[Federal Register Volume 82, Number 167 (Wednesday, August 30, 2017)]
[Notices]
[Pages 41259-41262]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-18402]


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FEDERAL RESERVE SYSTEM

[Docket Number OP-1573]


Request for Information Relating to Production of Rates

AGENCY: Board of Governors of the Federal Reserve System.

ACTION: Notice and request for public comment.

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SUMMARY: The Board of Governors of the Federal Reserve System (Board) 
is considering the production and publication of three rates by the 
Federal Reserve Bank of New York (FRBNY), based on data for overnight 
repurchase agreement transactions on Treasury securities. The Board is 
inviting public comment to assist the Federal Reserve in considering 
and developing this proposal.

DATES: Comments must be received by October 30, 2017.

ADDRESSES: You may submit comments, identified by Docket No. OP--1573, 
by any of the following methods:
     Agency Web site: http://www.federalreserve.gov. Follow the 
instructions for submitting comments at http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm.
     Federal eRulemaking Portal: http://www.regulations.gov. 
Follow the instructions for submitting comments.
     Email: [email protected]. Include the 
docket number in the subject line of the message.
     Fax: (202) 452-3819 or (202) 452-3102.
     Mail: Address to Ann E. Misback, Secretary, Board of 
Governors of the Federal Reserve System, 20th Street and Constitution 
Avenue NW., Washington, DC 20551.
    All public comments will be made available on the Board's Web site 
at http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm as 
submitted, unless modified for technical reasons. Accordingly, comments 
will not be edited to remove any identifying or contact information. 
Public comments may also be viewed electronically or in paper in Room 
3515, 1801 K Street NW. (between 18th and 19th Streets NW.), 
Washington, DC 20006 between 9:00 a.m. and 5:00 p.m. on weekdays.

FOR FURTHER INFORMATION CONTACT: David Bowman, Associate Director, 
(202-452-2334), Division of International Finance; or Christopher W. 
Clubb, Special Counsel (202-452-3904), Evan Winerman, Counsel (202-872-
7578), Legal Division; for users of Telecommunications Device for the 
Deaf (TDD) only, contact (202-263-4869).

SUPPLEMENTARY INFORMATION: 

I. Background

    FRBNY, in cooperation with the U.S. Office of Financial Research 
(OFR), is considering publishing three rates based on overnight 
repurchase agreement

[[Page 41260]]

(repo) transactions on U.S. Treasury securities (Treasury repo). The 
publication of these rates, targeted to commence by mid-2018, is 
intended to improve transparency into the repo market by increasing the 
amount and quality of information available about the market for 
overnight Treasury repo activity. The three overnight Treasury repo 
rates would be based on transaction-level data from various segments of 
the repo market.
    The U.S. Treasury securities market is the deepest and most liquid 
government securities market in the world. It plays a critical and 
unique role in the global economy, serving as a means of financing the 
U.S. federal government, a significant investment instrument and 
hedging vehicle for global investors, a risk-free benchmark for other 
financial instruments, and an important market for the Federal 
Reserve's implementation of monetary policy.
    Treasury repos are critically important for the U.S. financial 
system and for the implementation of monetary policy. A repo 
transaction is the sale of a security, or a portfolio of securities, 
combined with an agreement to repurchase the security or portfolio on a 
specified future date at a prearranged price.\1\ A repo also has the 
economic characteristics of a collateralized loan. The initial seller 
of the security (the ``securities provider'') may view itself as a 
borrower of cash and the initial buyer of the security (the ``cash 
provider'') may view itself as a lender in a secured transaction. The 
discount on the repurchase is equivalent to an interest rate. In the 
event the securities provider is unable to repurchase the securities 
(i.e., repay the loan) at maturity, the cash provider is entitled to 
liquidate the securities to obtain repayment.
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    \1\ For a detailed discussion of the U.S. repo market, see FRBNY 
Staff Report No. 740, ``Reference Guide to U.S. Repo and Securities 
Lending Markets,'' (Revised Dec. 2015) https://www.newyorkfed.org/medialibrary/media/research/staff_reports/sr740.pdf .
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    The market for Treasury repos includes a ``tri-party'' segment (a 
submarket of which is executed through the GCF Repo[supreg] service 
offered by the Fixed Income Clearing Corporation (FICC)) and a 
bilateral segment. All tri-party repos--and some bilateral repos--are 
made against a pool of ``general'' collateral rather than specific 
securities. In a general collateral (GC) repo, the cash provider 
stipulates a population of acceptable collateral (e.g., all Treasury 
securities), but does not stipulate the specific securities that the 
securities provider must pledge.

