Bank committee picks an alternative to US dollar LIBOR

Maria Nikolova

The Alternative Reference Rates Committee identified a broad Treasuries repo financing rate as the rate for use in certain new US dollar derivatives and other financial contracts.

The move away from scandal-plagued LIBOR continues, as the Alternative Reference Rates Committee (ARRC) on Thursday made its choice with regards to a LIBOR alternative when it comes to USD financial contracts.

In an official announcement, the Alternative Reference Rates Committee (ARRC) said it identified a broad Treasuries repo financing rate, which the Federal Reserve Bank of New York has proposed publishing in cooperation with the Office of Financial Research, as the rate that represents best practice for use in certain new US dollar derivatives and other financial contracts.

The ARRC, a group of private-market participants convened by official sector agencies, aims to develop a strategy to move a substantial portion of derivatives trading from instruments referencing USD LIBOR to a more robust alternative rate. The ARRC claims, however, that its goal is not to eliminate USD LIBOR completely. It aims to encourage the development of sufficient liquidity in futures and swaps markets referencing the new rate so that trading in these markets can replace a significant portion of current trading in interest rate derivatives referencing all of the USD LIBOR fixings.

The body took into account various factors in selecting a broad repo rate, such as the depth of the underlying market and its likely robustness over time; the rate’s usefulness to market participants; and whether the rate’s construction, governance, and accountability would be consistent with the IOSCO Principles for Financial Benchmarks. The ARRC believes that, measured against these criteria, a broad repo rate is most appropriate as a reference rate.

The ARRC intends to publish its final report later this year before implementation is expected to begin.

Other industry bodies have also been seeking to replace LIBOR with alternatives. For instance, in April this year, the Bank of England announced that its Working Group on Sterling Risk-Free Reference had picked the Sterling Overnight Index Average (SONIA) as its preferred near risk-free interest rate benchmark for use in sterling derivatives and relevant financial contracts.

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