Instead we saw a ‘dash for cash’ and pronounced redemption dynamics. In prime institutional MMFs there were 20 consecutive days of outflows between 6 and 26 March 2020. [15] Redemptions in such funds have been a regular feature of market dislocations and it is these funds that underpin the CP and CD markets that provide many of the reference transactions for Libor. Many of these new credit sensitive rates continue to reference these markets and when liquidity drops away they seek to expand their ‘daily’ data sets through the use of rolling windows, giving the appearance of larger underlying volumes. Additionally executable quotes are also sometimes added (albeit at a lower weighting). The use of regression approaches introduces significant model risk and fitting of data to try to demonstrate stability – what is a lot less clear is how stable these rates will be in the future as these underlying market continue to evolve, especially against the backdrop of the potential for further money market reform. It is therefore not clear to what extent alternative credit sensitive benchmarks have truly addressed the weaknesses of Libor. These rates, which are being promoted by some as alternatives to the selected risk-free rates have only a fraction of the underlying data points and are still exposed to the liquidity premia inherent in Libor. Building new benchmarks from small, and shrinking markets can create large and sudden movements in those rates that immediately get passed on to borrowers with contracts linked to those rates.
or above as soon as the deposit in the payer’s account allows this to be done. The system thereby transfers payment orders, which are above the minimum needed to qualify for the RTGS system, directly to or from participants’ current accounts with the Central Bank. The RTGS system has a triple function. Firstly, the Central Bank uses the system for the implementation of its monetary policy; secondly, it is used in transactions by credit institutions with the Central Bank; and thirdly, it is used for gross settlements between credit institutions. The security and functionality of this system are thereby preconditions for enabling the Central Bank to achieve its objectives for both price and financial stability. Consequently, operation of the RTGS system has been assigned to the Central Bank, a familiar arrangement from many other countries. The Bank’s duty is to strengthen the security, efficiency and independence of the system. At the end of 2002 agreements were made with all system participants specifying payment authorisations and collateral security for settlements. This represented a major step towards bringing arrangements for the credit institutions’ transactions with the Central Bank into harmony with best international practices. Automatic Central Bank guarantees for settlements in the RTGS system are thus a thing of the past. Work is still in progress on developing the system. This year it is expected that the rules governing it will be revised, its independence be enhanced, collateral security amounts for settlements be reviewed, handling times be shortened and settlement limits be lowered.