[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