A. Tri-Party Repo Market

    In a tri-party repo, a clearing bank is used to facilitate the 
clearing and settlement of the transaction by managing the securities 
and ensuring that the securities adhere to the cash provider's 
eligibility requirements (as noted above, all repo transactions 
currently conducted over tri-party repo platforms are GC repos). Tri-
party repos settle on the books of the clearing bank, where cash and 
securities are transferred between the cash provider's and securities 
provider's respective accounts. Among the most prominent cash providers 
in this segment are money market mutual funds and cash collateral 
reinvestment accounts managed for securities lenders, while the primary 
securities providers are securities dealers. Bank of New York Mellon 
(BNYM) and JPMorgan Chase (JPMC) currently serve as the two clearing 
banks in the tri-party repo market. JPMC announced in July 2016 that it 
plans to exit government securities settlement for broker-dealers by 
the end of 2018. After 2018, BNYM may become the sole clearing bank in 
the tri-party repo market for Treasury securities.
    The tri-party Treasury repo market is important because it provides 
market liquidity and price transparency for U.S. government securities 
and thereby fosters stable financing costs for the U.S. government. It 
also serves as a critical source of funding for many systemically 
important broker-dealers that make markets in U.S. government 
securities. The tri-party repo market interconnects with other payment, 
clearing, and settlement services that are central to U.S. financial 
markets.
    Currently, information available to the public about rates of 
return in the market for tri-party Treasury repos is limited. Pursuant 
to the Board's supervisory authority, however, the FRBNY collects 
trade-by-trade data on tri-party Treasury repo transactions on a daily 
basis from the two clearing banks. This data set includes: the interest 
rate of the transaction; the parties to the transaction; information on 
the collateral that may be pledged in the transaction; the type of 
transaction; the date the transaction is initiated; the date the 
transaction becomes effective; the date the transaction matures; 
whether the transaction is open-ended (i.e., has no specific maturity 
date); the value of funds borrowed in the transaction; whether the 
transaction includes an option (e.g., the ability to extend or 
terminate early); and, if the transaction includes an option, the 
minimum notice period required to exercise such an option.

B. General Collateral Financing (GCF) Repo Market

    GCF Repo, introduced by FICC in 1998, permits FICC's netting 
members to trade cash and securities among themselves based on 
negotiated rates and terms. GCF Repo trades are completed on an 
anonymous basis through interdealer brokers and settle on the two 
clearing banks' tri-party repo platforms. FICC acts as a central 
counterparty in GCF Repo, serving as the legal counterparty to each 
side of the repo transaction for settlement purposes. GCF Repo is 
designed as a general collateral repo service, where FICC defines the 
set of permissible collateral classes.
    Securities dealers currently rely on GCF Repo transactions for a 
variety of functions, including raising funds and seeking securities to 
fulfill tri-party repo obligations. FRBNY has entered into an agreement 
with DTCC Solutions LLC (DTCC Solutions), an affiliate of the 
Depository Trust & Clearing Corporation (DTCC), to obtain data 
regarding GCF Repo transactions.\2\ This data set includes: the 
interest rate of the transaction; information on the collateral that 
may be pledged in the transaction; the date the transaction is 
initiated; the date the transaction becomes effective; the date the 
transaction matures; the value of funds borrowed in the transaction; 
and an indicator differentiating between repos and reverse repos in 
relation to the central counterparty.
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    \2\ FICC's GCF Repo service only clears interdealer repo 
transactions. The Securities and Exchange Commission recently 
approved a change to FICC's rulebook to permit a new FICC service to 
clear tri-party repo transactions involving buy-side cash lenders, 
called the ``Centrally Cleared Institutional Tri-Party Service'' or 
the ``CCITTM Service.'' 82 FR 21439 (May 8, 2017). At 
this time, it is not anticipated that the three proposed rates would 
include data regarding the CCIT repo transactions.
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C. Bilateral Repo Market

    Unlike the tri-party repo market, in the bilateral repo market, 
counterparties instruct their custodians to exchange cash and 
securities without the use of a third party to manage collateral and 
facilitate centralized settlement. In order to effect settlement, the 
parties identify specific securities for their custodians to transfer. 
As a result, the bilateral repo market can be used to temporarily 
acquire specific securities (referred to as specific-issue collateral). 
Depending on the individual market for each security, repos for 
specific-issue collateral can take place at much lower rates than GC 
trades, as cash providers may be willing

