Bank of America Merrill Lynch Rates Strategist Mark Cabana writes, "GC repo index chosen as new benchmark." The update explains, "As we suggested in our publication two weeks ago, the Alternative Reference Rate Committee (​ARRC) selected a broad Treasuries repo financing rate (​BTFR) as an alternative to USD LIBOR. The selection of the BTFR will not obviate the need for USD LIBOR, but instead provide an alternative benchmark in case there were to ever be an issue with LIBOR production. We expect these two benchmarks to run in parallel for quite some time and expect that USD LIBOR will remain an important benchmark for the foreseeable future. BTFR trading activity is expected to grow very gradually and slowly, largely driven by changes to price alignment interest and derivative discounting measures, before any broader transition to the new rate might be adopted." The piece adds, "The ARRC decided last week to choose the BTFR instead of the overnight bank funding rate (​OBFR) as an alternative to LIBOR due to the depth of the underlying market and its expected robustness over time. BTFR volumes are 3x those of OBFR and the divergence in volumes between them is likely to extend in the future. A drawback to the BTFR is its daily volatility. BTFR rates have varied widely on a daily basis in relation to the Fed'​s main target rates of IOER and the ON RRP. While this volatility appears less pronounced when smoothed over time, it may still cause confusion amongst market participants who are less familiar with repo market vagaries."

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