[Federal Register Volume 82, Number 237 (Tuesday, December 12, 2017)]
[Notices]
[Pages 58397-58400]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-26761]


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FEDERAL RESERVE SYSTEM

[Docket Number OP-1573]


Production of Rates Based on Data for Repurchase Agreements

AGENCY: Board of Governors of the Federal Reserve System.

ACTION: Notice.

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SUMMARY: The Board of Governors of the Federal Reserve System (Board) 
is announcing the production and publication of three rates by the 
Federal Reserve Bank of New York (FRBNY), in coordination with the U.S. 
Office of Financial Research (OFR), based on data for overnight 
repurchase agreement transactions on Treasury securities.

DATES: FRBNY intends to begin publishing the three rates during the 
second quarter of 2018.

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

    On August 30, 2017, the Board published a notice and request for 
public comment (Request for Information) on the proposal that FRBNY, in 
coordination with OFR, produce and publish three rates based on 
overnight repurchase agreement (repo) transactions on U.S. Treasury 
securities (Treasury repo).\1\ The three rates (collectively, the 
``Treasury repo rates'') would be based on transaction-level data from 
various segments of the repo market.
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    \1\ 82 FR 41259 (Aug. 30, 2017). The Request for Information 
included a detailed overview of the Treasury repo market.
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A. Summary of Proposed Rates

Rate 1: Tri-Party General Collateral Rate (TGCR)
    The Request for Information indicated that this rate would be a 
measure of rates on overnight, specific-counterparty tri-party Treasury 
general collateral (GC) repo. This rate would be calculated based on 
transaction-level tri-party repo data collected from the Bank of New 
York Mellon (BNYM) under the Board's supervisory authority. The rate 
would exclude General Collateral Finance (GCF) Repo[supreg] cleared by 
the Fixed Income Clearing Corporation (FICC) and transactions in which 
a Federal Reserve Bank is a counterparty.\2\
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    \2\ A Federal Reserve Bank may enter into bilateral and tri-
party Treasury repos in order to implement monetary policy. Because 
all three proposed rates were intended to reflect rates on trades 
between market participants, it was proposed that all would exclude 
Federal Reserve repos.
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Rate 2: Broad General Collateral Rate (BGCR)
    The Request for Information indicated that this rate would provide 
a broad measure of rates on overnight Treasury GC repo transactions. 
The rate would be calculated based on the same transaction-level tri-
party repo data collected from BNYM as in the TGCR plus GCF Repo data 
obtained from DTCC Solutions LLC (DTCC Solutions), an affiliate of the 
Depository Trust & Clearing Corporation (DTCC).
Rate 3: Secured Overnight Financing Rate (SOFR)
    The Request for Information indicated that this rate would provide 
a broad measure of the general cost of financing Treasury securities 
overnight. The rate would be calculated based on the tri-party data 
from BNYM and GCF Repo data from DTCC Solutions used to calculate the 
BGCR, plus bilateral Treasury repo transactions cleared through FICC's 
Delivery-versus-Payment (DVP) service, filtered to remove some (but not 
all) transactions considered ``specials.'' \3\ This rate would not be a 
pure GC repo rate, but would offer the broadest measure of dealers' 
cost of financing Treasury securities overnight.
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    \3\ ``Specials'' are repos for specific-issue collateral, which 
can take place at much lower rates than GC trades because cash 
providers may be willing to accept a lesser return on their cash, or 
even at times accept a negative return, in order to secure a 
particular security. The Request for Information noted that FRBNY 
could filter out specials by simply excluding the lowest quartile of 
bilateral transaction volume.
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B. Proposed Calculation of and Publication of the Rates

    The Request for Information stated that FRBNY would use a volume-
weighted median as the central tendency measure for each of the three 
Treasury repo rates described above. FRBNY would 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.
    The Request for Information included a target publication time of 
8:30 a.m. ET. The Request for Information stated that the rates would 
be revised only on a same-day basis, and only if the revision would 
result in a shift in the volume-weighted median by more than one

[[Page 58398]]

basis point. Such revisions would be effected that same day at or 
around 2:30 p.m. ET and would result in a republication of updated 
summary statistics. If relevant data sources were unavailable, the 
Request for Information stated that the rates would be calculated based 
upon back-up repo market survey data collected from FRBNY's primary 
dealer counterparties. In such circumstances, the Request for 
Information indicated that FRBNY might revise the summary statistics or 
publish additional summary statistics on a lagged basis.
    For each rate, the Request for Information stated that FRBNY would 
exclude trades between affiliated entities when relevant and when the 
data to make such exclusions is 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.
    Finally, the Request for Information stated that 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.