[[Page 41261]]

to accept a lesser return on their cash, or even at times accept a 
negative return, in order to secure a particular security. Such 
securities are commonly referred to as ``specials.'' However, because 
all bilateral transactions must identify the securities being delivered 
in order to settle, it is not possible to determine from settlement 
data whether, in any particular trade, a cash provider intended to 
invest cash against general collateral (at the general collateral 
market rate) or to acquire specific securities (at a possibly lower 
rate for ``specials'').
    Bilateral repo transactions fall into two segments: Bilateral repo 
cleared through FICC's Delivery-versus-Payment (DVP) service and non-
cleared bilateral repo. Repos cleared through FICC's DVP service are 
similar to GCF Repo in that they both allow for clearing in interdealer 
repo markets and both novate transactions to FICC. GCF repos, however, 
are exclusively blind brokered, while DVP repos can be blind brokered 
or directly negotiated. Non-cleared bilateral repo transactions are 
conducted entirely outside the services offered by FICC and do not 
settle on the clearing banks' tri-party repo platforms, and detailed 
information about that segment is not currently available.
    FRBNY has entered into an agreement with DTCC Solutions to obtain 
data regarding FICC-cleared Treasury bilateral repo transactions. This 
data set includes: the interest rate of the transaction; information on 
the specific collateral that is pledged in the transaction; the date 
the transaction is initiated; the value of funds borrowed in the 
transaction; and an indicator differentiating between repos and reverse 
repos in relation to the central counterparty.

II. Production of Treasury Repo Rates

    In order to provide the public with more information regarding the 
interest rates associated with repo transactions, the FRBNY proposes to 
publish interest rate statistics for overnight Treasury repos. As 
described below, the FRBNY proposes to publish three different rates.

A. Proposed Rates

Rate 1: Tri-Party General Collateral Rate (TGCR)
    This rate would measure the rate of return available on overnight 
repo transactions against Treasury securities in the tri-party repo 
market, excluding GCF Repo and transactions in which the Federal 
Reserve is a counterparty.\3\ As currently envisioned, the FRBNY would 
calculate the rate based on the transaction-level tri-party data 
collected from BNYM under the Board of Governors' supervisory authority 
as described above. This rate would focus on the dealer-to-customer 
activity in tri-party repo and would capture a narrower set of 
transactions relative to the other two proposed rates.
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    \3\ The Federal Reserve may enter into bilateral and tri-party 
Treasury repos in order to implement monetary policy. The three 
proposed rates are intended to reflect market rates, and will 
exclude Federal Reserve repos because Federal Reserve repo 
transactions are priced at a policy rate rather than a market rate.
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Rate 2: Broad General Collateral Rate (BGCR)
    This rate would provide a broader measure of rates on overnight 
Treasury GC repo transactions. As currently envisioned, the FRBNY would 
calculate the rate based on the same transaction-level tri-party data 
collected from BNYM as in the TGCR plus GCF Repo data obtained from 
DTCC Solutions as described above. This rate would therefore reflect 
both dealer-to-customer and interdealer repos. By including data from 
different tri-party platforms, this rate would represent a broader, 
more diverse transaction set than the first rate, resulting in greater 
resiliency to market evolution. However, idiosyncratic pricing behavior 
over month- and quarter-ends in the GCF Repo transaction base could 
result in divergence from other money market rates depending on 
relative volume in the GCF Repo market.
Rate 3: Secured Overnight Financing Rate (SOFR)
    This rate would be the broadest measure of rates on overnight 
Treasury financing transactions by also including bilateral Treasury 
repo transactions cleared through FICC's DVP service, filtered to 
remove some (but not all) transactions considered ``specials.'' \4\ As 
currently envisioned, the FRBNY would calculate the rate based on the 
tri-party data from BNYM, GCF Repo data from DTCC Solutions, and FICC-
cleared bilateral repo data from DTCC Solutions. This rate would 
capture the broadest set of transactions, resulting in the rate most 
resilient to market evolution, but would not be a pure GC repo rate.
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    \4\ For example, the FRBNY could use a filter such as simply 
excluding the lowest quartile of bilateral transaction volume.
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B. Calculation of the Rates

