Bloomberg posted an article entitled, "There'​s a Seismic Change Coming to Money Markets, But we don'​t quite yet know what it will be." It reads, "In 2014, the Financial Stability Oversight Council (​FSOC) asked U.​S. regulators to look into creating a replacement for Libor -- one that would prove more immune to the subjective, scandalous, scurrilous whims of traders. The Alternative Reference Rates Committee (​ARRC), as the resulting body is known, last month suggested two potential replacements for the much-​maligned Libor.... Fresh research from Credit Suisse Securities USA LLC suggests the chosen rate could also become the new target rate for the Federal Reserve, replacing the federal funds rate that has dominated money markets for decades but has been neutered by recent regulation and asset purchase programs. "The question of alternative reference rates and alternative policy rates are [​sic] intertwined: ideally, they would be the same," writes Zoltan Pozsar, director of U.​S. economics at the Swiss bank. "So it is likely that the rate the ARRC will ultimately choose will also be the Fed'​s new target rate. But there are problems with both alternatives." A potential new target rate comes at a time when the federal funds market is said to be losing relevance because of new rules requiring banks to hold billions of dollars worth of high-​quality assets on their balance sheets as well as because of the Fed'​s quantitative easing (​QE)." It continues, "While the Fed is faced with a fed funds target rate that'​s fading into irrelevance, the ARRC has been eyeballing two alternative rates as it seeks to replace untrustworthy Libor.... The two are the Fed'​s new overnight bank funding rate (​OBFR) and the overnight U.​S. Treasury general collateral repo rate. The OBFR, which mixes fed funds with overnight eurodollar deposits to come up with an average cost of funds for U.​S. banks, has emerged as the front runner in recent weeks -- gaining support from at least one prominent financial industry body last month. The reasoning here is clear: The overnight eurodollar market is deep ($​250 billion vs. an average $​60 billion in fed funds) and features hundreds of participants vs. the 11 Federal Home Loan Banks (​FHLBs) still active in the fed funds market. On the flip side, the OBFR deviates significantly from the fed funds rate in that it gauges offshore interbank funding as opposed to domestic. "​Switching from the [​fed funds] rate to OBFR as the Fed'​s policy target is not without a broad set of existential questions," writes Pozsar. "Were that switch to happen the Fed would go from targeting an onshore rate to targeting an offshore rate; from targeting an interbank rate to targeting a customer-​to-​bank rate." To avoid the complications associated with this path, the Fed could settle in on the repo rate as its new policy target. But here Pozsar also sees potential problems: "Switching to a repo rate won'​t be simple either. In fact, it is impossible at present. Why? Because primary dealers do not have access to the discount window and so there is no ex-​ante mechanism in place that would enable the Fed to cap repo rates in a crisis. And if you can'​t cap it, you can'​t target it."

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