Noon Average Rate Contract (NARC)

What Is a Noon Average Rate Contract (NARC)?

A Noon Average Rate Contract (NARC) was a type of currency forward agreement that utilized the official exchange rate published by a central bank at noon each business day.

Developed by the Bank of Canada (BOC), NARCs primarily referenced the forex rate between the U.S. dollar and the Canadian dollar for the rest of the trading day. In 2017, the BOC discontinued the noon rate and replaced it with a single indicative rate, leading to the cessation of NARC trading.

Key Highlights

• NARCs were forex contracts based on the Bank of Canada's official noon exchange rate, released daily at 12:00 p.m.
• These contracts were mainly used between the U.S. and Canadian dollars to manage foreign exchange and currency risks.
• The Bank of Canada's shift to a continuously updated USD/CAD rate in 2017 ended the use of noon average rate contracts.

How Noon Average Rate Contracts (NARCs) Worked

The noon rate served as a benchmark set by the Bank of Canada, published daily around midday. It was calculated based on a three-minute trading window between 11:59 a.m. and 12:01 p.m. While the BOC published noon rates for various currency pairs, the USD/CAD pair was the most widely utilized. Contracts involving other currencies often relied on different daily reference rates.

Traders and corporations used the noon rate to perform forex calculations between two currencies, especially the U.S. and Canadian dollars. This rate was released before the market close rate, which came out at 4:30 p.m. The Bank of Canada discontinued the noon rate publication in 2017.

NARCs were designed to help businesses and investors hedge against currency risk—losses arising from fluctuations in exchange rates when conducting transactions in foreign currencies. These contracts were marked to market daily. The contract's agreed-upon exchange rate was compared to the daily noon rate, and the parties settled any differences in cash accordingly.

Important Considerations

In March 2017, the Bank of Canada decided to cease publishing the noon rate. Instead, it began releasing a single daily forex rate for 26 currencies against the Canadian dollar, including the USD, EUR, and GBP.

To ease the transition, the BOC maintained both the noon and closing rates from March 1 to April 28, 2017. Starting May 1, 2017, the single indicative rate became effective and is now published daily by 4:30 p.m.

Note

The Bank of Canada no longer publishes noon rates and provides only one indicative exchange rate at the end of each trading day.

Example of a Noon Average Rate Contract (NARC)

Consider a Canadian company needing to sell $1 million USD in one year—perhaps from sales made in the U.S. The USD/CAD forward rate at the time is 1.0655. The company locks in this rate with a counterparty through a NARC, aiming to protect against the possibility of the U.S. dollar weakening or the Canadian dollar strengthening.

Once locked in, the contract's value is adjusted daily based on fluctuations in the USD/CAD pair, using the Bank of Canada's noon rate as the benchmark prior to 2017.

If after one year the noon rate is 1.03, the company benefits by receiving CAD 35,500 more than the current market rate ((1.0655 - 1.03) × $1 million). Conversely, if the noon rate is 1.08, the company misses out on a favorable currency move and is CAD 14,500 worse off ((1.0655 - 1.08) × $1 million) than if it had waited to exchange at the prevailing rate. Since forward contracts are traded over-the-counter (OTC), the involved parties can customize contract terms.

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