New York Fed Weighing Three New Benchmark Repo Rates

New York Fed Weighing Three New Benchmark Repo Rates

Benchmarks come as industry seeks alternatives to Libor

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The entrance to the Federal Reserve Bank of New York in lower Manhattan.Photo: Claudio Papapietro for The Wall Street Journal

By

Katy Burne

Updated Nov. 4, 2016 12:04 p.m. ET

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The Federal Reserve Bank of New York is considering publishing three new bank-borrowing rates to improve transparency in an arcane but critical corner of short-term lending across Wall Street called repurchase agreements, or “repos.”

The New York Fed on Friday said the new benchmark rates would all be based on overnight repo lending transactions backed by U.S. government debt, and likely would start publishing in late 2017 or early 2018 in coordination with the Treasury Department.

The proposed benchmarks come as a central-bank-sponsored group has been working since 2014 to find a credible alternative to the London interbank offered rate, which was discovered to have been manipulated by banks for their own benefit following the financial crisis.

The Alternative Reference Rates Committee earlier this year landed on two candidates, a new overnight bank borrowing rate launched by the Fed in March and a newly comprehensive bank repo rate that had never been calculated before. The Fed’s new repo rates likely will stand in for that second option in the ARRC’s discussions, traders and analysts said.

The Treasury and the New York Fed have been moving to bolster the repo market since weaknesses surfaced in the financial crisis, exposing a dependency by securities dealers on short-term funding through repos. In recent months, the government also has been plugging gaps in public data on repos in an effort to better understand the different array of lending arrangements and their influences on U.S. money markets.

Finding new benchmarks also was flagged in minutes from the Fed’s December 2015 interest-rate-setting meeting. At that meeting, the Fed discussed the possibility that it “in conjunction with the Office of Financial Research might publish a reference rate for overnight transactions collateralized by Treasury securities.”

In its statement Friday, the New York Fed said the publication of the new rates “is intended to improve transparency of the repo market by increasing the amount and quality of information available about the market.”

The New York Fed said its focus in the new publication of benchmarks would be Treasury-backed repos called GC repos, short for loans backed by “general collateral” debt. The proposed Treasury GC repo benchmarks would be based on transaction-level data provided by the industry, the Fed said.

The first rate would be based on triparty repos, or repo loans that are processed through third-party intermediaries. In doing so, the Fed would rely on transaction data from Bank of New York Mellon Corp., which this year picked up a major settlement role in triparty repos when J.P. Morgan Chase & Co. decided to retreat from the business in July.

The second rate would include all of the transactions used to compile the first rate and add other transactions processed by Depository Trust & Clearing Corp.

These two rates wouldn’t include repo loans involving the Fed, which itself employs repos to influence money markets when keeping interest rates in a narrow range.

The third repo rate would be based on triparty repos provided by BNY Mellon and DTCC as well as the Fed’s overnight bank funding rate that launched in March.

The New York Fed said it would seek public comment on the composition of the new rates and their calculation methodology before adopting a final plan. The bank cautioned that “one or more of the rates could be modified over time, as appropriate, to incorporate additional data sources,” such as new data on one-to-one repo loans that are harder to document.

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