Streetwise Professor

May 2, 2008

I Have This Friend

Filed under: Derivatives,Economics — The Professor @ 9:08 am

Interdealer broker behemoth ICAP has announced an initiative to create an alternative to LIBOR. The ICAP alternative, dubbed NYFR for New York Financing Rate, will measure the 3 month and 1 month funding rates paid by New York banks. This is deemed desirable due to the apparent divergence between rates in the US and rates in Europe/London.

ICAP will survey 40 banks. Rather than asking what each bank pays, ICAP will ask each bank to assess what a “representative” bank would pay for funds. So, it’s sort of like . . . I have this friend, and he’s paying 3.625 pct for one month deposits.

This is supposedly intended to improve the accuracy of reporting by not putting banks in the potentially embarrassing position of choosing between lying about the rate that they pay, or revealing that they are sufficiently desperate for funds that they are willing to, and have to, pay a high rate.

Well, maybe this is an improvement, but if so, it’s not much of one. It would be much, much better to have a rate based on actual transactions. This is technologically feasible, and indeed, ICAP sees enough of the deal flow to make such a calculation based on real numbers rather than relying on this version of a Banker’s Anonymous meeting in which participants talk about their, ahem, issues, in the third person.

Print Friendly, PDF & Email

No Comments »

No comments yet.

RSS feed for comments on this post. TrackBack URI

Leave a comment

Powered by WordPress