Three new financial reference rates — one of which is meant to replace the U.S. dollar “LIBOR” — that will be based on overnight repurchase agreement (repo) transactions secured by Treasury securities were announced as final plans by the Federal Reserve Board Friday.
The new reference rates, the Fed said, will begin in the second quarter of 2018 and have an “expected daily publication time” of no later than 8 a.m. ET daily. The publication time is new from that proposed (8:30 a.m.), and is based on comments received about the proposal. Among them: an 8:30 a.m. publication would be too late for some foreign financial markets and on certain days would coincide with some U.S. economic data releases.
In August, the Fed proposed that the Federal Reserve Bank of New York, coordinating with Treasury’s Office of Financial Research (OFR), produce and publish three rates based on overnight repo transactions on U.S. Treasury securities. The three rates (which the Fed dubbed, collectively, the “Treasury repo rates”) would be based on transaction-level data from various segments of the repo market.
In a release, the Fed said that each rate will be calculated as a volume-weighted median of transacted rates. The most comprehensive of the rates, the so-called “Secured Overnight Financing Rate” (SOFR), “will be a broad measure of overnight Treasury financing transactions,” the Fed said. The SOFR was selected by the agency’s Alternative Reference Rates Committee as the group’s recommended alternative to the U.S. dollar LIBOR (London Interbank Offered Rate).
According to the Fed, the SOFR will include “triparty repo data” from Bank of New York Mellon (BYNM) and cleared bilateral and GCF (“general collateral financing”) Repo data from the Depository Trust & Clearing Corporation (DTCC).
The Fed said a second rate, the “Triparty General Collateral Rate (TGCR),” will be “based solely on triparty repo data from BNYM. The third rate, according to central bank, will be the Broad General Collateral Rate (BGCR), which will be based on the triparty repo data from BNYM and GCF Repo data from DTCC.
“The three interest rates will be constructed to reflect the cost of short-term secured borrowing in highly liquid and robust markets,” the Fed said. “Because these rates are based on transactions secured by Treasury securities, they are essentially risk-free rates, providing a valuable benchmark for market participants to use in financial transactions.”