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From Banking and Finance Law Daily, December 11, 2017

Fed finalizes production of new repo rates

By Charles A. Menke, J.D.

The Federal Reserve Board announced it is finalizing the production of three new reference rates based on overnight repurchase agreement (repo) transactions on Treasury securities. The three reference rates— the Secured Overnight Financing Rate (SOFR), Triparty General Collateral Rate (TGCR), and Broad General Collateral Rate (BGCR)—will be produced by the Federal Reserve Bank of New York, in cooperation with the U.S. Office of Financial Research.

Rate publication. The New York Fed will begin publishing the rates in the second quarter of 2018, according to the Fed’s notice and accompanying release. The target publication time will be no later than 8 a.m. ET each morning.

Rate calculations. The rates will be calculated as a volume-weighted median of transacted rates. The SOFR, which is the most comprehensive rate, will be a broad measure of overnight Treasury financing transactions. The SOFR was chosen by the Alternative Reference Rates Committee as its recommended alternative to U.S. dollar LIBOR. SOFR will include triparty repo data from Bank of New York Mellon (BNYM) and cleared bilateral and GCF Repo data from the Depository Trust & Clearing Corporation (DTCC). The TGCR, meanwhile, will be based solely on triparty repo data from BNYM, and the BGCR will be based on the triparty repo data from BNYM and GCF Repo data from DTCC.

Risk-free rates. The Fed noted that the three interest rates will be constructed to reflect the cost of short-term secured borrowing in highly liquid and robust markets. In addition, since the rates are based on transactions secured by Treasury securities, they are essentially risk-free rates, providing a valuable benchmark for market participants to use in financial transactions, the Fed added.

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