What if….

What if a rate rises in the woods at a "paced transition" and there's no one there to lift it?

Here's 2 clips from the Fed - the first from the May 2016 ARRC Roundtable and the second from Powell at the June 21 Roundtable forum:


"After extensive discussion, the ARRC has preliminarily narrowed the list of potential rates to two that it considers to be the strongest alternatives, the Overnight Bank Funding Rate and some form of overnight Treasury general collateral repurchase agreement (GC repo) rate. Because of the dominance of LIBOR in U.S. dollar interest rate derivative markets, planning for any transition to either rate poses a host of challenges. While the dealers and central counterparties currently represented in the ARRC play key roles in intermediating these markets, demand for interest rate derivatives is ultimately driven by end users. Therefore, it is key that end users play an integral role in the ultimate choice of an alternative and in an ultimate transition strategy. However, end users cannot be expected to choose or transition to trading a benchmark that does not have at least a threshold level of liquidity. Accordingly, the ARRC has thus far focused on formulating an initial transition strategy (the “paced transition”) that could potentially provide this threshold level of liquidity. This plan envisions gradually moving price alignment interest and also eventually discounting from the effective federal funds rate to the new rate chosen by the ARRC. If adopted, a paced transition would represent a first step in creating a liquid market for the alternative rate, but further work will be required – following consultation and close involvement with end users – both in developing the details of an initial transition strategy and in planning for a full transition strategy that would move a more significant portion of the derivatives markets away from LIBOR to the new rate. Following the publication of this interim report, the ARRC intends to consult widely and closely


In saying this, I want to make it clear that LIBOR has been significantly improved. ICE Benchmark Administration is in the process of making important changes to its methodology, and submissions to LIBOR are now regulated by the United Kingdom's Financial Conduct Authority. However, the term money market borrowing by banks that underlies U.S. dollar LIBOR has experienced a secular decline. As a result, the majority of U.S. dollar LIBOR submissions must still rely on expert judgement, and even those submissions that are transaction-based may be based on relatively few actual trades. This calls into question whether LIBOR can ultimately satisfy IOSCO Principle 7 regarding data sufficiency, which requires that a benchmark be based on an active market. That Principle is a particularly important one, as it is difficult to ask banks to submit rates at which they believe they could borrow on a daily basis if they do not actually borrow very often.

That basic fact poses the risk that LIBOR could eventually be forced to stop publication entirely.

Sources tell me several wall hangers in the discussion wondered why the FF rate couldn't just be used.? This should startle you to realize many people charged with this mission are ignorant. The Powell quote shows more understanding, "as it is difficult to ask banks to submit rates AT WHICH THEY BELIEVE THEY COULD BORROW ON A DAILY BASIS IF THEY DO NOT ACTUALLY BORROW VERY OFTEN."  But he's wrong too - its actually far too easy.  In fact, you just submit what you want. And that is where all the Lie in "Lie-bor" originated. The rate was constructed to be the offered rate. What is the rate that you would, are, offer a like entity for this tenor. The revised, but obviously still used, bank manipulated question; Where do you BELIEVE you could borrow ? is at best the bid side and -as we found out - at worst a mirage.

But who cares? right...its just regulatory. And what difference if a few saps who took floating mortgages get bumped, right? But what of the alleged 300 TRILLION in "stuff" link-marked (can't really call it benchmarked anymore) to the ephemeral phantasm rate? The open interest in Gyro-dollars might be calculated to some other, prior, notion of said ghost/memory. It's just heartening to know smart people are on it !

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