What Was a Noon Average Rate Contract (NARC)?
Established by the Bank of Canada (BOC), NARCs typically used the forex rate between the U.S. and Canadian dollar as a point of reference for the remainder of the day. The noon rate was abandoned and replaced with a single indicative rate by the BOC in 2017, and with that NARCs ceased to be traded.
- A noon average rate contract was a forex contract that used the Bank of Canada's official noon rate, published each day at 12:00 p.m.
- These contracts were established by the Bank of Canada mainly between the U.S. and Canadian dollars to help mitigate foreign exchange or currency risk.
- NARCs stopped trading following the Bank of Canada's decision to replace the noon rate with a continuously updated USD/CAD rate in 2017.
Understanding Noon Average Rate Contracts (NARCs)
The noon rate was a benchmark rate established by the BOC. Released every day around midday, it was based on a three-minute trading period in currency pairs between 11:59 a.m. and 12:01 p.m. While the Bank of Canada published noon rates for other currency pairs, the USD/CAD was the one was most heavily used. Noon average rate contracts involving currencies other than the Canadian dollar often used other daily benchmarks.
The noon rate was used by traders and companies that needed to make forex calculations between two currencies—notably, the U.S. and Canadian dollars. The rate was published ahead of the closing rate, which was released every day at 4:30 p.m. As noted above, the BOC scrapped the noon rate in 2017.
Noon average rate contracts used the noon rate posted by the Bank of Canada each day. These contracts are designed to help mitigate foreign exchange or currency risk. These are risks that stem from losses that come from currency fluctuations, especially when companies need to make transactions in a currency other than their own. Because NARCs are marked to market daily, the parties involved often hedge their currency exposure throughout the life of the contract. Since a contract's negotiated exchange rate was compared to the noon rate, the two parties settle the difference in cash.
The Bank of Canada decided to stop publishing and using the noon rate as of March 2017. The central bank began publishing forex rates only once a day for 26 currencies against the Canadian dollar, including the U.S. dollar, the euro, and the British pound.
The bank allowed traders and companies a transition period, where it continued to use the noon rate along with the closing rate between March 1 and April 28. The new single rate went into effect as of May 1, 2017. Single indicative rates for currency pairs are published by 4:30 p.m. every day.
The Bank of Canada stopped using noon rates in 2017 and only publishes a single indicative rate at the end of every day.
Example of Noon Average Rate Contract (NARC)
Let's assume Canadian Company A needed to sell $1 million US dollars in one year. This could be because they sold products in the U.S. and would be paid a lump sum of U.S. dollars for those products in the future. The USD/CAD forward rate at the time was 1.0655. They locked in this rate with another party via a noon average rate forward contract, likely because they thought the U.S. dollar may fall over the next year (or CAD would rise). Alternatively, they simply wanted to lock in a rate so they knew what they will get in CAD for the U.S. dollars they needed to sell in the future.
Once the rate is locked in, the contract is marked to market based on the daily fluctuations of the USD/CAD currency pair. Prior to 2017, the noon rate published by the Bank of Canada was used as the benchmark.
If in one year the USD/CAD noon rate is 1.03, Company A will be happy because it sold the U.S. dollars at 1.0655. They benefited by CAD 35,500 ((1.0655 - 1.03 x $1 million). If, on the other hand, the noon rate in one year is 1.08, they missed out on the advantageous currency move. They are CAD 14,500 (1.0655 - 1.08 x $1 million) worse off than if they didn't enter the contract and instead waited the year and sold the US dollars at 1.08. Since forward contracts trade over-the-counter (OTC), the parties involved can choose the terms of the contract.