FRB Seeks Comments on Proposed Repo-Based Reference Rates

The Board of Governors of the Federal Reserve System (“FRB”) issued a request for public comment on a proposal to publish three new benchmark interest rates based on overnight repurchase agreement (“repo”) transactions backed by Treasuries.

According to the FRB, the following rates would be produced in coordination with the Office of Financial Research:

  • Secured Overnight Financing Rate, which would be the “broadest measure of rates on overnight Treasury financing transactions” by including tri-party repo data from Bank of New York Mellon (“BNYM”), as well as cleared bilateral and General Collateral Financing (“GCF”) repo data from the Depository Trust & Clearing Corporation (“DTCC”). This rate was recently chosen by the Alternative Reference Rates Committee to be used as the alternative to U.S. dollar LIBOR.
  • Tri-Party General Collateral Rate, which would be based only on tri-party repo data from BNYM only.
  • Broad General Collateral Rate, which would be based on tri-party repo data from BNYM, as well as cleared GCF repo data from DTCC.

The FRB noted that since these rates are based on Treasury-backed repo data, they are “essentially risk-free.” FRB is proposing to use a “volume-weighted median” as the “central tendency measure” for the aforementioned rates. The FRB is also proposing to publish the reference rates and accompanying summary statistics at 8:30 a.m. Eastern time, each morning beginning in mid-2018.

FRB is soliciting comments from the public, which must be submitted within 60 days of publication in the Federal Register.

Lofchie Comment: Note that these rates are for fully collateralized transactions, while LIBOR was (at least in theory) a rate for uncollateralized transactions. It would be informative to see how these rates perform in terms of financial stress. For example, would it be the case that a “flight to safety” results in the Secured Overnight Financing Rate declining when rates generally are rising to reflect a perception of increased risk?