Fixing the Fixings: What Road to a More Representative Money Market Benchmark?

IMF Working Papers, May 29, 2013

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Interest rate derivatives on major currencies, with notional outstanding amounts adding up to hundreds of trillions, are mostly indexed on Libor and Euribor benchmarks.
Hundreds of billions in loans to enterprises, mortgages and other retail loans to the real economy are also indexed on Libor and Euribor.
The prevailing role of these benchmarks appears to be more a legacy from history rather than reflecting today’s structure of banks’ funding.
Building on earlier work (Brousseau, Chailloux, Durré, 2009), the paper discusses various options to move towards a new benchmarking system in the money market.

Proposes a more ambitious benchmark design that would consist of a trade-weighted index that would systematically pool all short-term wholesale funding operations of banks per tenor.
The benchmark is designed to better reflect actual bank funding practices by weighting based on traded volumes and pooling across short-term wholesale operations.

Current benchmark dominance (Libor and Euribor) is rooted in historical market structure rather than current funding patterns.
Reliance on legacy benchmarks affects a very large set of financial instruments, including:
- Interest rate derivatives with notional outstanding amounts totaling hundreds of trillions.
- Hundreds of billions in loans to enterprises, mortgages, and other retail loans.
A move to a trade-weighted pooled index could improve representativeness of money market benchmarks across tenors.

Banking; Currencies; Deposit rates; Financial institutions; Financial markets; Financial services; Interbank rates; Money; Money markets; Options.
Keywords used in the paper include: Asia and Pacific, bank, Benchmarking System, Currencies, Deposit rates, derivative instrument, derivatives data, Euribor, Euribor-index interest rate swap, Europe, fixings, forward rate, Global, index cash transaction, Interbank rates, interest rate, interest rate swap, Libor, London interbank offered rate, market, market participant, Money markets, North America, Northern Europe, Options, OTC derivative clearing houses, OTC interest rates derivative exposure, rate derivatives instruments, rate-indexed derivatives contract, rate-referenced derivative products, trading unit, Unsecured Money Market, WP.

Fixing the Fixings: What Road to a More Representative Money Market Benchmark? — _wp13131
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