OSFI Discusses Benchmark Rate Transition, Sets Out Work Priorities

The letter on CDOR transition specifies that OSFI expects all new derivative contracts (bilateral, cleared, and exchange-traded) and securities (assets and debt liabilities) to transition to the alternative reference rates by June 30, 2023, with no new CDOR exposure being booked after that date. By June 28, 2024, OSFI expects that federally regulated financial institutions will have transitioned all loan agreements referencing CDOR. As part of this transition, OSFI expects that federally regulated financial institutions:

• prioritize system and model updates to accommodate the use of Canadian Overnight Repo Rate Average (or any alternative reference rates, as necessary) prior to June 28, 2024.
• ensure adequate contingency planning is in place to respond to potential issues that may emerge at cessation.

Additionally, OSFI recognizes that the cessation of CDOR will have implications for funding and lending instruments, including the use of Banker’s Acceptances. Considering this, OSFI will review capital and liquidity guidance to ensure any specific references to, and treatments for, the Banker’s Acceptances remain appropriate after cessation of CDOR. For federally regulated financial institutions with material exposure to CDOR, OSFI will be considering CDOR transition efforts and project delivery within its supervisory risk assessments and will take supervisory actions, as appropriate, based on its evaluation of transition preparedness. This transition will elevate the Canadian benchmark standards and align Canada with other jurisdictions that are adopting similar standards.

Coming back to the OSFI work plans, the departmental plan highlights the key focus areas of OSFI over the coming year, including the following:

• Establishing an expanded and dedicated team for climate risk that builds out the work of OSFI's climate risk working group
• Advancing analysis and insights with respect to the digitalization of business model disruption, cyber risk, digital money, third-party risk management, and operational resilience
• Developing and implementing a strategic response framework for emerging risks that reflects a life cycle in prudential oversight, from policy innovation and risk identification through to policy setting, and onto supervision and ongoing review
• Establishing more focused and applied research capabilities to improve the identification and analysis of emerging risks in both supervisory and regulatory environments
• Developing more differentiated risk ratings for institutions, particularly for Stage 0 institutions
• Building greater risk appetite for earlier corrective actions into the supervisory framework
• Investing substantially in the updating and ongoing maintenance of the supervisory framework to better reflect the assessment of broad macro-risks, financial risk, non-financial risks, and operational resilience for regulated entities
• Implementing enhancements to OSFI's supervisory management system to achieve better data quality, more effective reporting of risk and more insightful analysis

Related Links

• Letter on CDOR Transition
• Press Release on Strategic Plan
• Strategic Plan
• Departmental Plan
• Statement on Climate Strategy

Keywords: Americas, Canada, Banking, Insurance, Securities, Basel, Lending, Interest Rate Benchmarks, Benchmark Reforms, CDOR, CORRA, Departmental Plan, Strategic Plan, Cyber Risk, Operational Risk, Reporting, OSFI