Wednesday, June 11, 2008

ICAP Intraday Effective Rates for the U.S. Market

ICAP’s intraday effective rates are cumulative, volume-weighted averages of rates on transactions brokered by ICAP’s U.S. trading desks. In each case, the effective rate for a given point in the day reflects the weighted average of all trades from the start of the session up until that point. For instance, an 11:00 AM effective rate would include all trades that had gone into the 10:00 effective as well as all new trades occurring between 10:00 AM and 11:00 AM.

These rates are intended to allow market participants to track intraday patterns more precisely than would be possible from monitoring indicative rates alone. They are also intended to provide objective, real-time pricing benchmarks for internal marking purposes and for continuing-contract and floating-rate instruments that require same-day reference rates. A volume-weighted average of actual market transactions is preferable to more arbitrary alternatives based on surveys for the daily opening rate. (For many years, the need for a same-day pricing benchmark has led many financial institutions to use the Garban ICAP “opening” fed funds rate that is disseminated on the major quote systems. This rate is a one-time snapshot of the market that may not reflect the full range of transactions occurring during the peak part of the New York session. By its very nature, a “snapshot” series will be noisier than a weighted average of transactions tabulated over a longer period.)

Hourly Effective Fed Funds Rate: HEFFR

Since August of 2002, ICAP has posted cumulative effective rates for overnight federal funds each hour from 9:00 AM to 6:00 PM. The transactions that go into the calculations are the same as those submitted by ICAP to the New York Fed each day for purposes of calculating the official effective federal funds rate. As of April 2006, ICAP also began to provide a final cumulative rate for the full session. It should be noted that this final effective rate is based solely on ICAP’s daily activity, and may differ from the official daily effective rate published by the New York Fed, which is a composite of the activity reported by all major brokerage firms. (The official series is included in the “Fed Effective” column on the HEFFR history page. More information about the Fed series is available on the New York Fed’s website.)

Early Return and Regular Return Rates:

ICAP's early return and regular return hourly indexes were introduced in July 2006. With the change in the Fed's payment system risk policy's treatment of GSE daylight overdrafts, market participants began to pay more attention to the impact of early-return trades on the daily effective. Early-return trades are those in which a lender agrees to a lower rate in exchange for a commitment from the borrower to process the return leg of the trade early in the following day. These trades have the potential to reduce the average effective rate for the session. ICAP now reports separately the cumulative effective rates on all early return trades and all other overnight fed funds trades separately. Taken together, the group of trades that goes into these two indexes is identical to the pool of trades underlying the HEFFR and ICAP's final effective fed funds rate.

Hourly EuroDollar Deposit Rate: HEDDR

ICAP’s hourly effective Eurodollar rates were introduced in March 2006 as a complement to the HEFFR series. The volume of overnight Eurodollar transactions on any given day tends to be several times larger than the volume of fed funds activity. Trading starts earlier in the day, allowing ICAP to start its daily series of HEDDR rates with an 8:00 AM effective, versus a 9:00 AM starting point for the HEFFR each day.

ICAP’s HEDDR rates are based on all transactions in which one or both sides of the trade were handled through ICAP’s New York office. The daily HEDDR sample starts immediately after the previous day’s fed funds close, and thus may include some transactions arising from open orders placed at the end of the prior session. As with the hourly effective funds rate, though, the hourly effective Eurodollar rate will exclude all tom-next and other forward transactions entered into prior to the previous day’s close.

The early timestamp on the first HEDDR index of the day is intended to address the market’s need for an objective opening reference rate. The use of rates taken from the broader Eurodollar market will also make the HEDDR a more appropriate reference rate for nonbank financial institutions that do not have access to Fedwire and are thus not eligible to trade fed funds. The HEDDR indexes may be more representative of the actual funding experience of nonbank institutions than the HEFFR indexes.

Hourly Aggregate OverNight Rate: HAONR

The aggregate overnight rate is a volume-weighted average of all transactions included in the HEFFR and HEDDR indexes. This blended index reflects all activity in the broadly-defined overnight market for uncollateralized immediately-available funds. Hourly observations start at 8:00 AM, matching the HEDDR index. The final reading of the day is as of the Fedwire close (generally 6:30 PM, unless trading is extended due to technical problems). The 6:30 closing index level can be compared to the final ICAP hourly fed funds index as a rough gauge of the difference between average overnight rate levels in the narrow fed funds market and the broader interbank market. (It is also possible to compare the final HAONR to the official effective fed funds rate published by the Fed, but this comparison could be affected by variation in the composition of activity at the different brokerage firms covered by the Fed’s composite index.)

i-Repo Indexes

The i-Repo indexes were introduced in July 2004 as a daily reference rate for overnight general collateral rates. In the U.S. market, these cumulative weighted average indexes are calculated twice a day ?once at 10:00 AM and a second time at 3:00 PM. The average includes all overnight Treasury general collateral RPs executed through ICAP’s voice and electronic brokerage operations. Unlike the HEFFR and HEDDR, the i-Repo indexes include overnight transactions arranged on a tom-next basis. The bulk of this activity in the repo market occurs after securities wire closes at 3:00, and can be thought of as the start of the next day’s session.

The U.S. i-Repo indexes are part of an international set of intraday repo indexes published by ICAP. Twice-daily averages are published for general collateral repo rates in euros and sterling as well. Historical data for all of the i-Repo indexes can be found at ALLX IREP on Bloomberg.

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