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Federal Board Establishes Two Standing Repurchase Agreements

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EDITOR NOTE: The idea of opening of a “standing'' repo facility--one for domestic firms and another for foreign ones-- is something that the Fed had been pondering for years. The main purpose would be to prevent short-term rates markets from blowing up and to serve as a backstop for money markets. Well, the Fed finally established two standing repurchase agreements last week. Interestingly, it did so at a time when the pressure on the market is exactly the opposite of what it faced during the turmoil seen in recent years, with the US Treasury having had to reduce a glut of cash on its balance sheet. Meanwhile, the Treasury’s actions have caused the reverse repo market (RRP) to spike to a record $1 Trillion.

Statement Regarding Repurchase Agreement Arrangements

The Federal Open Market Committee on Wednesday announced the establishment of two standing repurchase agreement (repo) facilities—a domestic standing repo facility (SRF) and a repo facility for foreign and international monetary authorities (FIMA repo facility). These facilities will serve as backstops in money markets to support the effective implementation of monetary policy and smooth market functioning.

Under the SRF, the Federal Reserve will conduct daily overnight repo operations against Treasury securities, agency debt securities, and agency mortgage-backed securities, with a maximum operation size of $500 billion. The minimum bid rate for repos under the facility will be set initially at 25 basis points, somewhat above the general level of overnight interest rates. Counterparties for this facility will include primary dealers and will be expanded over time to include additional depository institutions.

Under the FIMA repo facility, the Federal Reserve will enter into overnight repurchase agreements as needed with foreign official institutions against their holdings of Treasury securities maintained in custody at the Federal Reserve Bank of New York. The rate for this facility will be set initially at 25 basis points with a per counterparty limit of $60 billion. By creating a temporary source of dollar liquidity for FIMA account holders, the facility can help address pressures in global dollar funding markets that could otherwise affect financial market conditions in the United States.

Original post from The Federal Reserve

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