SOFR Averages publication by the Fed: what for?
The Federal Reserve Bank of New York has requested comments on its Proposed Publication of SOFR Averages and a SOFR Index. The proposal and the request for comments are available on their website at https://www.newyorkfed.org/markets/opolicy/operating_policy_191104. I commented on the proposal as can be seen on my post: Comment on a Proposed Publication of SOFR Averages and a SOFR Index.
The NY Fed has decided, against my advice, to go forward with the publication of those averages. The statement has been posted on 12 February on their website: Statement Regarding Publication of SOFR Averages and a SOFR Index. The page contains a link to the answers received (including mine).
The main reason for my advice to not publish such average was that it is, to my opinion, useless and creates confusion. The publication of the statement and the reading of some of the comments reinforce my opinion.
Nowhere in the statement or in the comments have I seen one single proposal on how to use those 30, 90 or 180 day averages. They do not correspond to any existing or planned instruments, being it inter-bank or retail. That is for the "useless" part of my opinion.
The "confusing" part is reinforced by the reading of the comments. They are many comments saying that an average is a good think but it should be done on the actual 1, 3 or 6 months periods using market conventions. Even those who indicate that seems to be oblivious to the fact that a "1-month period" is not a well defined concept in financial instruments. Even if we stay with only one business day adjustment, one day count and one calendar, a "1-month period" starting on a given day may end on different days if embedded in different instruments. When the "90 day average" will start to be published, some people will start to use it. But the usage they will do of it will not be in line with their actual contract; no contract existent or in planning is linked to those averages. That will automatically lead to disputes, confusions, loss of time, and further defiance with respect to financial products and SOFR itself.
If you known of any actual application of those average, beyond printing them in pretty-looking reports, don't hesitate to indicate it in the comments.
The NY Fed has decided, against my advice, to go forward with the publication of those averages. The statement has been posted on 12 February on their website: Statement Regarding Publication of SOFR Averages and a SOFR Index. The page contains a link to the answers received (including mine).
The main reason for my advice to not publish such average was that it is, to my opinion, useless and creates confusion. The publication of the statement and the reading of some of the comments reinforce my opinion.
Nowhere in the statement or in the comments have I seen one single proposal on how to use those 30, 90 or 180 day averages. They do not correspond to any existing or planned instruments, being it inter-bank or retail. That is for the "useless" part of my opinion.
The "confusing" part is reinforced by the reading of the comments. They are many comments saying that an average is a good think but it should be done on the actual 1, 3 or 6 months periods using market conventions. Even those who indicate that seems to be oblivious to the fact that a "1-month period" is not a well defined concept in financial instruments. Even if we stay with only one business day adjustment, one day count and one calendar, a "1-month period" starting on a given day may end on different days if embedded in different instruments. When the "90 day average" will start to be published, some people will start to use it. But the usage they will do of it will not be in line with their actual contract; no contract existent or in planning is linked to those averages. That will automatically lead to disputes, confusions, loss of time, and further defiance with respect to financial products and SOFR itself.
If you known of any actual application of those average, beyond printing them in pretty-looking reports, don't hesitate to indicate it in the comments.
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