Finance Report: Canadian and Global Interest Rate Benchmarks

This finance report provides an in-depth analysis of key financial concepts and benchmarks. It begins by defining the Central Bank's Policy Rate and its role in monetary policy, including its impact on commercial banks and exchange rate stability, using Canada's overnight interest rate as an example. The report then explores LIBOR (London Inter-Bank Offered Rate), detailing its function as a benchmark for short-term loans, its calculation method, and its advantages and disadvantages, including its eventual replacement by SOFR. Furthermore, the report delves into CDOR (Canadian Dollar Offered Rate), comparing it to LIBOR and explaining its role as a lending rate in the Canadian market. The report also includes a discussion on a speech by Governor Lynn Patterson, highlighting the importance of benchmark rates for stabilizing monetary conditions and the Bank of Canada's efforts to maintain the efficiency of the financial system. Finally, it provides a list of cited works to support the analysis.

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Finance

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Question 1
Central Bank’s Policy Rate refers to the interest rate used by central bank of any country to
implement its monetary policy position. The rate is generally set by the central banks’ policy
making committee. The bank rate set is also referred as the discount rates in many countries.
It is also referred as the rate of interest at which the central bank charges interest to the
commercial banks for providing loans and advances. The monetary policy of a country
becomes an important determinant for any commercial bank to borrow from central bank
whenever required, especially during shortage of funds of the commercial banks. This fixing
up of an interest rate is generally done to control the inflation rate and bring stability in
country’s exchange rates. A sudden change in the monetary policies or the rate of banks
might impact the country’s economy. For instance, Canada’s central bank is known as The
Bank of Canada. The Bank of Canada refers its interest rate as the overnight interest rate
which means that the commercial banks will be able to borrow money for a time period of
one day. On the other hand, Reference rate refers to a benchmark used to determine or fix
other interest rates in any country. Reference rates are commonly used to set the short-term
interest rates such as floating rate notes, swaps, and loans. Interest rates forms an integral part
of any country’s economy and hence it becomes very important for the country to monitor the
interest rates at a regular interval.
Question 2
LIBOR
The full form of LIBOR is “London Inter-Bank Offered Rate”. It is a rate which is used by
various leading banks across the world for providing short-term loan to its borrowers. It is a
benchmark of the floating rate for the borrowing of corporate loans (Kiff, 2012). The rate of
LIBOR for each day is published by the market intelligence department of Thomas Reuters.

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LIBOR rate is calculated by the IBA using trimmed mean where the figures are put in the
highest and the lowest quartiles and the average of the remaining numbers is done.
LIBOR is widely used in the global market because it represents the lowest rate of borrowing
between various banks and other financial institutions. Another importance of LIBOR is it is
used for setting up of the settlement prices for interest rate future contracts that further help
various companies to hedge the interest rate
In spite of having various advantages there exists a disadvantage of LIBOR i.e. LIBOR is not
based on the real transactions that takes place in the banks. In April 4, Fed has launched a
new USA benchmark rate known as the Secured Overnight Financing Rate which is likely to
replace the LIBOR. LIBOR is getting replaced because there were some charges against the
low level traders and there were few big banks operating in the world who were in the
scandal. This is when it was realized that the concept of LIBOR has to change.
Question 3
CDOR
The full form of CDOR is “Canadian Dollar Offered Rate”. It is the Canadian tax rate and it
is similar to LIBOR. CDOR also acts as a financial benchmark which is industry determined.
CDOR is the recognized benchmark which is widely used for acceptance of Canadian
bankers with a maturity term of one year or less than one year. CDOR is calculated by using
the average of the received submissions. Submissions are basically ranked on the basis of the
lowest and the highest rate which is being discarded.
In the Canadian market CDOR is that rate that helps the contributors in the Canadian market
to provide credit to the various corporate clients. CDOR tracks the expectation from the
various Canadian banks.

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Difference between CDOR and LIBOR
LIBOR is the borrowing rate. The rate at which the corporate clients can borrow money from
the banks and other financial institutions whereas CDOR is the lending rate. The rate at
which the banks and other financial institutions lend money to the clients. CDOR do not
directly reflect the worthiness of the credit of the submitter whereas LIBOR is the estimated
rate where the various contributors believe that they can borrow from the unsecured bank
market.
CDOR was going to get replaced because immediately after the financial crisis the CDOR
rate became very less volatile compared to the rate of LIBOR. Another problem which has
arised due to the replacement of the CDOR is the banks of Canada are facing the pressure of
funding when the spread between OIS and CDOR got widened.
Question 4
In the speech, Governor Lynn Patterson explains about the issues related to the interest rates
and their importance to Canadian and international financial markets. The Governor
explained the importance of setting up of a benchmark rate to stabilize the monetary
conditions of Canada or any other given country. The setting up of the benchmarks will help
the country to meet their inflation target and maintain the efficiency of the financial system.
The Bank of Canada is playing an important role in making concrete changes in its
benchmark rates as these rates should be resilient to the stress offered by the market. The
Canadian benchmark rates require being transparent and principles that are based on rates,
prices and values backed up by the forces of supply and demand. The country should also
develop new benchmarks used on risk-free rates which will accomplish two objectives, i.e.,
firstly it would reduces the dependency on a single benchmark and secondly, allow
counterparties to select the desired benchmarks. Canada’s benchmark rate is known as CDOR
(Canadian Dollar Reference Rate). This rate is used generally for loans, floating rate notes

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and derivates. CDOR was originally introduced by the Canadian banks as their lending rate
and also this would help in calculating a benchmark rate for the Banker’s Acceptance Market.
Canadian benchmark rates play an important role in the efficient functioning of their financial
markets. The concern for the Canadian benchmarks is its expiry dates and hence the banks
are taking countermeasures to tackle such issues.

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Works Cited
Global-rates.com, 2018. BOC Key Interest Rate - Canadian Central Bank’s Interest Rate.
Retrieved from https://www.global-rates.com/interest-rates/central-banks/central-
bank-canada/boc-interest-rate.aspx
International Monetary Fund, 2018. What Is the Central Bank Policy Rate? Retrieved from
http://datahelp.imf.org/knowledgebase/articles/484375-what-is-the-central-bank-
policy-rate
Kiff, John. "Back to Basics-What Is LIBOR?-The London interbank rate is used widely as a
benchmark but has come under fire." Finance and Development-English Edition, vol.
49, no. 4, 2012, pp. 32.