II. Public Comments

    The Board received twelve comments on the Request for Information 
from financial institutions and industry associations. Certain 
commenters focused on possible uses of the proposed rates, including 
the possibility that the proposed rates (particularly SOFR) could serve 
as reference rates for financial contracts. Other commenters focused on 
the calculation, publication, and governance of the proposed rates.

A. Uses of the Proposed Rates

    Commenters suggested that the proposed rates would be useful 
because they would provide a comprehensive view of pricing in the 
Treasury repo market, would provide a good proxy for a risk-free rate, 
would provide useful information regarding overnight demand and supply 
for funding, and could facilitate the creation of futures contracts 
that would allow market participants to hedge Treasury repos and spot-
market Treasury purchases. Most commenters who expressed a view on the 
potential uses of the proposed rates suggested that SOFR would be more 
useful than the other rates because SOFR would provide a broader 
measure of pricing in the Treasury repo market.
    Other commenters raised concerns regarding the possible use of SOFR 
as a replacement for the London Interbank Offered Rate (LIBOR) in 
financial contracts. For example, a number of commenters believed that 
U.S. dollar LIBOR should be replaced with term reference rates or rates 
that reflect bank credit risk in ways that are similar to U.S. dollar 
LIBOR. Some commenters also noted difficulties in amending certain 
existing contracts (e.g., syndicated loan and corporate bond contracts) 
to replace U.S. dollar LIBOR.
    Based on public comments, the Board believes that market 
participants could use the proposed Treasury repo rates in a variety of 
ways. The Board recognizes that the proposed rates could be used as 
reference rates in financial contracts, and that the Alternative 
Reference Rates Committee (ARRC) has selected SOFR as its recommended 
alternative to U.S. Dollar LIBOR.\4\ The Board notes, however, that the 
proposal to publish these rates was not contingent upon the ARRC's 
selection of SOFR or the possible use of SOFR (or either of the other 
proposed rates) as a reference rate in financial contracts. As noted in 
the Request for Information, the publication of the Treasury repo rates 
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. This information could be useful to 
market participants in a variety of ways. To the extent that market 
participants choose to use SOFR or another of the Treasury repo rates 
as a reference rate, details regarding the transition from U.S. Dollar 
LIBOR to that rate in particular markets are outside the scope of the 
Request for Information and this final Federal Register notice.
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    \4\ See https://www.newyorkfed.org/medialibrary/microsites/arrc/files/2017/ARRC-press-release-Jun-22-2017.pdf.
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B. Calculation, Publication, and Governance of the Proposed Rates

