identified and is not contingent upon further agreement among two or more parties or the voluntary submission of rates by third parties.
The majority of bonds in existence contain adequate fallback provisions and no additional action is needed from you.
For bonds with insufficient fallback language, RBC will reach out to you in the coming months to inform you of the issue and determine if any action is needed.
Should I make any changes due to IBOR linked bonds?
The majority of bonds outstanding have adequate fallback provisions so there is no action needed.
For bonds with insufficient fallback language, it is best to speak to your Investment Advisor to determine if any action is needed on your specific holding and the timing for such recommendation, if necessary. For our non-discretionary RBC Wealth Management Canada clients, we will be in contact to inform you of which products you have with us that are impacted.
What about my Fixed Income ETFs and Mutual Funds?
For any ETFs or Mutual Funds that hold products linked to IBOR, it will be up to the fund manager to determine the impact and best course of action.
Who should I contact for further information?
We will update this webpage with further information and updates from time to time. If you have any further questions in the meantime, please contact your Investment Advisor.
iBonds with no floating rate component