Fed Requests Comment on Proposed LIBOR Alternatives | Practical Law

Fed Requests Comment on Proposed LIBOR Alternatives | Practical Law

The Federal Reserve Board requested public comment on three new proposed reference rates as alternatives to LIBOR.

Fed Requests Comment on Proposed LIBOR Alternatives

Practical Law Legal Update w-010-1197 (Approx. 4 pages)

Fed Requests Comment on Proposed LIBOR Alternatives

by Practical Law Finance
Published on 31 Aug 2017 • USA (National/Federal)
The Federal Reserve Board requested public comment on three new proposed reference rates as alternatives to LIBOR.
On August 24, 2017, the Federal Reserve Board (FRB) requested public comment on three proposed reference rates as alternatives to LIBOR that are based on overnight repurchase agreement (repo) transactions on US Treasury securities.
The three proposed rates include:
  • The Tri-Party General Collateral Rate (TGCR), which is based on transaction-level tri-party repo data from Bank of New York Mellon (BNYM). The TGCR excludes general collateral financing (GCF) repo data and transactions in which the Federal Reserve (Fed) is a counterparty. The TGCR focuses on dealer-to-customer activities and captures the narrowest set of transactions of the three proposed rates.
  • The Broad General Collateral Rate (BGCR), which is based on transaction-level tri-party data from BNYM as well as GCF repo data from the Depository Trust & Clearing Corporation (DTCC). The BGCR focuses on both dealer-to-customer as well as interdealer activities and reflects a broader set of transactions than the TGCR.
  • The Secured Overnight Financing Rate (SOFR), which is based on transaction-level tri-party repo data from BNYM, GCF repo data from DTCC, and bilateral repo data from DTCC. SOFR is the broadest of the proposed alternative rates. The SOFR was recommended in June 2017 by the Alternative Reference Rates Committee as an alternative to LIBOR (see Legal Update, Fed Committee Announces GC Repo Rate as LIBOR Alternative for Financial Contracts).
The proposed reference rates would be calculated with the following methods:
  • Using a volume-weighted median as the central tendency measure.
  • Publishing summary statistics with the daily rate publication.
  • Publishing the three rates and their summary statistics at 8:30 a.m. eastern time.
  • Publishing any necessary revisions of the rates on the same day at around 2:30 p.m. eastern time, accompanied by updated summary statistics.
  • Excluding trades between affiliated entities and including open transactions for which pricing resets daily.
The proposed reference rates are intended for publication in mid-2018 by the Fed in cooperation with the Office of Financial Research (OFR).
Alternatives to LIBOR have been under consideration in recent years due to evidence of LIBOR abuse and rate-rigging (see Practice Note, What’s Market: Eurodollar Rate/LIBOR Interest Rate Provisions and Legal Update, Proposed Changes to LIBOR). The new proposed reference rates are intended to increase transparency in US financial markets by providing information about transactions secured by US Treasury securities, which, according to the FRB, are a "risk-free benchmark" for other financial transactions.
The FRB is requesting comment on the proposed rates. Comments must be submitted by October 30, 2017 and may be submitted on the Federal eRulemaking Portal.