    The Board received a number of comments on the calculation, 
publication, and governance of the proposed rates. Commenters discussed 
the types of data that FRBNY will include in the rates, FRBNY's 
calculation methodology, and various issues related to publication and 
governance of the rates.
1. Data Sources
    Three commenters suggested that the Federal Reserve and OFR should 
consider including additional Treasury repo activity in the proposed 
rates (e.g., uncleared bilateral repos, FICC's Sponsored DVP Repo 
Service, and FICC's new CCITTM Service) and should adopt a 
clear mechanism for including additional Treasury repo activity in the 
future. As noted in the Request for Information, each of the Treasury 
repo rates could be modified in the future in response to market 
evolution or to incorporate additional market segments if data become 
available. The Federal Reserve and OFR will monitor trading activity in 
new market segments and will consult with the public in deciding 
whether to include new data sources in the Treasury repo rates or make 
other compositional or methodological changes to the rates. The Board 
also notes that (1) FRBNY cannot currently include data regarding 
uncleared bilateral repos in the Treasury repo rates because there is 
no available data source for such information and (2) SOFR will include 
data from FICC's Sponsored DVP Repo Service.
    A commenter asked the Board to provide more information regarding 
FRBNY's contract to acquire data from DTCC Solutions, stating that 
additional information would help market participants evaluate 
potential risks related to loss of access to data. The Federal Reserve 
and OFR are confident that the combination of the relevant provisions 
of the contract with DTCC Solutions and the data collection authorities 
of the OFR and Federal Reserve will ensure that they will be able to 
continue to produce robust rates under a variety of circumstances. In 
this regard, the Board notes that OFR informed the Financial Stability 
Oversight Council on November 16, 2017, that it intends to propose an 
information collection in the first half of 2018 to collect data 
regarding cleared repo transactions.\5\
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    \5\ See https://www.financialresearch.gov/from-the-management-team/2017/11/22/ofr-update-on-bilateral-repo-collection/.
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    Finally, a commenter suggested that the Board should use its 
supervisory authority to ensure that BNYM conducts its tri-party 
operations properly, including appropriate business continuity and 
other risk contingency planning. BNYM is a State member bank and is 
subject to comprehensive supervision by the Federal Reserve.\6\ In 
particular, the Federal Reserve supervises BYNM's tri-party 
operations.\7\
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    \6\ See, inter alia, section 9 of the Federal Reserve Act (12 
U.S.C. 321 et seq.) and the Board's Regulation H (12 CFR part 208).
    \7\ The Board notes that the Federal Reserve has taken a variety 
of steps in recent years that have made tri-party repo 
infrastructure more resilient. See https://www.newyorkfed.org/banking/tpr_infr_reform.html.
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2. Calculation Methodology
    Two commenters supported the proposal to calculate the Treasury 
repo

[[Page 58399]]

