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  #91  
Old 05-23-2018, 01:48 PM
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http://www.naic.org/capital_markets_...uzz_180522.pdf

Quote:
THE RISE IN LIBOR
MAY 22, 2018

Executive Summary
• The rise in LIBOR in early 2018 is a function of technical
external factors and not a sign of stress in the financial
markets
• No immediate impact on the credit quality of insurer
investment portfolios, but high yield issuers and others
that rely heavily on the short-term and variable rate
markets for funding should be monitored closely
• LIBOR to be phased out over the next several years, with
alternatives currently being tested
• The transition away from LIBOR will require market
participants, including insurance companies, to review all
financial contracts that reference the short-term rate
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  #92  
Old 05-23-2018, 01:49 PM
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from the end of that presentation:
http://www.oliverwyman.com/content/d...in%20Focus.PDF

Quote:
LIBOR FALLBACKS IN FOCUS
A LESSON IN UNINTENDED CONSEQUENCES

EXECUTIVE SUMMARY

Market participants are undertaking significant work to prepare for a transition away from
LIBOR. The recent launch and reform of preferred alternative reference rates to USD LIBOR
and GBP LIBOR, respectively, are important steps in this transition journey. However, LIBORbased
products are still being created, sold and entered into on a daily basis. A large book
of financial instruments is likely to endure past 2021, when the Financial Conduct Authority
(the “FCA”) intends no longer to persuade or compel banks to submit to LIBOR.

The question then is what happens to these LIBOR-based products when LIBOR is no longer
available? As Andrew Bailey, the Chief Executive of the FCA, has noted, this depends on “the
preparations that users of LIBOR make in either switching contracts from the current basis
for LIBOR or in ensuring that their contracts have robust fallbacks in place that allow for a
smooth transition if current LIBOR did cease publication.”

So, what contractual fallbacks are in place today and what would happen if publication of
current LIBOR were to cease, triggering those fallbacks?

The answer is complex. Outside the derivatives world, fallback language is frequently
inconsistent, particularly across products and institutions. The definition of LIBOR, the
trigger for the fallbacks, and the fallbacks themselves vary significantly, even within the same
product sets. Additionally, existing contractual fallback language was typically originally
intended to address a temporary unavailability of LIBOR, not its permanent discontinuation.
This means that, in many cases, existing fallback language will produce unintended results
that can dramatically affect the very structure and economics of the product. In some cases,
floating rate products will become fixed, while in other cases, interest rates for the borrower
may increase substantially.

Given the potential consequences of some existing fallback language, continuing to enter
into contracts using such language carries real economic and potentially other risks. Market
participants should move to using fallback language that is written with the permanent
discontinuation of LIBOR in mind to minimize these risks.

This publication focuses on the legal framework and other issues related to fallback
language.1 To give a more tangible sense of what may be at stake and the efforts required to
transition, we provide in-depth analyses in three important product areas: derivatives, credit
facility transactions, and unsecured securities issued in the capital markets.
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  #93  
Old 08-31-2018, 11:25 AM
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https://www.thinkadvisor.com/2018/08...ealthNewsFlash

Quote:
MetLife Breaks Ground With $1 Billion Bond Based on Libor Heir
MetLife is giving a boost to the new dollar funding benchmark that’s been designed to replace Libor.
Spoiler:
MetLife Inc. is giving a boost to the new dollar funding benchmark that’s been designed to replace Libor, with the U.S. insurer selling a $1 billion bond tied to the secured overnight financing rate.

A debt-issuing unit of the company sold two-year floating-rate notes linked to SOFR, according to a person familiar with the matter, who asked not to be identified because they’re not authorized to speak about it. It is the first such transaction of benchmark size from a company that isn’t either a top-rated sovereign, supranational or agency issuer.

SOFR, which was developed by the Federal Reserve Bank of New York as a dollar-market alternative to the beleaguered London interbank offered rate, has been gaining traction recently with financial institutions. Fannie Mae, Credit Suisse, Barclays and the World Bank have each sold various types of SOFR-linked debt previously.

The new benchmark is calculated based on overnight loans collateralized by U.S. government debt. Libor, on the other hand, is derived from a daily survey of large banks that estimate how much it would cost to borrow from each other without putting up collateral.

The MetLife transaction, which was managed by Bank of America, is a floating-rate note with a coupon of 57 basis points more than SOFR, according to a person familiar. The notes are being issued by Metropolitan Life Global Funding I.

SOFR was set at 1.93 percent for Wednesday, down 2 basis points from the previous day. Overnight dollar Libor for the same day was 1.91538 percent.
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  #94  
Old 12-26-2018, 11:13 AM
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https://www.wsj.com/articles/ubs-to-...ms-11545424414

Quote:
UBS to Pay $68 Million to Settle State Libor-Manipulation Claims
Bank says it is pleased to have resolved the legacy matter

Spoiler:
UBS Group AG agreed to pay $68 million to end state investigations into alleged manipulation of a key lending benchmark that was considered one of the most important barometers of the world's financial health.

A spokesman for the bank said it was pleased to have resolved the legacy matter and said the settlement "was achieved with the best interests of our shareholders in mind."

UBS is the fourth U.S. dollar-Libor-setting-panel bank that reached settlements with attorneys general to resolve accusations that they made billions of dollars by rigging the lending benchmark.

