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Fed Committee Announces GC Repo Rate as LIBOR Alternative for Financial Contracts
Practical Law Legal Update w-008-7954 (Approx. 4 pages)
Fed Committee Announces GC Repo Rate as LIBOR Alternative for Financial Contracts
by Practical Law Finance
| Published on 26 Jun 2017 • USA (National/Federal) |
The Alternative Reference Rates Committee (ARRC) announced the selection of the Overnight Treasury General Collateral Repo (GC Repo) Rate to be used as a benchmark alternative to LIBOR for short-term interest rates in US financial contracts.
On June 22, 2017, the Alternative Reference Rates Committee (ARRC), a committee created by the Federal Reserve, announced the selection of the Overnight Treasury General Collateral Repo (GC Repo) Rate to be used as a benchmark alternative to LIBOR for short-term interest rates in US financial contracts.
In a publication released on May 24, 2017, the Federal Reserve Bank of New York explained that this new rate will be based on transaction-level data from a tri-party repo clearing platform plus activity occurring within the Depository Trust and Clearing Corporation’s General Collateral Financing Service.
AARC has been considering a LIBOR replacement since evidence of widespread LIBOR abuse and rate-rigging over the past decade became evident (see DOJ LIBOR Manipulation Investigation Chart). In May 2016, ARRC issued an interim report summarizing its progress toward narrowing the set of potential rates that could be used as market alternatives to replace US LIBOR (see Legal Update, Fed Committee Issues Report on Alternatives to LIBOR).
ARRC chose a broad Treasuries repo financing rate, which the Federal Reserve Bank of New York had proposed in cooperation with the Office of Financial Research (OFR), as the rate that "represents best practice for use in certain new US dollar derivatives and other financial contracts." The GC Repo Rate was selected over the Overnight Bank Funding Rate (OBFR), an unsecured bank lending rate based on transactions in the federal funds and Eurodollar markets.
Repo rates are considered more transparent than LIBOR because they reflect actual traded rates whereas LIBOR is based on rates reported by traders, which have been subject to misreporting and manipulation. The new rate will be based on live, actual transactions and published by the Federal Reserve Bank of New York in coordination with OFR.
Over the course of its search, the ARRC weighed many factors in choosing the replacement reference rate including:
- The depth of the underlying market.
- The likely robustness of the market over time.
- The rate’s usefulness to market participants.
- Whether the rate’s construction, governance, and accountability would be consistent with the International Organization of Securities Commissions (IOSCO) Principles for Financial Benchmarks.
The ARRC plans to:
- Refine its proposed transition plans.
- Consult with members of its advisory group to develop implementation options.
- Publish its final report later this year before implementation is expected to begin.
Market participants have pointed out that it will take a long time for a new repo benchmark rate to replace LIBOR due to the large number of outstanding derivatives transactions that use LIBOR as the reference rate.
ISDA has published the following videos on benchmark reform available here:
- The Search for Alternative Risk-free Reference Rates, which discusses the work to select new risk-free rates and the plans to transition to them.
- Identifying Robust Fallbacks for the IBORs, which discusses ISDA’s work on developing robust fallbacks to key IBOR rates.
- The EU Benchmarks Regulation, which highlights key requirements of the EU Benchmarks Regulation.