Internal FR September 29, 2015

Reverse Repurchase (RRP) Operations

Kyle Lee Money Markets Directorate, FRBNY Markets Group

2

What are Fed RRPs?

History of RRP Exercises

Operational Results

Agenda

for internal use only

What are Fed RRPs?

4

In a reverse repurchase agreement (“reverse repo” or “RRP”), the

Desk sells a security to an eligible RRP counterparty with an

agreement to repurchase the same security at a specified price and

future date

RRPs are economically similar to a collateralized loan, with SOMA

securities serving as collateral

RRPs drain reserves; altering Fed liabilities

Do not change the total size of the Fed’s balance sheet

Fed RRP Basics

5

Bilateral RRPs used occasionally pre-crisis

Since October 2009, the Desk has been testing RRPs using the tri-

party repo settlement process

In tri-party repo, a third-party clearing bank provides clearing and

settlement services related to the transaction

Tri-party settlement can create some operational efficiencies, and

allow the Fed to transact more easily with major cash lenders such as

money market funds

RRPs Currently Executed in Tri-party Platform

6

FRBNY currently has 168 RRP counterparties

146 expanded (i.e., non primary dealer) counterparties, and 22

primary dealers

Expanded counterparties include 109 money market funds, 13

government sponsored enterprises and 24 banks

Counterparty list comprises many of the major lenders in secured and

unsecured money markets

The New York Fed does not expect to increase the number of

expanded RRP counterparties further, unless deemed necessary to

support monetary policy implementation

RRP Counterparties

7

Overnight (“ON”) RRPs, are conceptually similar to IOER in providing

an overnight risk-free investment

IOER is available to banks with Fed accounts

ON RRP is available to Fed RRP counterparties

ON RRP can supplement the magnetic pull of IOER for helping

control the fed funds rate

By interacting directly with several types of non-bank counterparties,

ON RRP helps alleviate frictions that may curb the effectiveness of

IOER

ON RRP as a Policy Tool

for internal use only

History of RRP Exercises

9

In June 2013, the FOMC reviewed the exit strategy principles

and participants supported further staff study on potential

alternative policy approaches, tools to improve control of short-

term rates

In the July 2013, the FOMC discussed potential for an

overnight fixed-rate, full-allotment RRP facility as an additional

tool for managing rates, serving as a potential complement to

IOER

In September 2013, the FOMC authorized the Desk to conduct

ON RRPs

Start of ON RRP Operations

10

Part of an ongoing effort to improve the technical execution of

policy

Help the Desk, clearing banks and counterparties gain

experience with larger transactional flows

Provide additional information on how ON RRP operations

might be used to support FOMC monetary policy objectives

Not intended to materially affect the current level of short term

rates and does not signal any change in the stance of monetary

policy

Goals of ON RRP Exercise

11

Evolution of ON RRP Exercise

Date

Per-Counterparty

Cap ($ bln.)

Overall size limit

($ bln.)

Rate

(bps)

Sep 23, 2013 $0.5 1

Sep 27, 2013 $1 1

Oct 21, 2013 $1 2

Nov 04, 2013 $1 3

Nov 12, 2013 $1 4

Nov 19, 2013 $1 5

Dec 23, 2013 $3 3

Jan 15, 2014 $3 3

Jan 30, 2014 $5 3

Feb 18, 2014 $5 4

Feb 26, 2014 $5 5

Mar 05, 2014 $7 5

Apr 07, 2014 $10 5

Sep 22, 2014 $30 $300 5*

Nov 03, 2014 $30 $300 3*

Nov 17, 2014 $30 $300 7*

Dec 01, 2014 $30 $300 10*

Dec 15, 2014 $30 $300 5**If total submissions exceed overall size limit, the stop-out

rate in a single-price auction.

12

June and July 2014 FOMC minutes revealed concerns with a

large ON RRP

Financial stability: ON RRP could worsen bank runs in flight

to quality scenarios

Financial Intermediation: Could be unforeseen

consequences with a large ON RRP

In September 2014, the FOMC instructed the Desk to add a

$300 billion aggregate cap limit on the ON RRP

In October 2014, the FOMC authorized the Desk to conduct

term RRPs to examine how they might work as supplementary

tool to reduce potential, temporary volatility in money markets

Concerns Regarding a Large ON RRP

13

Evolution of Quarter-end Term RRP Exercise

Operation

Tenor

(days)

Settlement

Date

Maturity

Date

Amount Offered

($ bln.)

Max Offering

Rate (bps)

December 28 12/8/2014 1/5/2015 $50 10

21 12/15/2014 1/5/2015 $50 10

14 12/22/2014 1/5/2015 $100 10

7 12/29/2014 1/5/2015 $100 10

March 14 3/19/2015 4/2/2015 $75 10

7 3/30/2015 4/6/2015 $125 10

June 7 6/25/2015 7/2/2015 $100 8

2 6/29/2015 7/1/2015 $100 8

September 7 9/24/2015 10/1/2015 $100 8

2 9/30/2015 10/2/2015 $150 8

Over the quarter-end term RRP testing period, the term RRP

tests have become more similar to ON RRPs

14

Policy Normalization Principles and Plans

Per the updated September 2014 Policy Normalization Principles and Plans,

when conditions warrant, the Committee will...