A series of Wall Street Journal articles in 2008 raised questions about whether global banks were manipulating the interest-rate-setting process by lowballing a key interest rate to avoid looking desperate for cash amid the financial crisis.

The London interbank offered rate, or Libor, is used globally to help set the price of many types of financial contracts, from home mortgages to commercial borrowing.

Libor, which is being phased out, is calculated every working day by polling major banks on their estimated borrowing costs.

Under the agreement with the attorneys general, which ties into a previous federal case that ultimately led to the Swiss bank pleading guilty to wire fraud, UBS admitted that management at times directed employees to "err on the low side" or stay in the "middle of the pack" when submitting U.S. Libor rates and that it submitted false yen Libor rates to benefit its trading positions.

"It is highly advisable to err on the low side with fixings for the time being to protect our franchise in these sensitive markets," the then-head of the bank's asset and liability management wrote in an email, according to Friday's settlement agreement. "Fixing risk and [profit and loss] thereof is secondary priority for now."

As part of the settlement agreement with the states and District of Columbia, UBS agreed to cooperate with the state investigations and said it has "substantially complied" with required business changes under a 2012 settlement agreement with the U.S. Commodity Futures Trading Commission.

UBS said it wouldn't object to the CFTC providing any reports about UBS's compliance to the attorneys general.


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  #95  
Old 02-02-2019, 09:29 AM
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https://www.jpmorgan.com/global/markets/libor-sofr

Quote:
Leaving LIBOR:
A Landmark Transition

J.P. Morgan nurtures a new benchmark, SOFR, and breaks down what it means for nearly $200 trillion of assets.
Spoiler:
January 15, 2019

A new benchmark reference rate, the Secured Overnight Financing Rate (SOFR), is positioned to transform USD-based financial markets, heralding a transition from the London Interbank Offered Rate (LIBOR).

The size, scale and scope of LIBOR usage make this shift arguably the biggest challenge facing the finance industry today. Embedded in the plumbing of markets over more than three decades, the reference rate evolved into an international standard rooted in everything from consumer contracts such as auto loans to $190 trillion of interest rate derivatives.

But in the wake of post-crisis reforms that have altered market structure, the U.K. regulator tasked with overseeing the benchmark – the Financial Conduct Authority (FCA) – said what LIBOR seeks to measure is no longer sufficiently active and that it would not compel banks to submit it beyond 2021.

“I hope it is already clear that the discontinuation of LIBOR should not be considered a remote probability 'black swan' event,” Andrew Bailey, chief executive of the FCA, said in a speech earlier this year.

The LIBOR rate itself has become less and less robust. It is therefore essential to provide an alternative because there are significant financial stability risks in the marketplace for all participants if LIBOR ceases to exist and there is no clear way forward.
Sandie O’Connor ARRC Chair and JPMorgan Chase Chief Regulatory Affairs Officer
Now asset managers, lenders, investors, corporations and other stakeholders must get ready for what the press dubbed “the world’s most important number” to disappear. To proactively address the issue, the finance industry is collaborating across the private and official sectors to implement a replacement for USD LIBOR called SOFR.

J.P. Morgan is providing leadership in this landmark transition, chairing the Alternative Reference Rates Committee (ARRC), a group of industry participants convened by the Federal Reserve Board, and mobilizing hundreds of staff across the globe to prepare internally and externally for the ramifications.

Below, J.P. Morgan speaks with experts from its regulatory affairs, sales, trading and research departments to explore the issue and educate all stakeholders on the new reference rate set to replace the historic benchmark.

What is LIBOR and why doesn't it work?
From 1969 to 2021

Born on August 15, 1969 with a J.P. Morgan transaction

Born in 1969, LIBOR came on the scene when Greek banker Minos Zombanakis, a managing director at J.P. Morgan legacy bank Manufacturers Hanover Ltd. in London, brokered a syndicated loan of $80 million.

Ten months after the first deal – on June 5, 1970 – Manufacturers announced a second 5-year loan of $100 million bearing a fluctuating interest “based on the six-month interbank rate in London.” These are the first records of LIBOR.

The reference rate worked its way organically into deals, pushing the British Bankers Association to officially embrace it in 1986 and establish a governance system that involved asking traders across a host of panel banks to estimate each day at which level they believed they could borrow funds.

LIBOR, a measure of the interest rate banks were willing to pay one another to raise cash, then became the standard benchmark in derivatives markets, which ballooned in the 2000s. This tied LIBOR to transactions with notional amounts in the trillions of dollars.

LIBOR wasn't intended to become a benchmark for the entire market. It started out because a group of banks wanted to lend money to overseas clients back in the 60s and no one had ever done a floating rate loan before.
Josh Younger Interest Rate Derivatives Research, J.P. Morgan
You need to look at the exponential growth of the swaps market to understand why LIBOR became so embedded in the derivatives space. In the late 1990s, USD swaps totaled $15 trillion before jumping to well above $100 trillion in the late-2000s.
Adam Walker Rates Sales & Marketing, J.P. Morgan
The notional value of interest rate swaps outstanding dwarfs all outstanding fixed-income securities

$ trillion
Total USD fixed-income securities
USD swaps
'00
'02
'04
'06
'08
'10
'12
'14
'16
0
30
60
90
120
150
'10● Total USD fixed-income securities: 33.68604135
Source: J.P. Morgan, BIS, SIFMA
USD swaps market
grew by more than
10x
in the 2000s


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  #96  
Old 09-06-2019, 02:43 PM
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https://www.accountingtoday.com/news...ofr-transition
Quote:
FASB proposes guidance on LIBOR transition
Spoiler:
The Financial Accounting Standards Board released a proposed accounting standards update Thursday to help banks and other types of businesses make the transition from the London Interbank Offered Rate, a benchmark interest rate at which major global banks make short-term loans to one another, to new reference rates.