rates using a volume-weighted median approach. One commenter suggested, 
however, that a volume-weighted average might be more appropriate 
because SOFR could have a bimodal distribution, with one peak 
representing relatively low tri-party rates and a second peak 
reflecting higher rates for GCF repos and repos cleared through FICC's 
DVP service. This commenter believed that, if SOFR has a bimodal 
distribution, small changes in the relative volumes of the two peaks 
could result in significant shifts in the median rate. FRBNY will use a 
volume-weighted median approach because, compared to a volume-weighted 
mean approach, it is more robust to erroneous data and outliers and 
more frequently reflects a transacted rate. Although the aggregation of 
heterogeneous market segments increases the risk of a multimodal 
distribution, FRBNY's historical analysis indicates that use of a 
volume-weighted median did not materially increase the volatility of 
the rate and that small shifts in the data did not cause significant 
shifts in the median rate. The Federal Reserve and OFR will review the 
composition and methodology of the rates over time and, as noted above, 
will consult with the public in deciding whether to make any 
compositional or methodological changes.
    Multiple commenters asked the Board to clarify how FRBNY will trim 
specials from the proposed rates. One commenter supported exclusion of 
all bilateral transactions below the 25th volume-weighted percentile 
rate, while two commenters stated that they would need more data to 
evaluate whether this approach is sensible. Another commenter suggested 
other possible techniques for excluding outlier transactions. Federal 
Reserve and OFR staff considered several techniques for trimming 
specials activity, including removing all transactions collateralized 
by on-the-run and first-off-the-run securities.\8\ The Board confirms 
that FRBNY will trim specials by excluding from the FICC-cleared 
bilateral data all transactions with rates below the 25th volume-
weighted percentile. Analysis of various volume-weighted percentile 
thresholds revealed that excluding all activity trading below the 25th 
percentile rate struck an appropriate balance between removing the 
largest number of specials transactions and maintaining robust volume 
to use in calculating a rate.\9\ This approach effectively removes 
transactions with rates that are notably lower than other transactions 
in the FICC-cleared bilateral data set, which indicates that the 
removed transactions are specials.
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    \8\ See Kathryn Bayeux, Alyssa Cambron, Marco Cipriani, Adam 
Copeland, Scott Sherman, and Brett Solimine, ``Introducing the 
Revised Broad Treasuries Financing Rate,'' Federal Reserve Bank of 
New York Liberty Street Economics (blog), June 19, 2017, http://libertystreeteconomics.newyorkfed.org/2017/06/introducing-the-revised-broad-treasuries-financing-rate.html; Bowman, David, Joshua 
Louria, Matthew McCormick, and Mary-Frances Styczynski (2017). ``The 
Cleared Bilateral Repo Market and Proposed Repo Benchmark Rates,'' 
FEDS Notes. Washington: Board of Governors of the Federal Reserve 
System, February 27, 2017, https://doi.org/10.17016/2380-7172.1940.
    \9\ For a fuller explanation of this approach, see ``Introducing 
the Revised Broad Treasuries Financing Rate,'' http://libertystreeteconomics.newyorkfed.org/2017/06/introducing-the-revised-broad-treasuries-financing-rate.html.
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    A commenter requested more information about how FRBNY will include 
``open'' trades in the proposed rates. Open transactions are 
transactions with no specific maturity date for which the interest rate 
is periodically reset upon agreement by both borrower and lender. 
Although there are many forms of open transactions with different reset 
periods, those with daily rate resets are economically very similar to 
overnight transactions. On January 24, 2017, the Treasury Market 
Practices Group recommended a new best practice in the recording of 
daily-resetting open trades, which is expected to make daily-resetting 
trades easier to differentiate from open trades with different reset 
periods.\10\
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    \10\ See https://www.newyorkfed.org/medialibrary/microsites/tmpg/files/best-practices-tripartyrepo-170124.pdf.
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    Two commenters noted that SOFR tends to spike at quarter-ends and 
suggested that FRBNY apply a ``smoothing'' mechanism to minimize 
volatility of the proposed rates. The Board recognizes that rates in 
some segments of the Treasury repo market currently tend to increase at 
quarter-ends, but FRBNY will not apply a smoothing mechanism to the 
Treasury repo rates because doing so would provide an inaccurate view 
of that day's pricing in the Treasury repo market.
    Finally, one commenter suggested that, even though the proposed 
rates would exclude transactions in which a Federal Reserve Bank is a 
counterparty, Federal Reserve activity in repo markets might distort 
rates in Treasury repos that do not involve a Federal Reserve Bank. The 
Federal Reserve implements monetary policy through multiple types of 
financial transactions, including repos. These open market operations 
affect all money market rates. The Board nevertheless believes that the 
Treasury repo rates will provide market participants with a transparent 
and comprehensive view of pricing in the Treasury repo market.
3. Publication Issues
    One commenter stated that the proposed 8:30 a.m. ET publication 
time was appropriate. Another commenter asked the Federal Reserve to 
consider carefully whether publishing the rates at 8:30 a.m. would 
impact efficient market functioning. Three commenters believed that the 
proposed rates should be published earlier, explaining that 8:30 a.m. 
publication would be too late for some foreign financial markets and on 
certain days would coincide with some U.S. economic data releases. 
FRBNY will shift the publication time at least as early as 8:00 a.m. ET 
to avoid coincident release with key U.S. economic data. The Board and 
FRBNY will consider whether FRBNY can publish Treasury repo rates even 
earlier, but operational constraints--for example, constraints on the 
ability of FRBNY's data providers to produce and deliver data overnight 
and the time required for FRBNY to perform data validation and quality 
assurance processes--may prevent earlier publication.
    A commenter asked for an explanation of how FRBNY would publish the 
proposed rates. FRBNY will publish the Treasury repo rates on its 
public website, similar to the manner in which FRBNY currently 
publishes the effective federal funds rate (EFFR) and the overnight 
bank funding rate (OBFR).\11\
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    \11\ See https://apps.newyorkfed.org/markets/autorates/fed%20funds and https://apps.newyorkfed.org/markets/autorates/obfr.
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    Four commenters supported the proposal to publish summary 
statistics. One of these commenters suggested, however, that publishing 
statistics from the 1st and 99th percentiles would not be informative, 
and that FRBNY should instead publish summary statistics for 
percentiles between the 1st and 25th/75th and 99th percentiles (e.g., 
the 5th and 95th percentiles). Initially, FRBNY will publish summary 
statistics as described in the Request for Information, and may publish 
additional percentiles on a lagged basis. After FRBNY begins publishing 
the Treasury repo rates, FRBNY will reassess whether market 
participants would benefit from additional summary statistics.
    Three commenters requested that FRBNY publish historical data for 
SOFR. Commenters believed that historical data would serve a number of 
purposes--for example, commenters suggested that historical data would 
help market participants determine

