New tools needed for bespoke SOFR trades – Wells Fargo

US bank’s Libor transition head wants ‘simple’ way to calculate compound rates for any given period

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Officials at Wells Fargo are pressing the Federal Reserve Bank of New York to create a tool that would allow market participants to easily calculate backward-looking averages of the secured overnight financing rate (SOFR) for bespoke trades.

The New York Fed is expected to begin publishing a compound average of SOFR – dubbed SAFR, for secured average financing rate – in the first half of 2020. The compounded rate is likely to be available in the most commonly used tenors – 30, 60 and 90 days. 

Brian Grabenstein, head of the Libor transition office at Wells Fargo, says that may not be enough to encourage take-up of the new benchmark.

“Wells Fargo believes that market participants would also benefit from a tool that would allow them to easily calculate compounded averages over any given period, not just standard 30, 60 or 90-day periods,” he says. “Such a tool would facilitate trading [in] intra-period payoffs and non-standard accrual periods.”    

He called on the Fed to publish a ‘SOFR index’ in addition to SAFR. That way, market participants would be able to “observe the SOFR index on any two days, as opposed to each day during an accrual period, and perform a straightforward calculation” to determine the index value over that period.

Grabenstein first pitched the idea at an Alternative Reference Rates Committee (ARRC) event in New York yesterday (June 4).

“Right now a lot of systems are set up to take a number – say, one month Libor – and multiply it by a principal balance. It’s really easy, simple to understand, clients are used to it, and systems are set up to do it,” he said.

“So, if we can make it simpler to the point where there is an official SOFR-based index where it’s like Libor, where your system just grabs one number… then it makes the transition that much easier.”

Staff at the New York Fed have already started work on publishing SAFR, which Lorie Logan, deputy manager of the System Open Market Account, described “as a further step to support reference rate reform” at a recent Federal Open Market Committee meeting.

SAFR will be the Fed’s first effort at creating a term version of the US dollar Libor replacement. However, cash markets are still lobbying for a forward-looking term rate based on SOFR derivatives. The SOFR futures and swaps markets are not liquid enough to generate such a rate today, but the ARRC is aiming to create one by the end of 2021.

Tom Wipf, chair of the ARRC and vice-chairman of institutional securities at Morgan Stanley, said the proposed ‘big bang’ move to SOFR discounting for cleared swaps in 2020 could be a catalyst for building out a forward-looking term rate.

“Hopefully the big bang will allow us to pull the timing of a robust, Iosco [International Organization of Securities Commissions] compliant, forward-looking term rate, ahead,” he said. “But at this stage, we are still not in a position to say by how much or to provide any guarantees. The forward-looking term rate has to be robust and based on a deep market before it can be endorsed by the ARRC.”

Two staffers at the Federal Reserve have already produced indicative forward-looking rates, but they are not intended to be used in contracts and are not Iosco compliant.

Public comment on SAFR will be sought later this year before publication begins in the first half of 2020.

A spokesperson for the New York Fed declined to comment on whether it would publish a SOFR index.

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