The guidance aims to ease the potential burden in accounting for, or recognizing the effects of, reference rate reform on financial reporting as banks make the transition from LIBOR. Regulators began pushing for banks to move away from LIBOR after a scandal erupted in 2012 over reports of conversations between traders from some of the major banks showing how the rate can be manipulated to make investment gains. FASB has been working on ways to help accountants make the transition from LIBOR to the Secured Overnight Financing Rate (SOFR), and in June it advanced an initiative to offer accounting relief for companies and organizations that need to modify their contracts (see FASB moves to ease transition from LIBOR to SOFR).

“The FASB is committed to providing stakeholders with the guidance they need to ease the process of migrating away from LIBOR and other interbank offered rates to new reference rates,” said FASB Chairman Russell Golden in a statement. “The board’s proposal will address operational challenges they have raised and ultimately help simplify the process while reducing related costs.”

FASB chairman Russell Golden
FASB Chairman Russell Goldenphoto from AICPA conference
Web Seminar The future of audit
In this webinar, a panel of audit experts will chart the developments that are revolutionizing this core service of the profession.
SPONSORED BY

FASB noted that trillions of dollars in loans, derivatives and other financial contracts reference LIBOR. Global capital markets are expected to transition away from LIBOR and other interbank offered rates toward rates that are more observable or transaction-based and less susceptible to manipulation. FASB launched a project in late 2018 to deal with the potential accounting challenges anticipated to come with the transition.

The proposed accounting standards update would offer some optional expedients and exceptions for applying U.S. GAAP to contract modifications and hedging relationships affected by the reference rate reform. FASB’s guidance would apply only to contracts or hedging relationships that reference LIBOR or another reference rate that’s expected to be discontinued due to reference rate reform.

The guidance aims to help stakeholders during the global market-wide reference rate transition period, so it would be in effect for just a limited time after the final guidance is issued by FASB. It wouldn’t apply to contract modifications made and hedging relationships entered into or evaluated after Dec. 31, 2022.

FASB is asking stakeholders to review and provide comments on the proposed update by Oct. 7, 2019. The proposed update, including a “FASB in Focus” overview document and information about how to submit comments, is available on FASB's website.


https://www.fasb.org/jsp/FASB/Docume...isclaimer=true

https://www.fasb.org/cs/Satellite?c=...eid=c21e3346c3
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  #97  
Old 09-18-2019, 05:59 PM
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https://www.shearman.com/perspective...j_0xwjLxfUT2ms

Quote:
SOFR SURGE EVENT: WHAT JUST HAPPENED?!

Spoiler:
SOFR – the secured overnight funding rate in USD – is a rate published by the New York federal reserve based upon secured overnight transactions in the repo market. It is of increasing importance, since it has been regarded by many market participants as the basis for the likely successor to U.S. dollar LIBOR, a long-standing benchmark which is being phased out at the behest of the UK’s Financial Conduct Authority.

The confluence of a number of events has exposed insufficient elasticity in the USD overnight cash repo market. Contributing to the stress on the system is an upcoming corporate tax payment date, which pulled cash out of the money market system, whilst at around the same time $115 billion of investment grade debt was being issued and traded (based on data for the first half of September). The secondary market trading volumes of this newly issued investment-grade paper increased inventories at broker dealers; who, in turn, rely on the repo market to fund those volumes. In addition, $60 billion of Treasury bond maturities negatively impacted available cash. All these events contributed to a cash crunch on September 17, 2019, that we refer to here as the “SOFR Surge Event”, in which the SOFR rate increased by 282 basis points, compared with the previous day. As of the time of this publication, the surge is not expected to last more than one day (albeit an uptick in SOFR may temporarily linger, given its causes (which are of a temporary nature)).

Backward-looking cumulative 1 month SOFR has been discussed as a new USD rate benchmark for the derivatives markets to replace the floating rate for forward looking 1 month USD LIBOR. Since this is based upon actual SOFR overnight rate data, this rate will continue to capture and incorporate the effects of the SOFR Surge Event for the next month. Given the 282 basis points of surge and assuming this is very short-lived (i.e., the event lasts one day), the increase to the 1-month SOFR for each of the 30 days following the SOFR Surge Event will be approximately 10 basis points. This is not just material in the world of interest rate pricing, but of huge economic impact. For those who are interest rate traders, this SOFR Surge Event presents a material change for risk management purposes and complicates managing a complex book of interest rate positions. The risk of future such events will also need to be taken into account by banks when agreeing on rates with their counterparties.

