TMX, CanDeal strike deal for Canadian benchmark transition

Next month, Canadian exchange group TMX and Canadian fixed income trading platform CanDeal will launch a new overnight risk-free rate benchmark index based on observed transactions, which will ultimately replace the former survey-based interbank offered rate benchmark Cdor (Canadian Dollar Offered Rate).

The methodology for the new index, dubbed Term Corra (Canadian Overnight Repo Rate Average), was developed by the Bank of Canada and its Carr (Canadian Alternative Reference Rate) Committee, an industry group to oversee and ensure robust Canadian benchmarks, in response to global index benchmarks migrating away from the Libor rate and other interbank offered rates.

The deal between TMX and CanDeal was signed last month, and the pair began distributing test benchmark data to tier-one Canadian and global banks participating in its beta-testing program, which began on July 4. The data is available via the exchange’s web store, and is provided for free during the beta-testing period, which ends at the official launch of the benchmark on September 5. After that date, clients will be able to use the data for commercial purposes, and Term Corra will run in parallel with Cdor until June 28, 2024, when the current Cdor benchmark administrator, Refinitiv Benchmark Services Limited, will cease publishing Cdor rates.

Also from September 5, license fees will apply for the Term Corra data, except for corporate licensees, for whom the data remains free until June 2024. TMX officials say they are still deciding the fees for the data, but say they are seeing a lot of interest in it, as well as interest in TMX’s futures products. Currently, three of the seven tier-one Canadian dealer firms are participating in the beta test.

The timeframes may seem short, but André Craig, president of CanDeal’s DNA (Data & Analytics) division, notes that many moving parts had to fall into place simultaneously. For its part, he says the DNA group’s adoption of International Organization of Securities Commissions principles at its formation was done specifically to position it as a potential calculation agent and administrator for Term Corra.

To create the benchmark, TMX will collect a quorum of trades and volumes in one-month and three-month Corra futures contracts on the exchange’s MX (the former Montreal Exchange) derivatives market during a two-hour “observation window” between 10 a.m. and noon every day. These reference the Canadian repo market, where the underlying volume of daily repos ranges between C$15 and C$20 billion.

Should there not be enough trades in that two-hour window, the parties may expand that if needed. Plus, the methodology published by the Carr Committee and elaborated on by CanDeal may also be something of a moving target as the benchmark develops over time.

“As industry needs evolve and we see best practices coming from the UK and US, the use cases for Term Corra will be expanded on,” says Gavin Morris, director of business operations at TMX Datalinx, the exchange’s data business.

Craig also says CanDeal will be soliciting feedback on a regular basis to identify any gaps in the service and will bring them to its methodology committee. Although the methodology for Term Corra was broadly dictated by the Carr Committee, CanDeal and TMX have made practical tweaks—such as changing the 2.5 basis point limit on either side of the midpoint price to a spread of 5bp to “optimize the methodology,” he says.

TMX also applies various calculations and analytics on top of the data, such as Vwap (Volume-weighted average price) and other moving averages to ensure the data is robust. This information is then passed to CanDeal, which uses it as the inputs for its benchmark calculation process, then provides the final benchmark data back to TMX Datalinx, which will use its existing global data distribution platform to distribute it to clients. In addition, CanDeal will publish the benchmark data on its website on a T+1 basis.

The aim of the transition from Cdor to Term Corra is to provide a more accurate benchmark for pricing loans. In addition, the fact that the new benchmark is calculated on a T+0, rather than a T+1 basis, will enable faster calculation and allow lenders and dealers to better serve clients, officials say.

“We wanted a clear, transparent benchmark that uses live transactions from the exchange. And if we look at the technology that TMX has adopted over the years, such as public cloud services for rapid go-to-market product development, we realized that we have the technology capabilities to publish on a T+0 basis,” Morris says. “That will allow people to use Term Corra as a reference rate for loan products and to address their customer needs more quickly and responsively.”

Forward curve

Just as other exchanges have invested in broadening their ranges of value-add analytics and investable index products, TMX also sees this as an area with growth potential.

“This collaboration with CanDeal and Term Corra is the start of investing in benchmarks as one of our growth pillars. This helps us accelerate that,” says TMX Datalinx president Michelle Tran, noting how TMX’s acquisition of a 21% stake in US-based data, analytics and indexing provider VettaFi for $175 million in January has already added more indexes to TMX Datalinx’s product portfolio, and will accelerate the exchange’s ability to launch more indexes.

“By collaborating with CanDeal Benchmark Administration Services for the launch of Term Corra, and through our investment with VettaFi, TMX Datalinx provides a broad suite of capabilities across a range of client index and benchmark solutions,” Tran says.

Meanwhile, CanDeal is also already looking to broaden its Term Corra-based offerings. Craig says he believes—and is seeing indications from dealers in the Canadian market—that there’s value in creating a forward-looking curve, extending to terms of 30 or 40 years, to provide greater insight when making investment decisions, create derivatives pricing, and also to be able to provide additional terms in contract lengths besides one month and three months.

“We’re building a prototype and will assess industry interest,” he says. “We already capture swaps curves data from banks… but by pooling inputs and aggregating individual dealer rates, that will shepherd a broader market view.”