N.Y. Fed develops U.S. repo benchmark rates

NEW YORK (Reuters) - The New York Federal Reserve said on Friday it is developing, with the cooperation of the U.S. Office of Financial Research, three benchmark rates based on overnight repurchase agreements in a bid to increase transparency in that market.

Federal Reserve and New York City Police officers stand guard in front of the New York Federal Reserve Building in New York, October 17, 2012. REUTERS/Keith Bedford/File Photo

One of these repo rates could serve as a possible replacement for the London Interbank Offered rate, or Libor, which is a benchmark for some $350 trillion worth of financial products worldwide, according to analysts.

Libor has been in regulators’ crosshairs since its credibility was tarnished by a rate-rigging scandal emerging from the 2008 financial crisis. About a dozen global banks collectively have paid tens of billions of dollars in fines to settle the matter.

In May, the Alternative Reference Rates Committee (ARRC), a group of global banks and clearing houses working with U.S. regulators, identified a rate based on repos backed by Treasury securities or a general collateral (GC) rate as a possible replacement for Libor.

The group named the New York Fed's Overnight Bank Funding Rate (OBFR) as an another possible candidate, which was launched in March. USONBFR=

“The ARRC have discussed GC repo or OBFR as an alternative to LIBOR. On the former, they have discussed constructing an index for GC repo rates,” Citi interest rate analyst Steve Kang said.

A key advantage of OBFR and a repo-based rate over Libor is they are less prone to manipulation because they are calculated from actual trades in the wholesale funding markets rather than survey responses, analysts said.

The publication of the proposed repo rates, based on overnight repos backed by Treasury securities, is scheduled for initial publication by late 2017 or early 2018, the New York Fed said in a statement.

The first repo rate would be based on trades from tri-party repo clearing systems, excluding the Fed’s transactions in the repo market, the New York Fed said.

In a tri-party repo, an investor extends a loan to a bond dealer which uses a Treasury issue as collateral. A clearinghouse makes sure there is sufficient collateral for the loan at the agreed upon interest rate.

The second rate would be based on trades used in the first rate and tri-party activity in the Depository Trust & Clearing Corp’s general collateral financing service, it said.

The third rate would be based on trades used in the second rate and the Fed’s overnight repo trades.

Reporting by Richard Leong; Editing by Chizu Nomiyama and Bill Rigby