Introducing the Secured Overnight Financing Rate (SOFR) Joshua Frost Senior Vice President, Markets Group, FRBNY November 2, 2017 ARRC Roundtable

Introducing the Secured Overnight Financing Rate (SOFR) Joshua Frost Senior Vice President, Markets Group, FRBNY November 2, 2017 ARRC Roundtable

SOFR: The Selected Alternative to LIBOR The New York Fed, in cooperation with the Office of Financial Research, has announced its intention to produce three reference rates based upon trade-level data from various segments of the repo market: TGCR Tri-party General Collateral Rate: Based on trade-level tri-party data BGCR Broad General Collateral Rate: TGCR + GCF repo SOFR Secured Overnight Financing Rate: BGCR + FICC-cleared bilateral repo In June 2017, the ARRC identified the SOFR as its preferred alternative to USD LIBOR The SOFR is the broadest of the three repo rates, and will begin publication in the first half of 2018 Current expectations are for publication to begin in Q2 In addition to serving as potential alternative reference rate, the SOFR (along with the TGCR and BGCR) is intended to provide market participants with greater transparency into an important segment of U.S. financial markets

Characteristics of the SOFR Fully transaction-based Encompasses a robust underlying market Overnight, nearly risk-free reference rate that correlates closely with other money market rates Covers multiple repo market segments allowing for future market evolution

Fully Transaction-Based Most LIBOR submissions are still based on expert judgment Percentage of Submission Types for USD LIBOR Panel in Q3 2017 Source: IBA 2017 Q3 Report on Volumes The SOFR will be fully transacted-based, with Bank of New York Mellon (BNYM) and the Depository Trust and Clearing Corporation (DTCC) providing transaction-level data for three repo market segments

Robust Underlying Volume $Billions Aggregate Volumes Underlying Select Money Market Rates 1000 900 OBFR BGCR SOFR 800 700 600 500 400 Tri-party activity Tri-party + cleared bilateral activity 300 200 100 0 08/22/14 12/22/14 04/22/15 08/22/15 12/22/15 04/22/16 08/22/16 12/22/16 04/22/17 08/22/17 Source: Bank of New York Mellon; JPMorgan Chase; DTCC Solutions, LLC; FRBNY Staff Calculations

Correlates Closely with Other Money Market Benchmarks.Over shorter and longer timeframes. Percent 1.4 1.2 1 Overnight Money Market Rates OBFR SOFR TGCR USD LIBOR Percent 1.4 1.2 1 Rolling 3-Month Geometric Average of Overnight Money Market Rates OBFR TGCR SOFR USD LIBOR 0.8 0.8 0.6 0.6 0.4 0.4 0.2 0.2 0 01/01/17 03/01/17 05/01/17 07/01/17 09/01/17 0 01/15/15 08/15/15 03/15/16 10/15/16 05/15/17 Source: Bank of New York Mellon, JP Morgan Chase, DTCC Solutions, LLC., Federal Reserve Bank of New York and Federal Reserve Board Staff Calculations

Covers Multiple Market Segments, Allowing for Future Market Evolution Tri-Party Bilateral NYM Fed Transactions (ON RRP) General Tri-Party (BNYM) Non-Cleared DTCC Inter-dealer (GCF Repo) Centrally Cleared Institutional Tri-Party (CCIT) FICC-Cleared

Refining the Source Data to Isolate Targeted Activity In an effort to align the SOFR to the IOSCO Principles, certain filters and trims are applied to the data to separate overnight Treasury GC repo from other repo market activity Tri-party repo data (BNYM) Fed transactions will be removed Open trades that are economically similar to overnight trades will be included Transactions between affiliated entities not conducted at arm s length will be removed GCF data (DTCC) Duplicate transactions with FICC as central counterparty will be treated as single transaction Transactions between affiliated entities will not be removed, as they are blindbrokered FICC-cleared bilateral repo data (DTCC) Transactions between affiliated entities will not be removed as counterparty names are not currently available as part of the data we receive All transactions with rates below the 25 th volume-weighted percentile rate within this data set will be removed, to reduce the impact of specials activity on the SOFR

Bilateral Data: Trimming Methodology Motivations for trading in the bilateral repo market: Want to invest cash, but specific Treasury issues are denoted Want to acquire specific Treasury issues with scarcity value, known as specials activity Removing the bottom 25 th percentile of the distribution strikes a reasonable balance between filtering out specials activity and maintaining robust volumes $Billions 100 90 80 70 60 50 40 30 20 10 Average Volume by Rate by Market Segment (June 15, 2017 - October 17, 2017) Tri-Party GCF Repo Bilateral 0 0.5 0.6 0.7 0.8 0.9 1 1.1 1.2 1.3 1.4 1.5 Source: Bank of New York Mellon; JPMorgan Chase; DTCC Solutions, LLC; FRBNY Staff Calculations Note: All month and quarter-ends are excluded. $Billions 100 90 80 70 60 50 40 30 20 10 Applied Bilateral Trimming Method (June 15, 2017 - October 17, 2017) Excluded (LHS) Included (LHS) Cumulative Percent of Total Volume % of Volume 0 0% -1.5-1 -0.5 0 0.5 1 1.5 Source: DTCC Solutions, LLC; FRBNY Staff Calculations Note: All month and quarter-ends are excluded. 100% 90% 80% 70% 60% 50% 40% 30% 20% 10%

Rate Production Process Expected publication time of around 8:30 a.m. ET based on the prior day s trading activity Robust production platforms Dedicated staff with experience in reference rate production Resilient back-up processes Geographic dispersion among staff and platforms involved in data collection, administration, and publication Daily survey of primary dealers overnight repo borrowing will act as a potential contingency data source Extensive oversight Regular review by oversight bodies Comprehensive Ethics and Conflicts of Interest policies for staff

Timeline for Publication Initial Federal Register Notice (FRN) comment period ended: October 30, 2017 Publication of final FRN: by end-q4 2017 Announce production date: Q1 2018 Begin production: Currently tracking toward Q2 2018

Additional Information November 2016 Desk Statement: https://www.newyorkfed.org/markets/opolicy/operating_policy_161104 December 2016 Liberty Street Blog: http://libertystreeteconomics.newyorkfed.org/2016/12/investigating-the-proposedovernight-treasury-gc-repo-benchmark-rates.html February 2017 FEDS Note: https://www.federalreserve.gov/econresdata/notes/feds-notes/2017/cleared-bilateral-repomarket-and-proposed-repo-benchmark-rates-20170227.html May 2017: May Desk Statement: https://www.newyorkfed.org/markets/opolicy/operating_policy_170524a June 2017 Liberty Street Blog: http://libertystreeteconomics.newyorkfed.org/2017/06/introducing-the-revised-broadtreasuries-financing-rate.html

Questions What historical data can the Fed make available on the SOFR? Is it possible to provide more than has already been made public? What steps has the Fed taken to ensure that the SOFR is robust against attempts to manipulate it? How early can the Fed publish the SOFR? Has the Fed considered publishing transaction-based term repo rates based on the same datasets that underlie the SOFR? What are the Fed s plans for dealing with a disruption to one or more of the data sources or processes that go into generating the SOFR? Others?