IGTA Journal - Summer 2018

sector to address LIBOR’s shortcomings and to find alternative rates. One notable development has been the publication of an international set of principles for financial benchmarks, developed by the International Organization of Securities Commissions (IOSCO) in 2013 . These principles—which include 19 specific standards across governance, benchmark quality, methodology, and accountability—have emerged as the international standard. IOSCO has rightly focused on tying benchmarks more closely to observable, arms-length transactions. This represents an important step toward eliminating excessive reliance on expert judgment. The Financial Stability Board (FSB) has been a galvanizing force at the international level. The FSB and its members have published proposals, plans, and timelines for reference rate reform and have promoted the strengthening of the major interest rate benchmarks. The FSB has been carrying out work on the development and introduction of alternative benchmarks, developing a plan to accomplish a transition to new benchmarks, encouraging work by the private sector on contract robustness, and reporting regularly on the progress made . The Federal Reserve has played a lead role in the development of these recommendations as applied to U.S.-dollar LIBOR, working closely with the other major financial regulatory agencies in the United States. This effort has also involved coordinating with the official sector sponsors of similar efforts around the world . In late 2014, in response to FSB and Financial Stability Oversight Council recommendations, the Federal Reserve convened the Alternative Reference Rates Committee (ARRC)—a group of market participants established to identify more robust alternative U.S.-dollar reference rates that are risk-free or nearly risk-free, fit the needs of the derivatives market, and are compliant with IOSCO principles . This effort paralleled similar ones in other jurisdictions to find reference rates that are well-suited to local conditions and market needs—including the UK’s Working Group on Sterling Risk-Free Reference Rates. The ARRC was also tasked with developing a transition plan to facilitate the adoption of these rates in a voluntary and orderly manner, and with considering best practices in contract design to prepare for the possibility that LIBOR ceases to be published. Publication of Alternative Reference Rates by the Federal Reserve The ARRC has made important progress in achieving its mandate. Notably, in June 2017, it selected the Secured Overnight Financing Rate, or SOFR, as its preferred alternative to U.S.- dollar LIBOR. SOFR is a broad measure of the cost of borrowing cash overnight using U.S. Treasury securities as collateral, and is thus relevant to a wide range of market participants. The rate is entirely transaction-based, and the underlying market is robust, with current daily volume of more than $700 billion. (By comparison, unsecured three-month U.S.-dollar wholesale borrowing totals roughly $1 billion per day, as I mentioned earlier.) SOFR moves closely with LIBOR and other money market rates over time, and because it covers multiple segments of the repo market, it provides scope for future market evolution . Besides being more resistant to manipulation, this nearly risk-free rate should also prove much more resilient during periods of financial stress, because the U.S. Treasury repo market is likely to remain deep and active during such episodes. The New York Fed administers and produces SOFR in cooperation with the Office of Financial Research. We began publishing this rate on April 3 of this year, along with two other repo rates: the Tri-Party General Collateral Rate and the Broad General Collateral Rate . This work complements steps by the Federal Reserve to promote greater transparency in rates in unsecured markets through enhancements to the calculation of the effective federal funds rate (EFFR) and the launching of an entirely new rate, the overnight bank funding rate (OBFR) . I have long been a proponent of the idea that central banks are well suited to take on this responsibility. Reference rates have strong public good properties, and the private sector faces notable coordination challenges in this area. Central banks have a long history in producing such measures—recognizing that traditionally this has been for purposes related to monetary policy— 13 14 15 16 17 18 19 3 / 6 BIS central bankers' speeches IGTA eJournal | Summer 2018 | 48