The Fed Manipulated SOFR: the explanation (or not)
On 5 June, I published a post titled The Fed Manipulated SOFR. On 6 June, Risk.Net published an article titled A mystery: Why did the NY Fed use a survey to get SOFR? (subscription required).
The Fed corporate communications has published a comment in Risk.Net that is supposed to be a rebuttal of those analysis. I was expecting rebuttal to be an argument on the quality of the market infrastructure put in place but I only heard "you cannot sue us for this issue".
It is true that the information on the production of SOFR is available in the Fed Website. But when the Risk.Net article was published, "A spokesperson for the New York Fed declined to comment.", proof that it was not obvious even for the Fed; the "comment" referred above was published only on 18 July (more than one month and an half after the data); the CRO of a large bank when asked at an industry conferences said that he had no idea what happened. All those small items are evidences more of an issue than a procedure well understood by the users. I have also found a presentation to ARRC dating 26 June on the subject, proof that ARRC, which has recommended SOFR as RFR, needed to be explained what happened and what the small prints are.
If the comments had been under the form of an interview with me the journalist, I can imagine a dialogue like this (The Fed sentence are from their comment in Risk).
The Fed: On the morning of June 3, one of the data sources [...] was unavailable.
Me: You waited 60 hours before wondering why the data was not available? The market stop trading on 31 May around 6:00 pm. What was the procedure between the 31 May around 6:00 pm and the morning of June 3?
The Fed: Fortunately, SOFR was designed to be operationally resilient in the face of just such a challenge.
Me: What was the actual challenge? You could not find the phone number of the provider to check why the data was not there on 31 May in the evening? Would you call a bank that notices only on Monday morning that it has not enough liquidity due to its Friday positions a "resilient bank"?
The Fed: [...] market participants should have every confidence in the robust, resilient and, notably, transparent production methodology for SOFR.
Me: Could you explain with more detail what you mean by transparency? It took more than a month and a half to publish the explanation. To my knowledge, the actual numbers from the trade data for SOFR (rate and percentile) have not been and will never be published. To some market participants, this may not look very transparent.
Does the Fed really think that all this legalese will bring deeper trust for the new market infrastructure, starting with the new benchmarks?
Why have the actual statistics (median, 1, 25, 75, 99 percentiles) not been published? From the comments, it seems that the actual rate "did not change by more than one basis point" from the published rate. The rates are published with a one basis points rounding. Does it mean that the rate was exactly the same? I understand that some statistics are published on a quarterly basis (Q1 2019 statistics). But as of today, 20 July 2019, the statistics from Q2 2019 ending on 28 June 2019 (including the infamous 31 May), do not appear to be available. Moreover those statistics are per sectors and the actual SOFR rate and statistics can not be reconstituted from those numbers.
Financial markets are like golf, the most important shot of your round is the next one. And nobody is interested to hear you excuses for missing the previous one. What is the Fed's plan for its next shot?
What "comment" I would have liked to hear from the top of the fed (not only from the communications department) is: "We did not received the data as expected, and on June 3 we did what we could to save the situation. We understand that this is not ideal for the market, specially when we are trying to convince the market to transition to the new benchmark. In this transition phase it is even more important than ever to have benchmarks that are as resilient and transparent as possible. We are working on mechanisms to improve the situation."
No excuse, no blah-blah, just tell me that work is in progress to improve the process in the light of recent events.
The Fed corporate communications has published a comment in Risk.Net that is supposed to be a rebuttal of those analysis. I was expecting rebuttal to be an argument on the quality of the market infrastructure put in place but I only heard "you cannot sue us for this issue".
It is true that the information on the production of SOFR is available in the Fed Website. But when the Risk.Net article was published, "A spokesperson for the New York Fed declined to comment.", proof that it was not obvious even for the Fed; the "comment" referred above was published only on 18 July (more than one month and an half after the data); the CRO of a large bank when asked at an industry conferences said that he had no idea what happened. All those small items are evidences more of an issue than a procedure well understood by the users. I have also found a presentation to ARRC dating 26 June on the subject, proof that ARRC, which has recommended SOFR as RFR, needed to be explained what happened and what the small prints are.
If the comments had been under the form of an interview with me the journalist, I can imagine a dialogue like this (The Fed sentence are from their comment in Risk).
The Fed: On the morning of June 3, one of the data sources [...] was unavailable.
Me: You waited 60 hours before wondering why the data was not available? The market stop trading on 31 May around 6:00 pm. What was the procedure between the 31 May around 6:00 pm and the morning of June 3?
The Fed: Fortunately, SOFR was designed to be operationally resilient in the face of just such a challenge.
Me: What was the actual challenge? You could not find the phone number of the provider to check why the data was not there on 31 May in the evening? Would you call a bank that notices only on Monday morning that it has not enough liquidity due to its Friday positions a "resilient bank"?
The Fed: [...] market participants should have every confidence in the robust, resilient and, notably, transparent production methodology for SOFR.
Me: Could you explain with more detail what you mean by transparency? It took more than a month and a half to publish the explanation. To my knowledge, the actual numbers from the trade data for SOFR (rate and percentile) have not been and will never be published. To some market participants, this may not look very transparent.
Does the Fed really think that all this legalese will bring deeper trust for the new market infrastructure, starting with the new benchmarks?
Why have the actual statistics (median, 1, 25, 75, 99 percentiles) not been published? From the comments, it seems that the actual rate "did not change by more than one basis point" from the published rate. The rates are published with a one basis points rounding. Does it mean that the rate was exactly the same? I understand that some statistics are published on a quarterly basis (Q1 2019 statistics). But as of today, 20 July 2019, the statistics from Q2 2019 ending on 28 June 2019 (including the infamous 31 May), do not appear to be available. Moreover those statistics are per sectors and the actual SOFR rate and statistics can not be reconstituted from those numbers.
Financial markets are like golf, the most important shot of your round is the next one. And nobody is interested to hear you excuses for missing the previous one. What is the Fed's plan for its next shot?
What "comment" I would have liked to hear from the top of the fed (not only from the communications department) is: "We did not received the data as expected, and on June 3 we did what we could to save the situation. We understand that this is not ideal for the market, specially when we are trying to convince the market to transition to the new benchmark. In this transition phase it is even more important than ever to have benchmarks that are as resilient and transparent as possible. We are working on mechanisms to improve the situation."
No excuse, no blah-blah, just tell me that work is in progress to improve the process in the light of recent events.
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