BrokerTec and MTS’s new daily repo index series for the sovereign bond markets of the main eurozone countries will be launched in the fourth quarter of 2012.
The indices will provide the rate of secured borrowing using the relevant sovereign debt as collateral. Crucially, actual trade data will be behind the rates, a method more transparent than the Libor panel-based system of guesstimates, which failed so spectacularly to prevent abuse.
Martin Wheatley, managing director at the Financial Services Authority, ought to be interested in this. Using trade data is one option he outlined when launching his Libor review.
Wheatley suggested that transaction data “could help to overcome the issues of subjectivity and corroboration”. By watching the use of the repo indices closely, he will be able to see how that works in the real world.
Using trade data rather than quoted rates in Libor is not without its drawbacks, as Wheatley points out. The low volume of transactions in certain currencies or tenors means useful data collection is impossible. A hybrid model might be the better approach in this case.
Additionally, the structural nature of the repo market also sets it apart from unsecured lending. The repo market’s large-scale use of central counterparties means it is easier to collect and collate all the necessary data and further improves its transparency.
The new daily repo index series will not provide a carbon copy for Libor reformers to follow. And it must gain momentum and market trust before it becomes a standard.
But watching how the series performs and its effect on the secured interbank market will provide an invaluable reference point for the Libor reform debate. Those responsible for formulating Son of Libor should take note.