A SOFR Squeeze?
Following up on Libor Squeeze?, Libor and Reserves? and Reserves, RRP and The Libor Squeeze?
Only the 3rd rate SOFR (of three proposed: Tri-party General Collateral Rate (TGCR); Broad General Collateral Rate (BGCR); and Secured Overnight Financing Rate (SOFR) ) would include Fed ON RRP volumes, which dwarf all others in ON (overnight).
Consequences? Again think shooting fish in a barrel for arb or quarter turn premium, in what has become a BIFURCATED market (LIBOR, SOFR)....
The SOFR rate was officially published at 1.80% for the 1st time by AARC on APRIL 3rd, 2018. The CME Group will launch futures trades based on $808B in daily volume for SOFR on May 7, while major dealers will enable swaps trading on the rate this year.
If you didn't already, now you know. Required reading in chronological order....
Statement Regarding the Publication of Overnight Treasury GC Repo Rates
November 4, 2016
Statement Regarding the Publication of Overnight Treasury Repo Rates
May 24, 2017
Introducing the Revised Broad Treasuries Financing Rate
June 19, 2017
The ARRC Selects a Broad Repo Rate as its Preferred Alternative Reference Rate
June 22, 2017
AARC - Alternative Reference Rate Committee
Home Page
Publications
And this 2nd version of the AARC report released March 2018 which lays out LIBOR exposures in no uncertain terms.
Quarter end is coming and there's more than meets the eye, so TNN needs to dig deeper. More to come, stay tuned, no flippin.Indeed, TNN needed to dig deeper... The ball started rolling on SOFR in November 2014, with FOMC tipping their hat November 4th, 2016.
Only the 3rd rate SOFR (of three proposed: Tri-party General Collateral Rate (TGCR); Broad General Collateral Rate (BGCR); and Secured Overnight Financing Rate (SOFR) ) would include Fed ON RRP volumes, which dwarf all others in ON (overnight).
"While both EFFR and OBFR are IOSCO compliant rates, most overnight transactions in fed funds and Eurodollar markets at this stage are arbitrage trades involving a fairly limited set of cash providers who are ineligible to earn the interest rate on excess reserves (IOER) rate paid on funds deposited at the Federal Reserve and instead lend money to financial institutions that can deposit and earn the IOER rate at the Federal Reserve. Money market fund reforms have also led to some decline in unsecured overnight transactions volumes since 2016. In contrast, Treasury repo markets were seen as more resilient and an active source of funding for a wide range of market participants." - AARC March 2018 ReportBanks have become less reliant on overnight funding as they have termed out their debt in order to comply with Basel 3 - bank capital and LCR - liquidity management.
Consequences? Again think shooting fish in a barrel for arb or quarter turn premium, in what has become a BIFURCATED market (LIBOR, SOFR)....
The notional size of the derivatives market accounts for 95% of the outstanding gross notional value of all financial products referencing USD LIBOR. However, USD LIBOR is also referenced in several trillion dollars of corporate loans, floating-rate mortgages, floating rate notes (FRNs), and securitized products. These LIBOR exposures dwarf the volumes underlying the wholesale unsecured term bank funding markets that LIBOR is meant to represent.Roughly equivalent to 10X U.S. GDP... the total exposure to USD LIBOR is closer to $200 Trillion... $81 Trillion of which is tied to INTEREST RATE SWAPS which have morphed into... defacto deposit or reserve swaps for what is held at the FED.
The SOFR rate was officially published at 1.80% for the 1st time by AARC on APRIL 3rd, 2018. The CME Group will launch futures trades based on $808B in daily volume for SOFR on May 7, while major dealers will enable swaps trading on the rate this year.
If you didn't already, now you know. Required reading in chronological order....
Statement Regarding the Publication of Overnight Treasury GC Repo Rates
November 4, 2016
Statement Regarding the Publication of Overnight Treasury Repo Rates
May 24, 2017
Introducing the Revised Broad Treasuries Financing Rate
June 19, 2017
The ARRC Selects a Broad Repo Rate as its Preferred Alternative Reference Rate
June 22, 2017
AARC - Alternative Reference Rate Committee
Home Page
Publications
And this 2nd version of the AARC report released March 2018 which lays out LIBOR exposures in no uncertain terms.
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