U.S. Markets

CME to offer repo-backed futures and options

(Reuters) - The CME Group CME.O said on Wednesday that it will develop futures and options based on the repurchase agreement market, after a bank committee in June selected a benchmark repo rate to be used as an alternative to Libor in derivatives transactions.

The Alternative Reference Rates Committee (ARRC) selected a broad repo rate as a new benchmark at the behest of regulators, including the Federal Reserve, which worried that a decline in short-term bank lending since the 2008 financial crisis undermined faith in Libor, as the London interbank offered rate is known, and posed risks to the trillions of dollars of derivatives backed by the rate.

Around $150 trillion in private and exchange-traded derivatives are based on U.S. dollar-based Libor.

The CME said it expects to introduce the new repo-backed futures and options, pending regulatory approvals, after the New York Fed and U.S. Treasury Office of Financial Research begin publishing the rate, expected in the first half of 2018.

Agha Mirza, CME’s global head of interest rate products, said in an interview that the company is speaking with market participants about the design of the contracts, noting that the rate will likely be used to back shorter-term derivatives.

“The ARRC-chosen broad repo financing rate is an overnight rate, and therefore it naturally fits in with the short-end of the curve,” Mirza said.

Mizra added that the CME may offer liquidity incentive programs if it decides they are necessary.

The CME’s Eurodollar futures contracts are based on Libor and are frequently used by banks to hedge privately traded Libor-based interest rate swaps.

Reporting by Karen Brettell; Editing by Leslie Adler