[[Page 58400]]

margin requirements for derivatives that reference SOFR and would help 
market participants compare SOFR to existing benchmarks. The Board 
recognizes that market participants might benefit from historical data. 
While longer histories of comparable commercially produced repo rates 
are publicly available, the Board believes that a significantly longer 
history of the Treasury repo rates may not be possible due to 
limitations on the availability of data. The Board and FRBNY will work 
with BNYM and DTCC to determine whether FRBNY can publish additional 
historical data for the Treasury repo rates.
    Two commenters suggested that the proposed threshold of ``greater 
than one basis point'' for revising the proposed rates was too 
sensitive. Another commenter explained that its members had not 
achieved consensus on the threshold at which FRBNY should revise 
errors, but the commenter emphasized that FRBNY should articulate a 
clear rationale for its revision policy. The Board notes that, because 
FRBNY will round the Treasury repo rates to the nearest whole basis 
point, the threshold is effectively two basis points. The Board also 
notes that this is the same threshold employed for EFFR and OBFR, for 
which revisions are very rare. The Federal Reserve will periodically 
review the revision threshold to ensure that revisions are very rare 
and do not impose undue operational costs on users of the Treasury repo 
rates.
    A commenter asked whether FRBNY would publish the proposed rates if 
relevant data sources were unavailable and, if so, whether FRBNY would 
correct such rates retroactively when data becomes available. Another 
commenter suggested that FRBNY should provide more information 
regarding the back-up repo market survey it would conduct if standard 
data sources are unavailable. As noted in the Request for Information, 
in the event that data sources are unavailable, the Treasury repo rates 
would be calculated based upon back-up repo market survey data 
collected from FRBNY's primary dealer counterparties. FRBNY currently 
collects repo data from primary dealers each morning. Going forward, 
FRBNY will also collect data each afternoon. The afternoon survey will 
capture that day's activity by primary dealers and will be available as 
a contingency data source for the following morning's publication of 
the Treasury repo rates. The survey will request aggregated primary 
dealer activity in each of the market segments captured in the Treasury 
repo rates: Overnight tri-party Treasury repo transactions, overnight 
Treasury repo transactions in the GCF market, and FICC-cleared 
bilateral Treasury repo transactions. For each of these market 
segments, each dealer will report its aggregate borrowing activity 
(excluding, to the extent possible, transactions between affiliated 
entities and transactions in which the Federal Reserve is a 
counterparty), along with the weighted-average rate of its borrowing. 
If FRBNY publishes Treasury repo rates that use survey data and 
subsequently receives updated data, FRBNY would issue same-day 
revisions at or around 2:30 p.m. ET if the use of updated data would 
result in the published rate changing by more than one basis point.
    Finally, two commenters asked that FRBNY begin publishing the 
Treasury repo rates as soon as possible. FRBNY intends to begin 
publishing the Treasury repo rates in the second quarter of 2018.
4. Governance
    A commenter suggested that governance arrangements for the Treasury 
repo rates should align with the Principles for Financial Benchmarks 
published by the International Organization of Securities Commissions 
(IOSCO) in July 2013.\12\ FRBNY plans to publish an IOSCO statement of 
compliance covering the Treasury repo rates in the first half of 2018.
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    \12\ See https://www.iosco.org/library/pubdocs/pdf/IOSCOPD415.pdf.
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III. Conclusion

    After considering public comments, the Board concludes that the 
public would benefit if FRBNY publishes the three Treasury repo rates 
as proposed, with certain modifications described above.

IV. 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 Request 
for Information and this final notice 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 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, 
producing the rates will not involve a collection of information 
pursuant to the Paperwork Reduction Act.
    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 Board was not 
required to publish a notice of proposed rulemaking. Accordingly, the 
RFA does not apply and an initial and final regulatory flexibility 
analysis is not required.
    The Board did not receive any comments regarding the Paperwork 
Reduction Act or the RFA.

    By order of the Board of Governors of the Federal Reserve 
System, December 7, 2017.
Ann E. Misback,
Secretary of the Board.
[FR Doc. 2017-26761 Filed 12-11-17; 8:45 am]
 BILLING CODE 6210-01-P