    The FRBNY proposes to use a volume-weighted median as the central 
tendency measure for each of the three Treasury repo rates described 
above. While the volume-weighted mean, median, and trimmed mean would 
be similar to each other based on historical data, the median is more 
resistant to erroneous data, and would be consistent with the 
methodology used for the Effective Federal Funds Rate (EFFR) and 
Overnight Bank Funding Rate (OBFR).\5\ Further, in instances when the 
three statistical measures differ considerably from each other, the 
median has generally been more representative of where the bulk of 
trading has taken place. FRBNY also proposes to publish summary 
statistics to accompany the daily publication of the rate, which would 
consist of the 1st, 25th, 75th and 99th volume-weighted percentile 
rates, as well as volumes.
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    \5\ In the event of an even number of transactions in the data 
set, the median would be considered to be the higher of the two 
numbers (i.e., it would be rounded up).
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    The target publication time for the three rates and their summary 
statistics would be each morning at 8:30 ET. The repo rates would only 
be revised on a same-day basis, and only if the updated data would 
result in a shift in the volume-weighted median by more than one basis 
point. Such revisions, which should be a rare occurrence, would be 
effected that same day at or around 2:30 ET and would result in a 
republication of updated summary statistics. In the event the 
previously noted data sources were unavailable, the rates would be 
calculated based upon back-up repo market survey data collected each 
morning from FRBNY's primary dealer counterparties. FRBNY may decide to 
revise the summary statistics or publish additional summary statistics 
on a lagged basis.
    For each rate, FRBNY would exclude trades between affiliated 
entities when relevant and the data to make such exclusions are 
available. To the extent possible, ``open'' trades for which pricing 
resets daily (making such transactions economically similar to 
overnight transactions) would be included in the calculation of the 
rates. The inclusion of these open transactions is intended to ensure 
that the proposed rates incorporate all relevant transactions, and will 
mitigate risks around potential changes in market practice. Each of the 
rates could be modified in the future in response to market evolution 
or to incorporate additional market segments if data become available.

Solicitation for Comments on Production of the Rates

    To assist the Board in considering the production of the proposed 
rates, the

[[Page 41262]]

Board seeks public comment on the following questions:
    1. Would the proposed rates be useful to market participants, 
researchers, or others? For what purpose(s)?
    2. Are one or more of the proposed rates more likely to be useful 
than the other(s)? For what purpose(s)?
    3. Are there changes to one or more of the rates that would make 
them more useful? For what purpose(s)?
    4. Are there particular sources of data or data sets that should be 
incorporated in the calculation of the rates that would make the rates 
more useful to the public?
    5. Are there changes that should be made to the proposed manner of 
calculating and publishing the three rates?
    6. Is the proposed time of publication early enough to facilitate 
the use of the rates for various purposes?
    7. Is the use of the volume-weighted median appropriate? Is there a 
different measure of the central tendency of the distribution of 
individual transacted rates that would be better suited? For what 
purpose(s)?
    8. Are the proposed summary statistics useful to the market? For 
what purposes? Would other summary statistics be more useful to 
accompany the daily publication, instead of or in addition to those 
proposed?

Administrative Law

    In accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 
3506; 5 CFR part 1320, Appendix A.1), the Board reviewed the proposal 
under the authority delegated to the Board by the Office of Management 
and Budget. For purposes of calculating burden under the Paperwork 
Reduction Act, a ``collection of information'' involves 10 or more 
respondents. As noted above, the data to be used to produce the 
proposed rates will be obtained solely from (1) BNYM with respect to 
tri-party GC repo data and (2) DTCC Solutions with respect to GCF repo 
data and DVP bilateral repo data. Therefore, no collection of 
information pursuant to the Paperwork Reduction Act is contemplated by 
the proposed rate production at this time.
    The Regulatory Flexibility Act (5 U.S.C. 601 et seq.) (``RFA'') 
generally requires an agency to perform an initial and a final 
regulatory flexibility analysis on the impact a rule is expected to 
have on small entities. The RFA imposes these requirements in 
situations where an agency is required by law to publish a general 
notice of proposed rulemaking for any proposed rule. The production of 
the rates does not create any obligations or rights for any private 
parties, including any small entities, and so the publication of a 
general notice of proposed rulemaking is not required. Accordingly, the 
RFA does not apply and an initial and final regulatory flexibility 
analysis is not required.

    By order of the Board of Governors of the Federal Reserve 
System, August 22, 2017.
Ann E. Misback,
Secretary of the Board.
[FR Doc. 2017-18402 Filed 8-29-17; 8:45 am]
 BILLING CODE 6210-01-P