In contrast to backward-looking SOFR, LIBOR is forward looking. For example, the 1 month USD LIBOR setting would take account of changes that LIBOR submitting banks foresee in the month ahead. So the 1 month rate would include the average effect of any expected month end uplifts to interest rates. Unexpected/flash events that are anomalous and very short lived would not usually be factored into LIBOR, because forward expectations should exclude unexpected and (with significant exceptions) also exclude historical outcomes. This is an important stabilizing component of LIBOR that is often overlooked, but is underscored by this recent SOFR Surge Event.

There are some interesting implications.

First, in relation to the proposed transition from LIBOR to fallback or alternative rates (meaning, in the USD market, SOFR-based rates). The proposal at the moment, which has wide market support, is ultimately for a SOFR-based rate (likely a cumulative overnight backward-looking rate, as described above) plus a fixed spread, to replace the relevant LIBOR rate setting. The fixed spread would be determined as the average difference between SOFR and LIBOR over a historic period. If the transition date had, for example, been declared and set to be the end of September 2019, the fixed spread as between SOFR and LIBOR would be calculated over a period including the SOFR Surge Event and the entire USD LIBOR floating rate market would suffer an artificially increased fixed spread as a result. An excess 10bps (if the fixed rate averaging period is a month) rippling across trillions of dollars of assets and liabilities is a matter of grave concern and potentially has systemic implications.

Secondly, in relation to the robustness of the SOFR rate itself, the SOFR Surge Event raises the troubling reminder that the cash market stabilization role played by the repo market, through the Fed lending window, is ultimately managed through discretionary mechanisms controlled by the Fed. In this instance, the Fed, briefly, was unable to intervene to stabilize the overnight rate, with the result that there was a surge in the SOFR rate. The corollary is that SOFR is, in large measure, determined from input data that is dependent on Fed activity and the ability and effectiveness of the Fed’s market stabilization activity, and that SOFR may be affected by one-off economic events and greater levels of volatility than have been observed with LIBOR. It is therefore questionable whether SOFR can be truly characterized as a market rate or is yet suitable to be used on a market-wide basis. It is a government-managed rate that is subject to discretionary adjustment by the Fed. The argument that a replacement rate (for LIBOR) should be based in transparent actual transactions is still valid. SOFR was calculated in accordance with its published formula based on actual transactions. However, its utility as a market replacement rate is weaker than expected. In contrast, the USD LIBOR market was stable during the occurrence of the SOFR Surge Event. The broader cash market was also stable. It is hard to balance the cash market stabilization role played by the Fed through the overnight repo market with the goal of creating a market replacement rate. Suffice to say that any equivalent discretion afforded to a non-government agency would instantly disqualify the resulting rate from being sufficiently robust and not subject to manipulation or unanticipated external shocks.

Thirdly, the SOFR Surge Event not being reflected in LIBOR outputs on September 17 shows that SOFR is “almost, but not entirely, unlike”[1] LIBOR. The transactions which qualify as inputs for LIBOR settings are not the same as those that underpin SOFR. The former are unsecured, while the latter are secured; LIBOR is forward-looking, whilst SOFR is backward-looking. The ripple effect of the SOFR Surge Event on LIBOR qualifying transactions is not clear, but we can infer (given the apparent stability of LIBOR) that (1) the SOFR Surge Event was possibly too short in duration to impact interbank lending (i.e., a “flash” event), (2) a significant number of LIBOR submitting banks were not meaningfully exposed to the SOFR Surge Event and therefore were able to continue orderly interbank lending or (3) given the forward looking nature of LIBOR, the LIBOR submitting banks determined that the SOFR Surge Event was anomalous and one-off and therefore not relevant to the forward-looking LIBOR market.

As transitions from LIBOR to other rates are rolled out by financial institutions to their contracts, such as derivatives, lending agreements, mortgages, securities and so on, it will be necessary for them to explain what the change to customers will be from the new rates. As a practical matter, it will likely be an incrementally harder sell to customers to disclose that changing the rate to SOFR will expose customers to the risk of more extreme volatility and off-market pricing, but this will be necessary in light of the SOFR Surge Event. As LIBOR risk factors are a necessity and common practice in the debt capital markets (i.e., for bonds and other securities), these risk factors will need to evolve to take account of the additional risks relating to the SOFR Surge Event.

A significant difficulty with any contemplated transition from LIBOR to SOFR is that insufficient time has been given to market participants to observe how LIBOR and SOFR compare over a period that includes time to capture events such as the SOFR Surge Event, as well as more significant market events, such as downturns in the economic cycle, periods of heightened sovereign risk, periods of significant change to asset prices or major global conflicts. As a result, the risk exists that neither financial institutions nor customers will be able to readily develop sophisticated hedging products that allow the differences between SOFR and LIBOR to be effectively and cost efficiently managed.
All this raises questions as to whether the markets and the regulators have sufficiently thought through the appropriateness and benefits of adopting SOFR in place of LIBOR as the leading USD floating rate benchmark and the risks it poses to the cash and derivatives markets, and long term debt capital markets, as a fall back for LIBOR.


https://www.wsj.com/articles/fed-to-...rs-11568729757
Quote:
Fed Intervenes to Curb Soaring Short-Term Borrowing Costs
For first time since 2008 the central bank injects funds into money markets after a sudden shortage of cash

Spoiler:
For the first time in more than a decade, the Federal Reserve injected cash into money markets Tuesday to pull down interest rates and said it would do so again Wednesday after technical factors led to a sudden shortfall of cash.

