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CDOR vs. CORRA – who should get the final rose?

It’s the final selection, and our bachelorette has given her two last roses to suitors CDOR and CORRA.

At first glance, the two contestants likely to propose didn’t seem that different – both were Canadian-dollar based variable benchmarks used to price everything from consumer loans to floating rate notes, variable mortgage-backed securities and asset swaps.

But as the season went on, we learned there was more to these dashing suitors than we originally thought – and a mid-season plot twist led to a scandal that lit up Twitter for days.

Will the bachelorette accept a proposal from CDOR, who was the fan favourite before rumours of a cheating scandal, or will she choose earnest CORRA, whose character remains untested? Can she move past the LIBOR heartbreak, and find true love at last?

Before we get to the final rose, let’s look back at the bachelors looking to win our girl’s heart:

The bad boy/fan favourite: CDOR

CDOR, or the Canadian Dollar Offered Rate, was initially a fan favourite, since he seemed to be everything the bachelorette was looking for. The short-term credit instrument was the main benchmark recognized by the big banks and was considered more grounded in the market than LIBOR, its U.S. counterpart, because CDOR is the rate at which banks are committed to lending off. It’s published at 10am every day and has a curve. Like LIBOR, it’s a survey-based rate, but because it’s based off a consensus among the banks, CDOR is believed to be less likely to be manipulated. CDOR is used to price floating rate notes, Canada-U.S. interest rate swaps and exchange traded notes.

CDOR’s boy-next-door image was thrown into question near the end of the season, however, when cheating rumours cast shade on his character. Suddenly, the Canadian dollar-based lending metric looked like he may be living up to the “CAD” in his designation. A complaint filed by a Colorado pension fund claiming several U.S. and Canadian banks tried to reduce the interest they would owe investors on CDOR by coordinating artificially lower submissions made the bachelorette doubt his commitment. Yet those allegations have yet to be proven in court, and after Canadian regulators said they would work on fixing the problems with CDOR and propose a new CDOR that would exist alongside the current one, she began to believe his feeling may be real after all, and awarded him one of the two final roses.

The reliable underdog: CORRA

Many fans were surprised when CORRA received a final rose. The unassuming index wasn’t a standout contestant, and is still a new concept. Some saw him as a reliable alternative to CDOR, given the rumors about CDOR’s dalliances. The province of Nova Scotia was one of the first members of Bachelorette Nation to appear to root for Team CORRA: Nova Scotia treasurer Peter Urbanc reportedly told Bloomberg that his province would price an upcoming debt offering off CORRA.

The interest in the Canadian Overnight Repo Rate Average stemmed from the fact that CORRA is determined by actual market transactions instead of individuals at a bank. It’s a one-day (overnight) rate for the cost of overnight lending, based on an average of government of Canada collateral repo trades that happened from 6am to 4pm that day.

This makes it more transparent than CDOR, because anyone can go back and figure out the exact math behind the day’s rate – a level of honesty that our bachelorette may appreciate after LIBOR’s betrayal.

The ex: LIBOR

LIBOR may not be holding a final rose, but his actions had such a profound impact on the bachelorette that it’s hard to imagine he won’t factor into her final decision.

The London Interbank Offered Rate, or the rate at which a group of lenders think they can access funding, caused quite a bit of trouble early in the season. While the bachelorette believed LIBOR had fallen for her, it turned out he was only using her to get rich and famous. Despite repeated warnings from other contestants, she stood by him, until a shocking hot tub allegation of rate manipulation. Those led to fines and lawsuits in Europe and the U.S., prompting authorities to announce they would remove LIBOR as a benchmark by 2021.

In fact, before the season had even wrapped filming in early 2018, the Federal Reserve Bank of New York had already announced the Secured Overnight Financing Rate, the Broad General Collateral Rate and the Tri-Party General Collateral Rate would replace U.S. dollar LIBOR as overnight interbank lending references.

Whose proposal should she accept?

And so we find ourselves at the final ceremony, wondering which suitor the bachelorette will choose. There are, of course, no shortage of outside opinions.

The Bank of Canada is looking for a market risk free benchmark to replace CDOR, in a bid to avoid collusion, increase transparency and accuracy for what it has called “probably the most important benchmark” – and one underpinning a huge portion of the Canadian economy. It’s also looking at CORRA and considering ways to broaden the volume of trades used to calculate rates.

The Investment Industry Regulation Organization of Canada and the Office of the Superintendent of Financial Institutions are also involved in the review, but they have yet to pick a side.

Even if CORRA wins the bachelorette’s heart, many questions will remain.

Will the engagement last once the limelight fades? Is CORRA as honest as he appears, and did CDOR really step out on the bachelorette? Have we really seen the last of LIBOR, and will the market settle on a uniform rate? If CDOR is replaced, what will happen to the outstanding floating rate notes and swaps? Will they automatically default to CORRA, leading spreads to widen out.

Find out this fall, when the reviews wrap up, in After the Final Rose.

1 month ago

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