The Bank of Canada is taking steps to shore up governance of the local equivalents of benchmark Libor rates, to ensure there are no manipulation scandals as seen in other countries, Deputy Governor Tim Lane said.
Central bank officials have discussed establishing more “formal administrative arrangements” for the Canadian dealer offered rate, or CDOR, and are reviewing the merits of changes in benchmarks for overnight index swaps and the Canadian dollar, Lane said. The government’s last budget signaled new legislation will allow for a body to set regulations on how banks submit bids that help generate benchmark lending and currency rates, he said.
“Whether it is a litre of wine, a pound of butter or an interest rate benchmark, there should be no question that measurements for commercial and financial transactions are accurate and fair,” Lane said in a speech to the Osgoode Hall Law School and York University’s Schulich School of Business. “Better articulated governance arrangements for CDOR and other important financial benchmarks will contribute to greater financial stability.”
Canadian policy makers have joined global counterparts in stepping up regulation of financial benchmarks amid growing concerns that some reference rates, such as the London Interbank Offered Rate, or Libor, had been manipulated. There has been no evidence of manipulation in the CDOR rate that backs C$130 billion ($116 billion) of floating-rate debt and payments on $9.3 trillion of Canada-dollar interest rate swaps, he said.
Some elements of the CDOR rate make it more robust than Libor, Lane said, reiterating there have been no similar problems reported with the Canadian benchmark. Still, regulators are taking steps to strengthen oversight, a process the Bank of Canada is contributing to, Lane said.
“Work continues to strengthen other aspects of the governance of CDOR,” said Lane. “We have discussed with industry the need for it to establish more formal administrative arrangements.”
The Bank of Canada has also begun to look at possible changes to the Canadian Overnight Repo Rate Average, or CORRA, and to the daily indicative foreign exchange rates that it publishes in Ottawa.
“While there is no evidence of market manipulation affecting the Bank of Canada’s rates, we are reviewing these rates and considering any changes that may be appropriate,” Lane said. “We will examine how these posted rates are currently used by market participants to see how any possible changes could affect market functioning.”
Worldwide, policy makers need to rebuild trust both by replacing some benchmarks with market-based measures and by overhauling others, Lane said. “You probably have to do some combination of the two to have a set of financial benchmarks that are really trustworthy,” he said.
“We are actually near the completion of the big pieces of the reform agenda in response to” the global financial crisis, Lane said in response to a question after the speech.
Lane didn’t mention the outlook for the central bank’s 1 percent policy interest rate in the speech, reiterating in response to a student’s question that policy makers focus on bringing inflation to the bank’s 2 percent target.
“Recently of course, the Canadian economy has had still a situation of significant excess supply and we expect that it will take somewhere around a couple of years to get back to the inflation target and to get the economy back to its potential,” he said.
Canada was “fortunate” there was no need to make major asset purchases, also known as quantitative easing, during the last global recession, Lane said. While some emerging markets complained about the impact on local currencies of the Federal Reserve’s quantitative easing, each country should focus on creating the best domestic policies, he said.
“The fact that the emerging market economies were doing a lot better than the U.S. and some other advanced economies, I think, was something that was likely to lead to a strengthening of those currencies,” he said.
Lane drew guffaws from the audience when he was asked about the growing popularity of digital currencies such as Bitcoin and whether they could ever rival the Bank of Canada’s own currency for stability.
“Does it look more stable?” Lane said. “When you look at how much a cup of coffee would cost in Bitcoin, does that look like it was the same from one day to the next?”
The central bank has no mandate to oversee such currencies, Lane said, but “it’s something we are clearly watching very closely,” without elaborating.