The pressures relate to shortages of funds banks face resulting from an increase in federal borrowing and the central bank's decision to shrink the size of its securities holdings in recent years. It reduced these holdings by not buying new ones when they matured, effectively taking money out of the financial system.

Separately, the Fed's rate-setting committee began a two-day policy meeting Tuesday at which officials are likely to lower the federal-funds range by a quarter-percentage point to cushion the economy from a global slowdown, a decision unrelated to the funding-market strains.

The federal-funds rate, a benchmark that influences borrowing costs throughout the financial system, rose to 2.25% on Monday, from 2.14% Friday. The Fed seeks to keep the rate in a target range between 2% and 2.25%. Bids in the fed-funds market reached as high as 5% early Tuesday, according to traders, well above the band.

The New York Fed moved Tuesday morning to inject $53 billion into the banking system through transactions known as repurchase agreements, or repos. The bank said Tuesday afternoon it would inject up to $75 billion more on Wednesday morning, but many in the market were looking beyond that decision. "The market will be waiting to see if the Fed makes this a more permanent part of the playbook," said Beth Hammack, the Goldman Sachs Group Inc. treasurer.

Fed policy makers set their target range to influence a suite of short-term rates at which banks lend to each other in overnight markets -- but those rates are ultimately determined by the markets. If various operations in the markets fail, the fed-funds rate can deviate significantly from the target.

In the short run this likely affects only market participants who borrow in the overnight markets, but if the strains last long enough it can affect the rates other businesses and consumers pay.

Such deviations also undercut the Fed's ability to keep the economic expansion on track through monetary policy, such as by lowering rates to provide a boost and raising them to prevent the economy from overheating.

Rising rates in overnight lending markets "are clearly not desirable because they impede the transmission of monetary policy decisions to the rest of the economy," said Roberto Perli, an analyst at Cornerstone Macro.

The Fed likely will continue to provide funding to ensure the smooth operation of the repo market for some time, although it isn't clear how long that might be, analysts said Tuesday. "This is in every way, shape and form an emergency measure," said Gennadiy Goldberg, a fixed-income strategist at TD Securities.

There wasn't evidence Tuesday of credit-market dislocations or other transactions that have followed past periods of distress. Instead, the pressures that sent the fed-funds rate higher were related to monetary and regulatory changes that created shortages of funds for banks.

The New York Fed hasn't had to intervene in money markets since 2008 because during and after the financial crisis, the Fed flooded the financial system with reserves -- the money banks hold at the Fed. It did this by buying hundreds of billions of dollars of Treasurys and mortgage-backed securities to spur growth after cutting interest rates to nearly zero.

Reserves over the last five years have been declining, after the Fed stopped increasing its securities holdings and later, in 2017, after the Fed began shrinking the holdings. Reserves have fallen to less than $1.5 trillion last week from a peak of $2.8 trillion.

The Fed stopped shrinking its asset holdings last month, but because other Fed liabilities such as currency in circulation and the Treasury's general financing account are rising, reserves are likely to grind lower in the weeks and months ahead.

In addition, brokers who buy and sell Treasurys have more securities on their balance sheets due to increased government-bond sales to finance rising government deficits.

Then on Monday, corporate tax payments were due to the Treasury, and Treasury debt auctions settled, leading to large transfers of cash from the banking system.

Meanwhile, postcrisis financial regulations have made short-term money markets less nimble. This didn't matter as much when the banking industry was awash in reserves and could absorb the kind of swings witnessed this week. These days, "the market doesn't respond to temporary deposit flows as efficiently or fluidly," said Lou Crandall, chief economist at financial-research firm Wrightson ICAP.

The surge in repo rates began Monday afternoon, well after the vast majority of trading in the market for overnight loans typically takes place, investors, traders and analysts said. The origin of the demand for cash was unclear, as traders seeking cash could have been acting on their own behalf or as intermediaries for other parties, one trader said.

Unexpected bids seeking cash entered the market at a time traders said was uncomfortably close to the 3 p.m. deadline for settling trades.

Scott Skyrm, a repo trader at Curvature Securities LLC, said he had seen cash trade in the repo rate as high as 9.25% Tuesday. "It's just crazy that rates could go so high so easily," he said.

On his trading screens, Mr. Skyrm said he could see traders with collateral securities that they were trying to exchange for cash. The rates they were offering would start to rise until an investor with cash available to trade would begin accepting bids, gradually driving repo rates down until investors had exhausted their cash, he said. Then rates would resume their climb.

While temporary technical factors could explain why cash would be in high demand this week, they didn't explain the market volatility, Mr. Skyrm said. "It seems like there's something underlying out there that we don't know about," he said.


https://www.wsj.com/articles/feds-re...rs-11568747574
Quote:
Fed’s Repo Rescue Leaves Many Searching for Answers
Some financial firms faced difficult choices after the short-term lending rate spiked

Spoiler:
A spike Tuesday in short-term funding costs threw a spotlight on a market that has been a sore subject for bankers, investors and regulators alike since the 2008 financial crisis.

