Fed Seeks Comment on Three Proposed Borrowing Benchmarks

By Gabriel T. Rubin and Katy Burne Features Dow Jones Newswires

The Federal Reserve on Thursday requested public comment on three proposed reference rates for firms using U.S. Treasurys as collateral for short-term loans, marking another step in the central bank's efforts to replace a scandal-plagued interest-rate benchmark.

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The new rates are meant to provide a more reliable data set for overnight borrowing costs across Wall Street, principally for participants in the repurchase agreement, or repo, market. In a repo, lenders make short-dated loans, usually taking government securities as collateral until the trades are unwound.

One of the Fed's three proposed reference rates, which the Fed said Thursday would be called the Secured Overnight Financing Rate, recently was selected by an industry committee sponsored by the Federal Reserve Bank of New York to replace U.S. dollar Libor. That benchmark has been used for decades to price hundreds of trillions of dollars of securities and derivatives across the globe.

Fed governor Jerome Powell said in a statement that the new benchmark "will be derived from the deepest, most resilient funding market in the United States. As such, it represents a robust rate that will support U.S. financial stability."

Regulators are pushing banks and others to transition the terms of financial contracts away from Libor, or the London interbank offered rate, after the industry collectively was fined billions of dollars for instances where firms were found to be rigging the benchmark. Libor isn't based on real transaction data, but on forward-looking bank surveys.

A U.K. regulator announced last month that Libor would be phased out, with the transition to alternate benchmarks taking place by the end of 2021.

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In a Wall Street Journal opinion column earlier this month, Mr. Powell and Commodity Futures Trading Commission Chairman J. Christopher Giancarlo said Libor replacements will take years to fully phase in.

In the U.S., transitions are voluntary, and 15 banks in June voted to select the SOFR rate, the broadest measure of overnight repo borrowing costs backed by Treasurys, as the best replacement. The rate isn't yet live.

Both the SOFR rate and a second rate proposed will include data taken from repo trades settled by Bank of New York Mellon Corp. and processed by Depository Trust & Clearing Corp. A third rate, to be called the Tri-Party General Collateral Rate, or TGCR, is based solely on data from BNY.

The New York Fed said in November that the publication of new reference rates is "intended to improve transparency of the repo market by increasing the amount and quality of information available about the market for overnight" repos.

Currently, regulators believe there isn't enough information available on the transactions to inform market participants.

The Fed, in cooperation with the Treasury Department's Office of Financial Research, will take comments for 60 days after the proposals are published in the Federal Register.

Write to Gabriel T. Rubin at gabriel.rubin@wsj.com and Katy Burne at katy.burne@wsj.com

(END) Dow Jones Newswires

August 24, 2017 16:32 ET (20:32 GMT)