The US appears to have settled upon a reference rate to
replace the current London Interbank Offered Rate (Libor).
At a meeting last week, the Alternative Reference Rates
Committee (ARRC) identified a broad Treasuries repo financing rate, which the
Federal Reserve Bank of New York has proposed publishing in cooperation with
the Office of Financial Research (OFR), as the rate that, in its consensus
view, represents best practice for use in certain new US dollar derivatives and
other financial contracts.
The ARRC says it considered a variety of factors in
selecting a broad repo rate, including the depth of the underlying market and
its likely robustness over time; the rate’s usefulness to market participants;
and whether the rate’s construction, governance, and accountability would be
consistent with the IOSCO Principles for Financial Benchmarks.
“The ARRC believes that, measured against these criteria, a
broad repo rate is the most appropriate for wide-spread and long-term adoption
as a reference rate,” it says in a statement published by the New York Fed. “The
ARRC considered the input of a wide range of market participants in making its
recommendation, holding a public roundtable and consultation to discuss its Interim
Report and seeking the views of an advisory group of end users, a significant majority
of which had expressed a preference for a Treasuries repo rate.
“The ARRC will refine its proposed transition plans,
developing implementation options for its recommended rate in consultation with
the members of its advisory group as well as through broader outreach efforts,”
it adds, revealing that it plans to publish its final report later this year
before implementation is expected to begin.
“The ARRC today took an important step to strengthen the
financial system by selecting a robust alternative reference interest rate. I
am proud of the committee’s work, and look forward to our continued efforts to
promote the widespread adoption and use of this rate,” says Sandra O’Connor,
Chair of the ARRC.
Christopher Giancarlo, acting chair of the US Commodity
Futures Trading Commission, adds, “I applaud the important work and the
thoughtful consideration of the ARRC in selecting a strong alternative
reference interest rate to replace Libor. A broad Treasuries repo rate will
encourage a wide range of market participants to use this reference rate, which
will strengthen our financial system. I look forward to the ARRC’s final report
later this year.”