Borrowers in the market for repurchase, or repo, agreements paid as much as 10% in morning trading, versus recent rates of just over 2%. The surge spurred the Federal Reserve Bank of New York to pour billions of dollars into the financial system to bring rates back down.

Banks and brokerages use repo contracts to borrow short-term cash by selling a security, like a mortgage or a Treasury bond, and promising to buy it back in the future at a slightly higher price. Asset managers get a safe place to put money and (usually) earn a slight return.

But Tuesday's rate spike came after a month of unusually volatile trading in the repo market and confronted some financial firms with difficult choices.

Ray Remy, co-head of fixed income in New York at Daiwa Capital Markets America Inc. -- one of 24 so-called primary dealers that can directly trade with the Federal Reserve -- said he faced a decision early Tuesday whether to pay an interest rate above 7% for cash he neededfor his bond-trading portfolio.

Mr. Remy said he "took a deep breath" and didn't borrow the money, hoping repo rates would fall. Borrowing at higher rates has "a huge, huge effect" on the profitability of large broker dealers, he said. Patience proved wise, as rates fell back near 2% shortly after the Fed's action. "We kind of got lucky today," he said. "The Fed came in."

Market participants on Tuesday were mostly at a loss to explain the magnitude of the spike. Most cited a confluence of unrelated factors that in isolation would pose no huge threat but combined to roil the market. Corporations paid their quarterly taxes, and the government collected payment for Treasury bills it sold to dealers last week. Both sucked billions of dollars out of banks and money-market funds, which created a pinch in available short-term funding. The Fed's intervention made more cash available to those seeking to borrow, normalizing rates.


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Old 09-19-2019, 06:28 AM
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maybe this needs its own thread now:

https://www.cnn.com/2019/09/18/busin...cue/index.html

Quote:
For a second day, the New York Fed spent billions to calm the financial market

Spoiler:
New York (CNN Business)For the second straight day, the New York Federal Reserve injected a huge sum of money into the financial system in a bid to calm stress in the overnight lending market.

The Fed on Wednesday poured another $75 billion into the market following a $53 billion rescue by the NY Fed on Tuesday. Overnight lending rates have suddenly spiked, and the Fed is acting to bring them back down to keep markets functioning smoothly.
Until this week, the Fed hadn't launched an operation like this since 2008.
Federal Reserve Chairman Jerome Powell said during a press conference on Wednesday that these steps were "effective in relieving funding pressures."
America's CFOs brace for a recession prior to the 2020 election
America's CFOs brace for a recession prior to the 2020 election
Still, the fact the Fed needed to pump $128 billion into the system on successive days shows that a crack has emerged in a seldom-discussed corner of Wall Street that is central to the global financial system. It also raises concerns that the Fed is losing its grip on the short-term rates the central bank is supposed to control.
"It shows you the plumbing is broken," said Michael Block, market strategist at Third Seven Advisors. "It's nice they are recognizing this and that they have safety valves."
To fix it, the NY Fed launched a pair of "overnight repo operations," during which the central bank aims to ease pressure by purchasing Treasuries and other securities.
Rates spiked to 10% before rescue
On Wednesday, the NY Fed submitted $80.1 billion of purchase orders, of which $75 billion was accepted. The aim is to keep borrowing rates from climbing sharply above the Fed's target range, which was set at 2% to 2.25% in late July. The Fed on Wednesday lowered rates to a range of 1.75% to 2%.
The overnight lending rate spiked to a high of 10% on Tuesday before the NY Fed stepped in. It has since tumbled below 3%, which is still above the Fed's target range.
Powell acknowledged "elevated pressures" in markets, but expressed confidence this won't have an impact on the economy.
"While these issues are important for market functioning and market participants, they have no implications for the economy or the stance of monetary policy," Powell said.
The overnight market is overshadowed by the Dow, the S&P 500 and even the 10-year Treasury rate, but it plays a critical role by allowing banks to borrow cheaply for brief periods. They often turn to this market to buy bonds, especially US Treasuries.
The spike in rates brought back bad memories of 2008, when this market broke down, but analysts don't believe this is a repeat. Back then, overnight rates spiked because banks were scared to lend to each other. No one knew who would survive the financial crisis. Today, banks have repaired their balance sheets and are hauling in massive profits.

