Finadium
October 2017

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On June 22, 2017, the Federal Reserve’s Alternative Reference Rates Committee made its long-awaited announcement: a US Treasury repo rate is the preferred replacement for LIBOR. This decision has now had ripple effects around the world, with dealers and investors beginning to prepare for a new era in financial markets. The move also comes as the European Money Markets Institute starts to finalize plans for its own repo benchmark.

The adoption of repo benchmark rates to replace LIBOR is not risk free however. There are issues to consider in the formulation of the rate, how it will differ from a revamped LIBOR calculation, and repo volumes themselves. We expect potential price volatility concurrent with government intervention in the market. As with any new index, especially a critical interest rate benchmark, understanding how the product works is critical for future success.

This report is a primer on repo benchmarks as a LIBOR replacement for financial market professionals. It should be read by capital market participants across the buy-side and sell-side, regulators, technology firms and market infrastructure providers. This report is part of the Finadium Investor Focus series.

This report is 21 pages with seven exhibits.

TABLE OF CONTENTS

■ Executive Summary

■ Secured vs. Unsecured Benchmarks

■ Constructing the US Repo Benchmark Index

■ European Interest Rate Benchmarks Post-LIBOR

■ The Risks in Repo Risk-Free Benchmarks
– Tri-party and Bilateral
– Comparison to IBA LIBOR Revisions
– Government Intervention

■ About the Author

■ About Finadium

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