(Corrects size of note market in the fourth paragraph
of story originally published Feb. 14.)
Nova Scotia is avoiding the Canadian equivalent of Libor while pricing the province’s latest variable-rate debt offering amid a widening probe into alleged market manipulation of benchmark interest rates.
“I would want the market to set the rate, not a group of individuals -- as we found out with Libor, it was set by what we believed to be a market but turned out to be a group of individuals who were colluding with each other,” Peter Urbanc, Nova Scotia’s treasurer, said in a phone interview today from Halifax. “Market participants, I think, on both sides would have a benefit from issuing through something that’s transparent and set by market, or the regulator.”
The province linked the sale of all three tranches of its impending C$475 million ($433 million) of floating-rate notes to the Canadian overnight repurchase agreement rate average, rather than the Canadian dealer offered rate, which is set from a survey of banks. CDOR is cited by the Bank of Canada as the benchmark for Canada’s C$95 billion market in floating-rate notes.
Benchmarks set by a poll of bankers who give estimates for what interest rates they will charge or receive have come under suspicion as some of the world’s largest banks have paid billions in fines for rigging the most important of these -- the London interbank offered rate. Canada’s federal government said this week it will step up regulation of financial benchmarks set by banks, which could include CDOR.
Unlike CDOR, the Canadian overnight repo rate average -- or CORRA -- is based on actual transactions collected and published by the Bank of Canada on its website. CORRA is the weighted average of the interest rates charged for overnight loans of securities conducted by designated interdealer brokers. If there are not enough transactions, the Bank of Canada sets the rate, Urbanc said.
“This CORRA, the nice thing about it is if there are not enough data points, it’s set by the Bank of Canada,” he said. “The Bank of Canada is the one setting that rate, not a group of 18 banks, so I like that, and I think the investor likes that too.”
Urbanc said this is the first floating-rate bond maturing in a year or more that has been priced using CORRA as the benchmark. Demand from investors, including CIBC Mellon Global Securities Services Co., prompted Nova Scotia to consider using CORRA, which also allowed the province to diversify away from other sources of short-term funding, he said. The new benchmark proved cost effective, he said.
Nova Scotia sold C$25 million of three-year notes to yield 21 basis points over CORRA, C$200 million of four-year securities yielding 33.5 basis points more and C$250 million of five-year debt to yield 41 basis points more than CORRA.
CDOR is the benchmark index for Canadian bankers’ acceptances with a maturity of one year or less, and is determined daily from a survey of nine market makers. Rates are submitted by banks that are issuers of banker’s acceptances in Canada, according to the central bank. CDOR is published daily at 10:15 a.m. by Reuters.
Bank of Montreal, Canadian Imperial Bank of Commerce, Deutsche Bank AG, HSBC Holdings Plc, Bank of America Corp., National Bank of Canada, Royal Bank of Canada, Bank of Nova Scotia and Toronto-Dominion Bank are the market makers.
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“CORRA is more transparent than CDOR, simple as that,” said Mike Gallaway, vice president of treasury investments at CIBC Mellon, and the lead investor on the deal, said by phone from Toronto. “It’s an evidence-based reference rate and there’s not as much evidence surrounding CDOR as there is with CORRA.”
Increased interest from Canadian authorities in CDOR contributed to his decision to look for another benchmark, Gallaway said.
The Office of the Superintendent of Financial Institutions, Canada’s bank regulator, said it is developing an enhanced oversight framework in a Jan. 13 letter.
“Global regulators have adopted principles to strengthen the integrity, reliability and oversight of financial benchmarks that are used in a wide variety of financial contracts,” the Federal government said in its 2014 budget released Feb. 11. “The government therefore proposes to introduce amendments to the Bank Act to provide a regulation-making authority that would apply to Canadian banks in their submissions to financial benchmarks.”
Firms including Barclays Plc (BCS:US) and UBS AG have been fined about $6 billion for manipulating Libor and related benchmarks. Prosecutors and regulators around the world are investigating whether firms colluded to rig rates to benefit their own derivatives trades. Ten people have been charged in parallel U.S. and U.K. criminal probes.
“If we want to have good governance and prudence you need transparency,” said Gallaway. “That will help make Canada’s financial system stronger and more well-regarded around the world.”
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