'Domino effect'
Mark Cabana, rate strategist at Bank of America Merrill Lynch, blamed soaring overnight lending rates on a sharp decline in the amount of reserves in the system.
"The amount of cash in the banking system is too limited," Cabana said in a note to clients on Tuesday.
Block, the Third Seven market strategist, said it's not clear precisely why that has happened, although he suggests likely factors include large withdrawals at major banks, shifts in foreign capital and the large supply of US Treasuries.
"It doesn't take much for a domino effect to happen," Block said.
Bank of America's Cabana pointed to Monday, when US companies withdrew large chunks of money from banks to make their quarterly tax payments to the US Treasury Department. That forced banks to drain their reserves parked at the Fed. Bank of America estimates $100 billion of reserves was drained from the banking system on Monday.
Powell agreed that the tax payments were a large factor.
"This upward pressure emerged as funds flowed from the private sector to Treasury for tax payments," he said.
Bigger picture, some analysts believe the rate spike is a symptom of the surge in Treasury bonds being issued to fund the $1 trillion federal deficit. Government borrowing has climbed because of a decline in tax revenue from the Republican tax law and a bipartisan surge in federal spending.
More Fed help on the way?
Wall Street is now looking to the Fed to calm the overnight lending market.
That means additional cash injections by the NY Fed, such as those announced this week.
And the Fed announced on Wednesday it is lowering the interest rate it pays on excess bank reserves, known as IOER, to 1.8%. That new rate is 0.2 percentage points below the high end of the Fed's new target range. The Fed explained the move is designed to keep short-term rates within its target range.
However, the Fed did not announce plans for a permanent operation to buy Treasuries.
Powell did open the door to increasing the size of the Fed's balance sheet.
"It is certainly possible we will need to resume the organic growth of the balance sheet sooner than we thought," he told reporters during a press conference.
Bank of America and Barclays anticipate the Fed eventually will have to ease the burden on banks by purchasing Treasuries. The Fed's bond buying program, known as quantitative easing, or QE, was launched during the financial crisis to keep borrowing costs low. The Fed later reversed course and started shrinking its balance sheet as the economy healed.
Cabana, the Bank of America strategist, estimates the Fed will need to purchase $150 billion of US Treasuries per year.

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Old 10-14-2019, 05:19 PM
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Mary Pat Campbell
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https://www.reuters.com/article/us-b...-idUSKBN1WN0H4

Quote:
The end of Libor: the biggest banking challenge you've never heard of

Spoiler:
LONDON (Reuters) - On June 30, British bank NatWest (RBS.L) sent out an arcane-sounding press release - bus operator National Express (NEX.L) had become the first company to take out a loan based on Sonia, a replacement for scandal-hit interest rate benchmark Libor.

It was billed as the first switch of thousands that British firms would make by end-2021, when the benchmark is set to be decommissioned.

Four months on, NatWest’s trailblazing Sonia switch has been followed by only one other loan, when the bank struck a deal with utility South West Water on Oct. 2.

The slow progress highlights the challenge banks and borrowers face as regulators attempt to end the use of Libor, a benchmark embedded in as much as $340 trillion financial contracts worldwide from home loans to complicated derivatives.

Libor, once dubbed the world’s most important number, was discredited after the 2008 financial crisis when authorities in the United States and Britain found traders had manipulated it to make a profit.

But replacing Libor is proving expensive and tricky with concerns that, if mishandled, it could trigger credit market confusion and waves of lawsuits, finance industry sources said.

RELATED COVERAGE
Factbox: The global benchmarks replacing Libor
With no obvious alternative, some countries are adopting their own benchmarks. The United States is leading the way with a booming trade in derivatives linked to its new Sofr rate, while the European Central Bank started publishing Estr, its new interest rate benchmark, earlier this month.

In Britain, professional investors such as hedge funds and pension insurance clients are also already writing and trading derivatives contracts linked to Sonia. But companies which make up the so-called Libor “cash” market of sterling-denominated loans are dragging their feet or are even not aware of the shift.

At least two banks in Britain have shifted staff from teams preparing for Brexit to specialist Libor taskforces in the past quarter as the issue becomes more pressing, industry sources said.

“Part of the market is very educated and smart on this and part of the market is not even aware that Libor is going,” said Phil Lloyd, head of market structure & regulatory customer engagement at NatWest Markets.

Lloyd said banks like NatWest are battling to allay concerns among corporate borrowers that the Sonia benchmark will make it harder for them to know how much interest they owe because the rate is backward looking.

Sonia, the sterling overnight index average, is based on the average of interest rates banks pay to borrow sterling from one another outside market hours, and is published at 9:00 a.m. local time (0800 GMT) daily, after the transactions have been vetted by the Bank of England.

Borrowers taking out Sonia loans will in effect not know exactly how much interest they owe until they are required to pay.

In contrast, loans linked to Libor can have forward-looking term rates, meaning borrowers have greater certainty over their future liabilities and can manage cash flows more easily.

Bankers and consultants said the market was exploring a forward-looking Sonia term rate by mid-2020 to appease borrowers but not everyone is in favor.

The overnight Sonia rate, based on actual transactions, is seen as more robust and less vulnerable to the kind of manipulation that affected Libor, which was based on rates submitted by banks.

The Libor rigging scandal saw billions of dollars in fines levied on major banks and jail sentences for traders convicted of manipulating the benchmark for profit.

Some banks and lawyers fear the creation of a Sonia term rate, which would likely be based on forward-looking estimates from banks as opposed to past transactions, could undermine the security of the benchmark and even spawn legal dangers for banks.

Murray Longton, a consultant at Capco who advises financial firms on Libor transition, said banks were fearful of lawsuits, as the proliferation of alternative Sonia term rates offered by different lenders could spark allegations of mis-selling.

“If you get this wrong, this is PPI for investment banking- if you haven’t communicated properly and you move a customer (on to Sonia) and benefit, there could be a case where this gets reviewed and you owe your client a lot,” he said.

The Payment Protection Insurance (PPI) mis-selling scandal in Britain has cost banks more than 43 billion pounds in compensation after the contracts were retrospectively deemed to have been mis-sold.

