Bank of Canada Releases Key Insights on CORRA

On August 12, 2024, the Bank of Canada released a staff analytical note explaining the increase in volumes and resulting upward pressure related to the Canadian Overnight Repo Rate Average (CORRA).

The Canadian Overnight Repo Rate Average (CORRA) tracks the interest rate on Government of Canada (GoC) securities in the overnight lending market. It is calculated by the Bank of Canada based on Canadian-dollar transactions of GoC treasury bills and bonds in the overnight repurchase (repo) market. 

CORRA is significant because it influences interest rates in the economy. Understanding why it can differ from the Bank of Canada’s overnight policy rate is important, especially after recent market changes. Fluctuations in CORRA can affect borrowing costs, affecting mortgage rates and financing conditions.

On May 27, 2024, the settlement period for trading GoC bonds in Canada’s secondary market was shortened from two days to one. This change aimed to reduce risks for market participants by aligning with North American standards. However, this adjustment caused significant changes in the financial markets, particularly affecting CORRA.

After the settlement period was shortened, CORRA trading volumes surged and have remained high. This increase in volume has also pushed CORRA above the Bank of Canada’s policy interest rate. In response, the Bank altered its overnight repurchase agreement operations, or repo operations, to better align CORRA with its target rate. These overnight repos are part of the Bank’s regular activities to implement monetary policy.

On May 28, 2024, the volume of overnight repos that settle the same day increased, while the volume of tomorrow-next repos (which settle the next day) decreased. This shift reflects the move to a one-day settlement period for cash bond trades. As a result, market participants who previously used the tomorrow-next market to fund their bond trades switched to the overnight market. Hedge funds, in particular, increased their activity in the overnight repo market, often at higher interest rates.

The rise in interest rates for these overnight repos has put upward pressure on CORRA. This pressure comes from the increased demand for funding in the overnight market, which is now CORRA-eligible. Previously, this demand was met in the tomorrow-next market, which did not affect CORRA.

The paper finds that without the recent hedge fund trades in the overnight market, CORRA would be up to 3 basis points lower. The upward pressure on CORRA is due to the transition of trading volumes from the tomorrow-next market to the overnight market and the additional demand from hedge funds for overnight funding. These trades are now in the overnight market because of the one-day settlement change.

The Bank of Canada’s recent adjustments to its overnight repo operations were aimed at reinforcing the policy interest rate, but the analytical note suggests these operations have only been partially effective, and that there may need to be further changes or new tools introduced to maintain the policy rate, given the new market dynamics. 

For full details and findings, review the full Bank of Canada Staff Analytical Note: CORRA: Explaining the Rise in Volumes and Resulting Upward Pressure.