Consultation: Principles for calculating and publishing Nowa
Norges Bank's letter of 15 October 2019
Nowa (Norwegian Overnight Weighted Average) is the only unsecured overnight rate in the Norwegian money market and has been recommended as an alternative reference rate in NOK. Nowa was established in 2011. Since then, Finance Norway has been responsible for administering Nowa, while Norges Bank has been the calculation agent. From 1 January 2020, Norges Bank will take over as administrator of Nowa. Finance Norway's responsibility for the Nowa rules will thereby be transferred to Norges Bank, which will continue to be responsible for calculating and publishing Nowa.
Norges Bank has drafted new principles for calculating and publishing Nowa (see attached document). The document specifies the dataset, definition, calculation method and publishing routines. Compared with the current Nowa, the proposal will entail minor changes to the interest rate on most days. The biggest differences will be on days with insufficient transaction data, discussed further under “Contingency method” in the attachment.
The principles for calculating and publishing Nowa are based on the IOSCO Principles for financial benchmarks.
The changes will apply from 1 January 2020.
Definition and data
Nowa is currently defined as the interest rate on unsecured loans from Nowa panel banks to other banks. The proposed new principles for calculating and publishing Nowa entail a change to the definition of Nowa. It is proposed that from 1 January 2020, Nowa be defined as the interest rate on unsecured loans between banks that are active in the Norwegian overnight market. Here, banks that are active in the Norwegian overnight market are defined as banks that report data on a daily basis to Norges Bank (see discussion below).
The proposal entails abandoning the current panel bank arrangement and instead, basing the interest rate on data already available via money market data reported to Norges Bank (RPD). Nowa will then be calculated on the basis of individual transactions between banks that report on a daily basis on the RPD form. All of these banks have an account with Norges Bank. In other words, Nowa will measure the market price for redistributing central bank reserves. Since this is a closed system (each deposit for one bank is matched by a corresponding loan from another), Nowa may be said to be both a deposit rate and a lending rate.
Today, loans to banks without an account with Norges Bank are also included in Nowa. This group accounts for a smaller share of the transaction base for Nowa as currently defined.
Nowa will be calculated as a volume-weighted average of the interest rate on daily transactions.
Minimum requirement for volume and number of transactions
Norges Bank proposes changing the requirement for what is considered a sufficient volume for calculating Nowa. The proposal is for the minimum total volume to be NOK 1 billion and for a minimum of three banks on the lending side and three banks on the deposit side of the transactions. The requirement for the amount and number of banks has been set to ensure that the interest rate is the best possible reflection of conditions in the overnight market. The requirement for a sufficient number of banks on both sides is intended to prevent manipulation and reduce the likelihood that Nowa will be influenced too much by circumstances at individual banks.
By comparison, Nowa as currently defined is calculated if there are data from a minimum of three banks and the minimum total volume is NOK 250 million.
Calculation in the event of insufficient data
On days with insufficient data, Norges Bank proposes that Nowa be calculated as a volume-weighted average of the interest rate on transactions carried out on the reporting date and the interest rate on transactions included in Nowa on the previous reporting date, adjusted for changes in the policy rate, if any. The calculation method will thus be the same on all days, but the transaction data will be supplemented by historical data.
On days without sufficient data, Nowa is currently calculated as an unweighted average of actual loans and panel banks’ estimates of the interest rate they would have charged if they had lent. Preliminary estimates show that the proposed calculation method will result in far smaller movements in Nowa on days with insufficient data.
Time of publication
Nowa will no longer be published on the same day, but on the day after the transactions have taken place. This is due to technical limitations on the collection of transaction data. Banks that report money market data are obliged to submit data by 7:00 am the following day. To ensure sufficient time to validate data, Norges Bank proposes that Nowa be published at 9:00 am the day after the transactions have taken place. However, during a transition period, banks’ reporting deadline will be extended to 11:00 am, and Nowa will therefore be published at 1:00 pm in the period to 1 March 2020.
The activities of Norges Bank are regulated by the Norges Bank Act and regulations laid down in pursuance of the Norges Bank Act, inter alia Regulation of 17 December 2009 No. 1630 on risk management and internal control at Norges Bank. Oversight and control arrangements have been established at the Bank that cover the Bank’s activities, including the work to calculate and publish Nowa.
Nowa is to be set on the basis of actual transactions. The calculations are automated and not subject to discretionary assessment. This reduces the risk of error.
Against this background, no separate oversight and control arrangements are being proposed beyond those already in accordance with current rules and the proposed user group for Nowa (cf immediately below). However, Norges Bank will regularly assess the need for further oversight and control measures.
User group for Nowa
Norges Bank proposes that the current steering group for Nowa be replaced by a user group, which will meet regularly to provide input to the administrator on calculation and publication practices and on needs for changes and clarifications. Norges Bank proposes that the user group be composed of representatives of the banks that report money market transaction (RPD) data on a daily basis and users of the reference rate from both the issuer and investor side. Information shared within the user group will not be confidential, in order to avoid conflicts of interest. Minutes of user group meetings will be published.
Changes to the method for calculating Nowa
In order to ensure that the calculation methodology and data take into account any changes in market structure, Norges Bank will regularly reassess the principles for calculating and publishing this interest rate. Input from the user group will be a part of these reassessments.
We kindly request comments on this proposal by 5 November 2019.
Olav Andreas Bø
Marie Lerbak Norum
Today this corresponds to 20 banks, compared with 11 banks in the current Nowa panel.