Fed's Third-in-Command Announces New Body to Monitor Reference Rates

The "third in command" of the Federal Reserve and the permanent voter of the FOMC,New York Fed Chairman Williams,announced on Thursday that the New York Fed will establish an institution composed of private market participants to monitor the use of interest rate benchmarks or reference rates in the financial markets,supporting the integrity,efficiency,and resilience of their use.The institution,named the Reference Rate Usage Committee,will begin holding meetings in October.

Williams announced the establishment of this new institution during his speech at the 10th Annual U.S.Treasury Market Conference held by the New York Fed.

Williams stated that the Reference Rate Usage Committee will focus on key issues regarding reference rates,including how the usage of these rates evolves and how the markets that support these rates might change.

He also mentioned that the group,convened by the New York Fed,aims to promote best practices related to the use of reference rates,including recommendations made by the Alternative Reference Rates Committee,which is supported by the Federal Reserve.Reference rates serve as the benchmark for setting other rates.

He said that the group will also "promote" "best practices" related to the use of reference rates,including recommendations made by the Alternative Reference Rates Committee,which is supported by the Federal Reserve.Reference rates are the benchmarks used to set other rates.

Williams indicated that the establishment of the new committee was inspired by the experience of transitioning from Libor,which has been one of the most important market reference rates in the United States for half a century.However,evidence exposed in 2008 showed that lending institutions in Europe and the United States manipulated rates to benefit their own portfolios,affecting the normal operation of the benchmark rate.

In response,Williams commented,"The Libor incident taught us two important lessons.First,systemic risks in the global financial system can accumulate gradually over time.Second,addressing this issue requires a complex,costly,and decade-long effort.We cannot afford to repeat the same mistakes."

Morgan Stanley's Deputy Chief Risk Officer,Patrick Howard,will serve as the first chairman of the aforementioned new committee.In a press release,he stated,"The financial industry and the public sector must work closely together to support the sustainable use of reference rates."

In the United States,the Alternative Reference Rates Committee chose to create a new benchmark,the Secured Overnight Financing Rate (SOFR),which is based on overnight repurchase agreements collateralized by U.S.Treasury securities.

The New York Fed proposed modifications to the calculation method of SOFR in July of this year.Wall Street strategists believe that these potential changes are necessary given the development of the repurchase market since the launch of the benchmark in 2018.However,SOFR still has two drawbacks: one is the lack of a forward-looking yield curve,and the other is the absence of a credit component,both of which are important characteristics that Libor possesses,but the new benchmark SOFR lacks.

Williams said: "The relevant work will complement the efforts of the Bank for International Settlements and the Financial Stability Board in the international scope of the use of interest rate benchmarks,ensuring that we will not face similar issues to Libor again."