The Federal Reserve Board has requested public comment on a
proposal for the Federal Reserve Bank of New York, in cooperation with the
Office of Financial Research, to produce three new reference rates based on
overnight repurchase agreement (repo) transactions secured by Treasuries.
These rates will replace the existing London Interbank
Offered Rate (Libor) mechanism as the benchmark for interest rates.
The three proposed benchmarks are a Tri-party General Collateral Rate (TGCR), a Broad General
Collateral Rate (BGCR), and a Secured Overnight Financing Rate (SOFR).
The TGCR would measure the rate of return available on overnight
repo transactions against Treasury securities in the tri-party repo market,
excluding General Collateral Finance (GCF) Repo and transactions in which the
Federal Reserve is a counterparty. As currently envisioned, the New York Fed
would calculate the rate based on the transaction-level tri-party data
collected from Bank of New York Mellon under the Federal Reserve’s Board of
Governors’ supervisory authority. This rate would focus on the
dealer-to-customer activity in tri-party repo and would capture a narrower set
of transactions relative to the other two proposed rates, the Fed says.
Meanwhile, the BGCR would provide a broader measure of rates
on overnight Treasury General Collateral (GC) repo transactions. The New York
Fed would calculate the rate based on the same transaction-level tri-party data
in the TGCR plus GCF Repo data obtained from DTCC Solutions above. This rate
would therefore reflect both dealer-to-customer and interdealer repos, the Fed
says, adding that by including data from different tri-party platforms, this
rate would represent a broader, more diverse transaction set than the first,
resulting in greater resiliency to market evolution. “However, idiosyncratic
pricing behaviour over month- and quarter-ends in the GCF Repo transaction base
could result in divergence from other money market rates depending on relative
volume in the GCF Repo market,” it warns.
The third proposed rate is the most comprehensive, the SOFR
will take rates on overnight Treasury financing transactions including
bilateral Treasury repo transactions cleared through the Fixed Income Clearing
Corporation’s DVP service, filtered to remove some (but not all) transactions
considered “specials.” The rate calculation will be based upon the tri-party
data from BNYM, GCF Repo data from DTCC Solutions, and FICC-cleared bilateral
repo data from DTCC Solutions. This rate would capture the broadest set of
transactions, resulting in the rate most resilient to market evolution, but
would not be a pure GC repo rate, the Fed says.
Apparently throwing his weight behind the third proposed
benchmark, Federal Reserve Board governor, Jerome Powell, says, “SOFR will be
derived from the deepest, most resilient funding market in the United States.
As such, it represents a robust rate that will support US financial stability.”
The Fed says the three interest rates will be constructed to
reflect the cost of short-term secured borrowing in “highly liquid and robust
markets”. It adds, “Because these rates are based on transactions secured by US
Treasury securities, they are essentially risk-free, providing a valuable
benchmark for market participants to use in financial transactions.”
Comments on the proposal to produce the three rates are
requested within 60 days of publication in the Federal Register, which is