(Bloomberg) -- Federal Reserve Bank of New York President John Williams on Thursday announced the formation of a body of private market participants to monitor the use of interest-rate benchmarks, or reference rates, across financial markets.
The Reference Rate Use Committee, which will begin meeting in October, “will focus on key issues regarding reference rates, including how their use is evolving and how the markets underpinning them may be changing too,” Williams said in remarks opening the New York Fed’s 10th annual US Treasury Market Conference.
He said the panel, convened by the New York Fed, will also “promote best practices” related to the use of reference rates, including recommendations set out by the Fed-backed Alternative Reference Rates Committee. A reference rate is a benchmark used to set other interest rates.
Williams didn’t comment on the economic outlook or monetary policy.
The new group’s formation was motivated, Williams said, by lessons learned from the transition away from Libor, one of the most important market reference rates for a half century. Evidence emerged in 2008 that European and US lenders had manipulated rates to benefit their own portfolios, tainting the benchmark.
“The Libor saga taught us all two important lessons,” Williams said. “First, enormous systemic risk can build in the global financial system gradually over time, and second, it took a complex, expensive, decade-long effort to fix that problem. We must not repeat that experience.”
Patrick Howard, Deputy Chief Risk Officer of Morgan Stanley, will serve as the new committee’s inaugural chair.
In the US, the Alternative Reference Rates Committee opted to create a new benchmark, the Secured Overnight Financing Rate, or SOFR, which is derived from overnight repurchase agreements collateralized by US Treasuries.
SOFR Modifications
The New York Fed in July proposed modifications to the methodology of calculating SOFR. Wall Street strategists see the potential changes as necessary given the evolution of the repo market since the benchmark’s introduction in 2018.
However, SOFR continues to be dogged by two shortcomings: a lack of a forward-looking curve, and the absence of a credit component — both key features of Libor that the newer rates lack.
“This work will complement international efforts at the Bank for International Settlements and the Financial Stability Board to monitor developments in the use of interest-rate benchmarks and ensure that we never have to face a problem like Libor again,” Williams said.
(Adds additional comment from Williams and further context.)
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