Bank watchdog to increase security of key Canadian rate

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Canada's banking watchdog is taking extra steps to monitor how the country's banks calculate the price of a key benchmark interest rate.

In the wake of the global Libor scandal, during which multiple international banks were found to have manipulated the global benchmark rate, affecting the price of countless investments, the Office of the Superintendent of Financial Institutions (OSFI) is developing a framework to ensure the same won't happen with the Canadian equivalent.

In Canada, a slew of securities are priced off a benchmark known as CDOR, or the Canadian Dealer Offered Rate. Currently the CDOR rate is calculated daily in a closed process between the country's biggest banks. Its global peer – Libor, or the London Interbank Offered Rate – is derived in much the same manner between global banks, and a number of them were found to set prices that benefited their own portfolios.

OSFI's new framework, which will come out later this year, "will be informed … by new international expectations and developments, and adapted to the unique characteristics of CDOR."

OSFI's review comes after the regulatory body for the country's investment dealers, the Investment Industry Regulatory Association of Canada, launched its own audit in August, 2012. During the process, IIROC met with the eight different banks that help set the benchmark rate, and worked with the Bank of Canada along the way.

"All participants recognize the potential for manipulation to take place," IIROC noted, adding that each firm had internal measures in place to prevent such manipulation.

In its final report, IIROC noted that there are some differences between Canada's benchmark and its global peer, which affect the banks' abilities to manipulate it. However, the regulator still called for a much more transparent, public explanation of how CDOR is defined and calculated, and asked for banks to establish controls to prevent potential manipulation. "Steps can and should be taken to strengthen the safeguards around the integrity of CDOR for its ongoing use," the report noted.

CDOR is used as a reference rate for both short-term money market instruments and derivatives such as futures contracts, forward rate agreements and swaps.

News of OSFI's involvement came on the same day that the U.S. Justice Department announced that three former Rabobank traders were charged over their alleged involvement in rigging what is known as the yen-Libor rate in Britain, Australia and Japan. The charges came after Rabobank agreed to pay $1.07-billion (U.S.) in fines to settle a probe into its traders' alleged manipulation of the benchmark rate.

For now, OSFI isn't saying much about its coming guidelines, other than to note that it they will focus on how banks submit their CDOR rates and that the rules will be rolled out over the course of 2014.