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US chooses Treasury repo rate to replace LIBOR

First Published 23rd June 2017

On Thursday, the Alternative Reference Rates Committee (ARRC), a group of market participants assembled by the US government, selected a "broad Treasuries repo financing rate" as the eventual replacement for US dollar LIBOR. The new rate will be published by the Federal Reserve Bank of New York in conjunction with the Office of Financial Research, which was established under Dodd-Franck to promote financial stability.

The "broad Treasuries repo financing rate" will be based on transaction data from a variety of sources: tri-party repo (through Bank of New York Mellon); the DTCC's General Collateral Financing (GCF) service; and bilateral repo cleared by the DTCC's FICC subsidiary. Transactions by the Federal Reserve in the repo market will not be included so as to ensure the rate is set by the private sector.

The inclusion of bilateral repo means that specials will be included in the calculation of the rate, in addition to general collateral. In order to avoid distortions that could becaused by specials, a trimming process will be used, though the methodology has not yet been specified. After the data has been trimmed, the final rate will be calculated as a volume-weighted median of transactions.

A final report from the AARC is expected later in 2017, outling "transition plans" and providing "implementation options" for the new rate.

One institution that might be happy with the announcement is ICE/NYSE-LIFFE. Their repo futures, which reference the DTCC GCF rate, should see increased activity. The OTC market is likely to develop basis swaps allowing those with exposure to LIBOR to switch their risk to the new rate. However, the transition from LIBOR to the new rate will happen over years if not decades, given the volume of derivatives referencing LIBOR and the tenor of some of those products. While illiquid, USD interest rate swaps with 50 years to maturity are quoted and traded.