Bank rates for top borrowers to go under the ‘magnifying glass’
Posted on Jan 16, 2014 in Mortgage Market Updates and NewsRepublish Reprint
Since it was created more than two decades ago Canada’s version of Libor has grown rapidly in importance, now affecting pricing on at least $6-trillion of residential mortgages, loans and derivatives. Yet despite the value at stake Canada’s major regulators have mostly stayed away, insisting that the Canadian Dealers Offered Rate, known as Cdor, is not their responsibility.
That is until the Libor scandal erupted, forcing financial authorities around the world to look more closely at such benchmark rates. Over the last several years more than a dozen international banks have forked out more than US$6-billion in fines and other penalties in connection with allegations they tried to manipulate Libor.
The fear is that if players were willing to take the risk of fixing Libor, what about other key benchmarks like Cdor, often described as the Canadian version of Libor? Couldn’t they be torqued just as easily?
On Monday, Canada’s banking regulator announced that, as part of a push by its international counterparts, it is now taking a more active role in oversight of Cdor and will now scrutinize the “governance and risk controls” of the banks involved in the rate-setting process.
A report by the Investment Industry Regulatory Organization of Canada (IIROC) released in Jan 2013, suggested that the calculation for Cdor involved a number of equations that varied from one submitting bank to the next. According to IIROC, some looked at factors such as the previous days’ rate while others focused on the futures market. In other words, there was a total lack of consistency.
Among its conclusions, IIROC warned that the situation created “the potential” for manipulation.
Given the lack of oversight, this may be an understatement. Within the industry there has long been concern on the part of some players that Cdor is not what it’s cracked up to be. Part of the problem is that some bankers acceptances are so thinly traded that respective Cdor submissions are almost hypothetical. Meanwhile the market for derivatives and other products priced off of the benchmark has soared.
“Recently, the international regulatory community turned its attention to weaknesses identified in the determination of some major global financial benchmarks, such as the London Interbank Offered Rate (Libor),” OSFI said in statement on its website. “The investigative findings of some national authorities have raised concerns regarding the integrity of major global benchmarks. In certain cases, these investigations have led to admissions of wrongdoing by large, internationally active financial institutions. None of these institutions have been Canadian-based.”
Louis Gagnon, a professor of finance at Queen’s University who has studied Cdor, welcomed OSFI’s plan to take greater interest in the benchmark.
“In this current market with all this scandal that we have witnessed, I think this is the era of transparencies,” he said. “So even if there are no direct concerns, I think is it is incumbent on Canadian regulators to lower their magnifying glass on markets to ensure that they have the integrity that is required.”