“A lot of the corporate market are waiting for a few things of which one is a term rate. And if they never get a term rate, then waiting will lead to them still executing Libor, and not being ready for Sonia. The clock is ticking,” Lloyd said.

“And the other point about having a term rate is you’re starting to get back into a world where you are really recreating a new version of Libor.”

COSTS AND CONSEQUENCES
But the reluctance of corporate borrowers to buy into Sonia is not the only reason for the slow progress.

Banks face large costs for adapting systems and educating thousands of relationship managers on the merits of Sonia over Libor.

Slideshow (2 Images)
Fourteen of the world’s top banks expect to spend more than $1.2 billion on the Libor transition, data from Oliver Wyman show, with the costs for the finance industry as a whole set to be several multiples of that sum.

Much of this cost is linked to the arduous task of changing the terms of contracts tied to Libor whose duration extend beyond the 2021 deadline. Progress has been held up not only by nervous borrowers but also by banks in loan syndicates which may not always agree on the new wording required to adapt existing loan agreements to the new benchmark.

“You need unanimous agreement to change the baseline product, so what are the chances if you’ve got 10-15 participants (in a syndicate) that they will all agree on the same thing?,” Capco’s Longton said.

Some corporate borrowers are also playing a wait-and-see game to see whether they can benefit financially from Libor’s slow death spiral. But this could have costly consequences, depending on the so-called “fallback” language in contracts for their existing loans.

These fallbacks - originally designed to kick in if Libor was temporarily unavailable - usually stipulate alternative rates, such as calling other banks for a quote or using the last published Libor rate. But the fallback clauses were not designed to cope with Libor ceasing to exist indefinitely.

That could create big risks for borrowers, for example, by potentially converting a “floating rate” loan, tied to the fluctuations of Libor into a fixed-rate one.

Serge Gwynne, a partner at consultant Oliver Wyman, said regulators could do more to help banks manage the transition away from Libor, starting with much harder deadlines on when it would formally cease to exist.

“Libor is embedded everywhere in the plumbing of the financial world, that’s why this is such a big challenge,” said Longton.

“You are changing a product that has been used to create markets for a long time. You are not just taking one thing out and putting one thing in but changing the whole dynamic of how this works.”


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Old 10-21-2019, 10:52 AM
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https://fixedincome.fidelity.com/ftg...fd160000_110.1

Quote:
Regulatory guidance on Libor transition welcomed
spoiler]The municipal bond industry will have a window of more than two years to adjust to the phase out of Libor under the proposed transition regulations announced by Treasury and the IRS.

The long-awaited rules announced Tuesday and published Wednesday in the Federal Register are subject to public comment through Nov. 25.

But the sections pertaining to public finance can be implemented immediately.

Those are among the reasons bond experts gave for their positive reaction to this proposal for helping issuers avoid adverse tax consequences from changing the terms of debt, derivatives, and other financial contracts to alternative reference rates.

An alternative reference will not trigger a reissuance if the new rate produces the same fair market value within 25 basis points.

There are two safe harbors for achieving that:

One involves looking at the historical average values of both reference rates and, if necessary, making an adjustment payment.


The second safe harbor allows the issuer and bondholder to simply agree that the fair market value is the same if they are unrelated to each other.

That second instance “is almost always going to be the case in the public finance world,” said said Johnny Hutchinson, a partner at Squire Patton Boggs in Houston and chair of the Tax Law Committee of the National Association of Bond Lawyers. “That particular safe harbor is going to be very helpful to people in the public finance world.”

Hutchinson said Treasury and the IRS “should be applauded for getting this to all come together and getting it out.”

“It’s a project that touches all sorts of different areas of federal income tax law far beyond our little corner of the world in public finance,” he said.

Libor, an acronym for the London Inter Bank Offered Rate, is being phased out by the end of 2021 at the recommendation of the Alternative Rates Reference Committee created by the U.S. Federal Reserve Board and the Federal Reserve Bank of New York.

Hutchinson commended the Treasury and IRS for allowing “a very broad list of other indices” to be used as a replacement for Libor instead of limiting the alternative solely to the Secured Overnight Financing Rate (SOFR) published by the Federal Reserve Bank of New York.

Although he labeled the proposed regulations “a little dense,” Hutchinson said that “from an initial read” they “give issuers of bonds fairly broad latitude to replace rates in their current bond documents and in their current swap documents.”

The Government Finance Officers Association also welcomed the proposed regulations.


“We are especially glad to see that the IRS is providing clarity around the tax issues relating to converting outstanding trades, such as an interest rate swap contract, in order to alleviate any costly and unproductive disruption for issuers,” said Emily Brock, director of the federal liaison center at GFOA.

Matthias Edrich, a tax partner at Kutak Rock in Denver and a former chair NABL’s Tax Law Committee, often serves as tax counsel for banks on their bond financings.

The absence of IRS guidance has hindered banks from determining the right approach to putting alternative rate language in bond documents.

“My estimate is that banks will start using the approaches that are in the regulations, and will start implementing changes to their alternative rate language now that there’s more certainty as to what the ultimate IRS approach will be,” Edrich said.

Both NABL and GFOA plan on sending comments to Treasury and the IRS on possible improvements to the proposed regulations.

“I know our members well and I am sure we will have some members who will come up with ways that they can be improved,” said Hutchinson.


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