The Federal Reserve Bank of New York, in cooperation with the Treasury Department’s Office of Financial Research (OFR), announced on November 4, 2016, that it was considering publishing three benchmark rates based on overnight repurchase agreement (repo) transactions collateralized by Treasury securities. The three proposed rates would be based upon transaction-level data from various segments of the Treasury repo market. The November 4 statement noted that the composition of the rates could be modified to incorporate additional data sources, such as information on bilateral repo transactions.
Since that time, the Federal Reserve has analyzed data obtained from Depository Trust and Clearing Corporation’s (DTCC) Fixed Income Clearing Corporation (FICC) to examine the possibility of including cleared bilateral repo transactions into the proposed Treasury repo rates.
An important difference between FICC-cleared bilateral Treasury repo and both tri-party repo and GCF repo is that the bilateral transactions are not limited to general collateral (GC) transactions, but include repo transactions motivated by the acquisition of specific Treasury collateral (referred to as “specials” transactions). Staff analysis suggests that a simple trimming mechanism may help to limit the influence of specials transactions on the benchmark rate calculations.
After assessing the impact of incorporating the trimmed data into the rates, it was concluded that the addition of the new data in the broadest proposed benchmark repo rate would result in a robust measure of Treasury financing rates across a broad range of market segments. In addition, based in part on feedback from market participants, Federal Reserve open market operations will not be included in any of the benchmark repo rates.
Under the revised proposal the Federal Reserve will produce the three benchmark rates noted below. The first two rates are identical to those proposed in the November 4, 2016 statement. The third proposed rate—the Broad Treasuries financing rate—differs from the original proposal by including the cleared bilateral transaction data and excluding Federal Reserve open market operations.
- Narrow general collateral repo rate: As currently envisioned, this rate would be based on transaction-level data from a tri-party repo clearing platform.1 This rate would not include Federal Reserve transactions in the repo market.
- Broad general collateral repo rate: As currently envisioned, this rate would be based on the same transaction-level data as the first rate plus activity occurring within DTCC’s General Collateral Financing (GCF) Service. This rate would not include Federal Reserve transactions in the repo market.
- Broad Treasury financing rate: As currently envisioned, this rate would be based on the same transaction-level data as the second rate plus trimmed FICC-cleared bilateral Treasury repo transactions. This rate would not include Federal Reserve transactions in the repo market. Due to the nature of the bilateral data, this rate will not consist exclusively of GC transactions.
The Federal Reserve will seek public comment on the composition and calculation methodology for these rates before adopting a final publication plan.
In the construction and publication of these benchmark repo rates, the New York Fed will endeavor to adopt policies and procedures consistent with best practices for financial benchmarks, to the extent appropriate. Given these changes to the proposed rate composition, the revised publication date of the benchmark rates is expected to be in the first half of 2018.
Data Collection for Overnight Treasury Repo Rates
These rates would rely on several sources of transaction-level data. Initially, this would include tri-party repo data collected from Bank of New York Mellon (BNYM), GCF data obtained from DTCC, and FICC-cleared bilateral Treasury repo data obtained from DTCC.
Proposed Calculation Methodology and Summary Statistics
Each benchmark repo rate would be calculated as a volume-weighted median of trades, in line with the calculation of the Effective Federal Funds Rate and Overnight Bank Funding Rate. For the Broad Treasury financing rate, the cleared bilateral data will be trimmed to control the influence of specials transactions before the calculation of the volume-weighted median. Additional summary statistics, such as transaction volume and measures of dispersion, would accompany the publication.
1 Because JP Morgan Chase (JPMC) has announced the firm’s exit from the tri-party settlement and clearing business, the New York Fed would initially utilize only data collected from Bank of New York Mellon (BNYM). BNYM’s share of the market should be representative of the tri-party market as JPMC expects to have the majority of their clients transferred to the BNYM system in the near future.