RMA and SIFMA Recommend New York Fed’s Overnight Bank Funding Rate as New Benchmark to Replace the Fed Funds Open Rate

Release Date: May 4, 2016

Contact:  Katrina Cavalli, 212.313.1181, [email protected]

               Frank Devlin, 215.446.4137, [email protected]  

RMA and SIFMA Recommend New York Fed’s Overnight Bank Funding Rate as New Benchmark to Replace the Fed Funds Open Rate  

Philadelphia, PA, and New York, NY, May 4, 2016-The Risk Management Association (RMA) and the Securities Industry and Financial Markets Association (SIFMA) have announced that each recommends the use of the Federal Reserve Bank of New York’s new Overnight Bank Funding Rate (OBFR) as a benchmark for pricing and performance reporting purposes to replace the Fed Funds Open (FFO) rate.

RMA and SIFMA began researching alternatives to ICAP’s FFO in the summer of 2015 after the Treasury Markets Practice Group (TMPG) approached industry leaders to address whether suitable alternatives could be developed or identified that would better address the benchmark standards recommended in 2013 by the International Organization of Securities Commissions (IOSCO). As the TMPG noted in its case study of the use of benchmarks in TMPG covered markets, because the FFO is based on a limited volume of transactions it may be less reflective of the underlying financial interest it is trying to measure than if it were a calculation based on a large volume of data points. The IOSCO standards were contained in the 2013 “Principles for Financial Benchmarks.”

RMA and SIFMA have been working closely on identifying a benchmark that would be consistent with such principles while also being a viable alternative to FFO and maintaining the liquidity, efficiency, and confidence in the markets that currently utilize or refer to FFO as a reference price, in light of our understanding that ICAP has determined that the FFO will be published for the final time on July 27, 2016.

The OBFR, which the Federal Reserve Bank of New York began publishing on March 2, 2016, includes overnight federal funds and certain Eurodollar transactions, and is published on most days at approximately 9 a.m. New York time.  According to FRBNY documentation (available at https://apps.newyorkfed.org/markets/autorates/obfr), the OBFR will exclude data that the New York Fed reasonably deems to be in error, and in such cases-and for other unusual occurrences-the New York Fed will include a note with the rate publication. There are also processes in place to revise the rate, when or if necessary.

“Choosing the OBFR makes sense at a time when industry participants are focused on the IOSCO guidelines and other standards that are attempting to confirm the accuracy and transparency of benchmarks,” said Fran Garritt, RMA Director of Securities Lending and Market Risk.

“As the market transitions away from the FFO, we look forward to working with all market participants to ensure a smooth changeover as they move to implement this recommendation,” added Rob Toomey, Managing Director and Associate General Counsel at SIFMA.

This is a recommendation only and is intended for SIFMA and RMA member firms in order to promote the smooth functioning of the market. The recommendation does not and should not restrict the flexibility of counterparties to negotiate the specific terms of any particular transaction or contractual relationship.