Icap’s daily New York Funding Rate poll comes as questions are raised about the accuracy of daily dollar Libor settings overseen by the British Bankers Association. Those rates are set in London before New York opens for business and of the 16 banks that supply the BBA with dollar quotes, just three are US based.
Libor is the daily reference rate for loans and derivatives worth billions of dollars and contributing quotes by banks are publicly posted. As the credit crunch has unfolded, however, concerns have been raised that contributing banks are reluctant to post higher Libor quotes as this could indicate they have funding problems.
Lou Crandall, economist at Wrightson Icap, said: “NYFR is an effort to explore some of the alternatives - to Libor - that have been suggested.”
The NYFR will be conducted during the New York morning when the eurodollar deposit market is most active. Results will be released just after 10 am and only rates, not the names of contributor banks will be shown. This says Icap will eliminate “any signalling effect that might arise from publicly posted levels.”
Doug Rhoten, chief executive officer of Icap Americas, said: “We don’t expect the NYFR to replace more transparent, established fixings as a contractual reference rate, but we believe the NYFR fixings will play a complementary role.”
The launch of the new poll comes as the British Bankers Association holds its annual conference, announcing steps to improve the way Libor is set.
The BBA is also considering a second US dollar Libor fix when New York opens and an additional European dollar index to capture dollar trading in Europe. It will also increase the number of banks that set Libor.
Since concerns about bank balance sheet funding emerged last August, dollar Libor has been elevated well above the Federal funds rate. On Tuesday, three-month dollar Libor was set at 2.79 per cent, well above the current Fed funds rate of 2 per cent. A year ago, Libor was set about 12 basis points above the funds rate.
This has sparked calls for the BBA to reform its system of calculating the benchmark, particularly for the dollar.
Icap says more than two dozen institutions have participated in the beta period. The brokerage is in discussions with a number of other potential contributors.
In each daily survey, the highest 25 per cent and lowest 25 per cent from a minimum of 16 contributions in each tenor will be discarded and the NYFR will be calculated as the simple average of the remaining rates.
London, 10 June 2008 – ICAP (IAP.L), the world’s leading voice and electronic interdealer broker, announced that it will launch its NYFR FixingsSM, a new survey-based measure of one- and three-month unsecured bank funding costs on Wednesday 11 June.
The daily NYFR poll will be conducted during the New York morning when the Eurodollar market is most active. ICAP initially will collect data on 1- and 3-month rates, but other maturities may be added to the program over time depending on market interest. Each NYFR index is defined as a “market mid rate” rather than an “own rate”. That is, banks will be asked to submit a rate where a representative A1/P1 institution would be likely to obtain funding in the market, rather than report on their own costs that morning. The kinds of funding covered by the survey are not limited to interbank deposits. In estimating borrowing costs on any given day, banks may consider other unsecured funding vehicles such as certificates of deposit or commercial paper. Importantly, all contributions will be anonymous. ICAP will only publish rates and not the names of individual bank contributors, thereby eliminating any signaling effect that might arise from publicly posted levels.
Doug Rhoten, Chief Executive Officer, ICAP Americas, said: “The launch of our new NYFR Fixing index is the result of considerable feedback received from customers. There has been much discussion about measuring the interbank rate when market conditions are volatile and we believe that a survey conducted during the most active part of the U.S. trading session will give us a concrete measure of actual funding costs. We also think the anonymity of this survey will make the survey results objective during periods of financial strain. We don’t expect the NYFR to replace more transparent, established fixings as a contractual reference rate, but we believe the NYFR fixings will play a complementary role.”
The number of contributors in the NYFR Fixing index will vary from day to day, but a minimum of 16 participants each day will be required in order to publish the rate. More than two dozen institutions have participated during the beta period, and ICAP is in ongoing discussions with a number of other potential contributors. In each daily survey, the highest 25% and lowest 25% of contributions in each tenor will be discarded, and the NYFR will be calculated as the simple average of the remaining rates. The survey will ask banks for market rates as of 9:15 AM ET and the results will be calculated by 10:00 AM and disseminated shortly thereafter. The fixings will be distributed via email to the press and to panel members. The fixings will also be posted along with ICAP’s hourly effective money market rates on www.heffr.com.
ICAP will review terms of the NYFR regularly and may revise them from time to time.