On July 27, 2017 the CEO of the Financial Conduct Authority called for the replacement of LIBOR by the end of 2021. In this commentary Cecchetti and Schoenholtz explain why such a move, although Herculean, might be the right thing to do especially since the risk of manipulation of LIBOR is still high despite the reforms that were implemented in 2014. They also discuss the benefits and shortcomings of the Secured Overnight Financing Rate (SOFR), a benchmark published by the Federal Reserve Bank of New York which is most likely to replace the US Dollar LIBOR.
Eclipsing LIBOR
By: Stephen G. Cecchetti, Kermit L. Schoenholtz – Brandeis University, NYU
Eclipsing LIBOR
By: Stephen G. Cecchetti, Kermit L. Schoenholtz – Brandeis University, NYU
The Fed is proposing three alternative rates to replace the US Dollar LIBOR:
1) Tri-party General Collateral Rate (TGCR): this rate would focus on the dealer-to-customer activity in tri-party repo.
2) Broad General Collateral Rate (BGCR): this rate would reflect both dealer-to-customer and interdealer repos.
3) Secured Overnight Financing Rate (SOFR): 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.
This article discusses the legal implications of replacing LIBOR. In particular, Julia Goptarenko argues, that an abrupt switch to a new benchmark will result in a need to remediate and collateralize millions of derivatives trades which may pose a significant threat to the industry.
Liberating the World from LIBOR: Implications for Non-Cleared Derivatives
Author: Julia Goptarenko
From: Stanford University
Liberating the World from LIBOR: Implications for Non-Cleared Derivatives
Author: Julia Goptarenko
From: Stanford University
Should markets be steered away from reference rates incorporating credit risk?
What Are Reference Rates For?
Author: Divya Kirti
From: IMF
What Are Reference Rates For?
Author: Divya Kirti
From: IMF
