June 29, 2017
Authored by: Matthew D'Amico
On June 22, the Alternative Reference Rates Committee (the “ARRC”) identified a broad Treasuries repo financing rate (the “Broad Treasuries Financing Rate”) that, according to the ARRC, in its consensus view represents best practice for use in certain new U.S. dollar derivatives and other financial contracts.
The work of the ARRC grew out of the past instances of manipulation of the LIBOR market which caused a loss of confidence in LIBOR – particularly as it had previously been determined and reported – as a reliable interest rate benchmark. That led the G20 to instruct the Financial Stability Board to review broadly-recognized interest rate benchmarks and devise a plan to ensure that the construction of these benchmarks are sound and used appropriately in the markets. According to the Working Group on Alternative Interest Rates initiated by the Federal Reserve in furtherance of the plan, the goals were two-fold: (1) strengthen the integrity of existing benchmark rates, and (2) develop alternative reference rates that would be free of many of the risks (including manipulation) associated with existing benchmarks. The Broad Treasuries Financing Rate would be one such alternative rate.
The Broad Treasuries Financing Rate would be based (with the Fed doing some “trimming”) on the following three types of transactions (1) repo transactions that settle in the tri-party repo market, (2) general collateral finance repos, and (3) Federal Reserve transactions.
It will be interesting to see how various markets react to this new benchmark, how long it might take to be broadly adopted in various markets, and whether it will replace LIBOR or other benchmarks in these markets.