New futures contract looks to take on Libor
NEW YORK |
NEW YORK (Reuters) - A new futures contract could challenge the London interbank offered rate (Libor)'s standing as the global interest rate benchmark, as a widening probe into whether Libor was manipulated raises questions about its reliability.
On Monday, the NYSE Liffe will launch a futures contract based on the index on trading in the repurchase agreement (repo) market, which is considered more transparent than Libor.
Investors and analysts are keen to see if this repo-based contract could prove a more reliable indicator on short-term dollar funding than the global benchmark for borrowing costs, Libor, as an investigation widens into whether the latter was manipulated by several big global banks.
"It's a more defensible rate," said Mary Beth Fisher, an interest rate strategist at BNP Paribas in New York, referring to repos. "The market is deep and transparent."
On June 27, British bank Barclays (BARC.L) (BCS.N) paid a record $453 million to American and British authorities to settle allegations that it manipulated Libor. More than a dozen banks are under investigation in Europe, Japan and the United States.
In contrast to Libor, which is based on a subjective survey of a panel of banks, the index for the repo futures contract is a daily average of repo rate levels cleared and settled by the Depository Trust & Clearing Corp (DTCC).
But it could be a tall order to replace Libor, a benchmark for $350 trillion worth of financial products worldwide.
"Libor is not going away any time soon. Its reach is just too far," said Bret Barker, portfolio manager at TCW in Los Angeles, which manages $127 billion of assets.
There have been prior attempts to challenge Libor. Four years ago, bond broker ICAP launched its own dollar-funding index when Libor's reliability was questioned during the global financial crisis. But ICAP's New York Funding Rate has yet to catch on as an alternative to Libor.
In addition to repo futures, traders and analysts are weighing the merits of indices on U.S. Treasury bill rates, federal funds and other short-term rates as viable competitors to Libor.
A repo transaction used for the DTCC index may involve a Wall Street dealer pledging a Treasury, agency or mortgage-backed security as collateral in exchange for an overnight loan.
The DTCC developed its general collateral funding (GCF) repo index about two years ago. It calculated the index based on the $400 billion sector whose trades it clears and settles each day.
"This rate is based on actual transactions in a very, very deep and very liquid market. So that's an appealing alternative," said Tom Collahan, chief executive of NYSE Liffe U.S.
Still, the repo market has its own drawbacks as a gauge on bank borrowing, analysts said.
For example, because repos are backed by collateral, it muddles the market perception of a bank's creditworthiness. Furthermore, repo rates could be skewed by scarcity of certain Treasury issues.
For Thursday, the DTCC repo index on Treasuries was 0.226 percent; on agency debt, 0.236 percent and on mortgage-backed securities, 0.251 percent.
According to the British Bankers' Association, its fixing on three-month Libor was 0.45510 percent on Friday, unchanged from Thursday.
Despite Libor's flaws, there are those in the market who said it remains a viable interest rate guide if it is properly corrected.
"The BBA could still try to make it into a more transparent rate," Alex Manzara, vice president at TJM Futures in Chicago.
As for its challenge to Libor, the repo futures contract needs to gain traction among traders, primary dealers and banks who are heavy repo players, analysts said.
"If it's viewed as a hedging mechanism, it could work," said Chuck Retzky, director of futures sales at Mizuho Securities USA in Chicago.
(Editing by Bernadette Baum)
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