The Alternative Reference Rates Committee (ARRC), a group of major banks convened by the Federal Reserve to explore LIBOR alternatives, announced it has identified a broad Treasuries financing rate as best suited for use in certain new U.S. dollar derivatives and other financial contracts. The committee will develop implementation plans and publish a final report later this year.
Need for new benchmark. In its 2014 annual report, the Financial Stability Oversight Council (FSOC) said that reliance on the U.S. Dollar London Interbank Offered Rate (USD LIBOR) might pose a threat to market integrity, to the safety and soundness of individual financial institutions, and to U.S. financial stability. FSOC explained that a reference rate that is not anchored in observable transactions, or that relies overly on transactions in a relatively low-volume market, increases the potential for manipulation. Further, low levels of activity in unsecured interbank markets meant that LIBOR might not be sustainable.
FSOC recommended that U.S. regulators coordinate with foreign regulators, international bodies, and market participants to identify alternative interest rate benchmarks and develop a plan for transition. The Federal Reserve convened the ARRC to accomplish this.
Treasury repo financing rate. After considering input from market participants, the ARRC identified a broad Treasury repurchase (repo) financing rate, described in a NY Fed policy statement and blog post, as the preferred alternative. The ARRC weighed several factors in selecting the 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.
Next, the ARRC will refine its proposed transition plans and develop implementation options in consultation with its Advisory Group as well as through broader outreach efforts. The ARRC plans to publish its final report later this year before implementation begins.
"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," said Sandra O’Connor, ARRC chair.
CFTC Acting Chairman J. Christopher Giancarlo welcomed the decision, saying a broad Treasuries repo rate will encourage a wide range of market participants to use the reference rate, which will strengthen the financial system.
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