An August 3, 2012 article by Helen Bartholomew in Reuters announced an about face by the US Treasury Borrowing Advisory Committee, throwing support to GCF Repo Indices to benchmark US Treasury Floating Rate Notes. This is a big win for repo.
The Committee, an industry group under the SIFMA umbrella, is charged with recommending to the US Treasury how and when to issue their debt. The Treasury is considering issuing floating rate paper and the big question is what the paper will float against. Back in May, 2012 the Committee voted six for Fed Funds Effective, four for Treasury Bills, and three for the general collateral repo rate.
The turnabout is fueled, at least in part, by the LIBOR crisis. While LIBOR was never on the table as a benchmark, the urge to adopt traded collateralized alternatives as an alternative to LIBOR has brought repo to front of the line. The weaknesses of LIBOR — notably lack of market depth — also plague the Fed Funds market (where liquidity is down 80% in recent years). The successful launch of GCF Repo Futures on the NYSE Liffe is also a critical factor. Having a viable futures market on the underlying security index is necessary for market players to hedge. Finally, news reports that several broker/dealers, including Nomura, Credit Suisse, BofA/Merrill, and UBS are quoting swaps using GCF Repo for the floating leg (as an alternative to LIBOR) improve index visibility. The combination of all these factors – a perfect storm if you will – could take repo from its “inside baseball” status to a globally accepted benchmark.
Our thanks to Jeff Kidwell of AVM for bringing this to our attention.
A link to the Reuters article is here.