The Federal Reserve Bank of New York (New York Fed) publishes the federal funds effective rate (federal funds rate) on a daily basis.1 This rate is calculated using data on transactions that occurred in the federal funds market on the previous day. The New York Fed plans to make an improvement to the process for calculating the federal funds rate, as described below. This change is solely intended to make the calculation process more robust, and no inferences should be drawn about the stance of monetary policy from its implementation.
In addition, to increase the amount and quality of information available to the public about the overnight funding costs of depository institutions, the New York Fed is preparing to publish an additional overnight rate on its public website. This rate—referred to as the overnight bank funding rate—will be calculated based on both federal funds transactions and the Eurodollar transactions of U.S.-managed banking offices.
Changes to the calculation of the federal funds rate and publication of the overnight bank funding rate will be implemented after revisions to a Federal Reserve data collection are complete, which is expected within approximately one year. The New York Fed will announce an implementation date and additional information closer to the effective date of the change.
Changes to the Process for Calculating the Federal Funds Rate
In light of recent international focus on best practices for reference rates, the New York Fed reviewed the process for calculating the federal funds rate.2 As a result of this review, the New York Fed intends to enhance the federal funds rate calculation process by transitioning the data source from data supplied by federal funds brokers to transaction-level data collected directly from depository institutions. This Federal Reserve data collection (the FR 2420) was initiated in April 2014 and collects data on unsecured money market borrowing by depository institutions on a daily basis.3 These data include both trades executed through brokers and those negotiated directly between counterparties. As such, the FR 2420 captures a greater share of federal funds activity than brokered data alone and provides a larger base of transactions for the calculation of the effective federal funds rate. The data also allow for greater insight into the transactions underlying the federal funds rate, supporting a robust calculation process. The New York Fed plans to make this change after certain revisions have been made to the FR 2420 data collection.4
Introduction of an Overnight Bank Funding Rate
The FR 2420 report collects data on several types of unsecured borrowings by depository institutions. In the overnight tenor, these data comprise both federal funds and Eurodollar transactions, which collectively represent a substantial proportion of banks’ overnight borrowings. Currently, there is little transaction-based information available to the public on broad overnight funding costs for U.S.-based banking offices. In order to provide insight into these costs, the New York Fed expects to begin publishing an overnight bank funding rate that is calculated using transactions in both federal funds and Eurodollars. The Eurodollar transactions included in the overnight bank funding rate will represent borrowings booked at offshore branches that are managed by U.S.-based banking offices, and primarily reflect transactions executed in the United States. The overnight bank funding rate is expected to be published daily based on trades executed on the previous day, as reported on the FR 2420. The publication of this rate will commence after revisions to the FR 2420 collection are complete.5
1 Federal funds data can be found on the New York Fed website. For a definition of federal funds, please refer to Regulation D.
2 For information on principles guiding this international work, please refer to the OICU-IOSCO “Principles for Financial Benchmarks, Final Report”.
3 FR 2420 forms and instructions can be found on the New York Fed website.
4 Revisions to the FR 2420 report will be sought through a Federal Register Notice. For federal funds data, proposed revisions are expected to include a change to the reporting panel and refinements to certain definitions.
5 For Eurodollars, the proposed revisions are expected to include additional reporting from International Banking Facilities and U.S. branches and agencies of foreign banks.