Raise the target range for the fed funds rate

Increase the IOER compensation rate

Use the ON RRP and other supplementary tools as needed to help

control the fed funds rate. ON RRP will be used “only to the extent

necessary.”

After the March 2015 meeting, the FOMC added additional details to the

Policy Normalization Principles and Plans that when commencing policy

firming:

Will continue to target a range of 25 basis points

Set IOER at the top of range and ON RRP at the bottom of range

Allow temporarily elevated ON RRP cap to support policy

implementation; however, they expect to reduced the capacity fairly

soon after policy firming

Adjust IOER rate, parameters of ON RRP, and use other tools such

as term operation as necessary for appropriate monetary control

for internal use only

Operational Results

16

Money market mutual funds account for 80 to 90 percent of take-up

GSEs account for roughly 10 percent of take-up

FHLBs prefer fed funds given its “early return” feature

Primary Dealers and Banks rarely participate

Banks generally do not participate because they can earn IOER

RRP Participation Primarily from MMFs

0

50

100

150

200

250

300

350

1/1/2014 7/1/2014 1/1/2015

$ bln.

Source: FRBNY

RRP Participation by Counterparty

Type Primary Dealers Banks GSEs MMF

17

ON RRP Participation is Rate Sensitive

Bidding behavior in the exercise shows some correlation and

sensitivity to prevailing secured funding rates

Suggests a downward sloping demand curve (e.g. when private

market repo rates decline relative to the ON RRP offering rate, ON

RRP demand increases)

0

75

150

225

300

375

450

-5 5 15 25 35 45

$ bln.

Treasury GCF Index less ON RRP Offering Rate (bps)

Overnight RRP Bids vs. Repo Rate

Spread (May '14 to Aug '15)

Source: Bloomberg

18

ON RRP Has Been an Effective Floor Under Rates

ON RRP offering rate has been an effective floor under market rates

Volume-weighted averages of most money market rates have

traded above the ON RRP offering rate on nearly all dates

1-month Treasury Bill rates trade below the ON RRP offering rate,

since not all cash lenders are ON RRP counterparties

-5

0

5

10

15

20

25

30

35

1/1/2014 7/1/2014 1/1/2015 7/1/2015

bps

Source: Bloomberg

Money Market Rates

Fed Funds

ON RRP

1-Month T-Bill

GCF TSY Index

45 42

19

In late 2014, ON RRP offering rate was lowered from 5 bps to 3 bps,

then raised to 7 bps and 10 bps

Increase in the ON RRP offering rate shifted the distributions of

overnight unsecured and secured rates toward higher rates

Impact of ON RRP Rate Adjustments on Rates

0

20

40

60

80

100

0.00 0.02 0.04 0.06 0.08 0.10 0.12 0.14Rate (%)

Cumulative Distribution of Overnight Fed

Funds Volumes during Rate Test, by Rate

ON RRP offering rate = 5 bps (pre-test)

ON RRP offering rate = 7 bps (test period)

ON RRP offering rate = 10 bps (test period)

% of Volumes

Source: FRBNY (Presentation by Simon Potter, April 15, 2015).

20

Financial Statement Date Effects

Over quarter-ends, and to a lesser extent, month-ends, the availability of

money market investments with banks and dealers often declines

Balance sheet reductions drive temporary increases in take-up,

particularly for prime MMFs

0%

25%

50%

75%

100%

Non-Quarter-End Dates Quarter-End Dates

Share of Total Participation in ON

RRP Exercise

Banks

Primary Dealers

GSEs

MMFs - Gov

MMFs - Prime

Source: FRBNY (Presentation by Simon Potter, Sept. 5,

0

75

150

225

300

375

450

1/1/2014 7/1/2014 1/1/2015 7/1/2015

$ bln.

Source: FRBNY

Total ON and Term RRP Participaiton

Term RRP ON RRP

21

Recent Quarter-end RRP Dynamics and term RRPs

In September 2014, a $300 billion cap was placed on the ON RRP given

FOMC concerns with a large ON RRP (e.g. financial stability risk, etc.)

Since RRP demand > RRPs available on September quarter-end, money

market rates declined below the max. 5 basis points ON RRP offering rate

In December 2014, the Desk tested how term RRPs might work as a

supplementary tool to help control the federal funds rate

Since testing term RRPs money market rates have remained above the

max. 5 basis points ON RRP offering rate on quarter-ends

0

100

200

300

400

500

9/30/2014 12/31/2014 3/31/2015 6/30/2015

$ bln

Source: FRBNY

Quarter-end RRP Demand

ON RRP (not awarded) Term RRP (awarded)

ON RRP (awarded)

0

5

10

15

20

25

30

35

40

45

9/30/2014 12/31/2014 3/31/2015 6/30/2015

bps

Money Market Rates on Quarter-

End GCF TSY Index Fed Funds ON RRP Award Rate

Source: FRBNY

Prior to

quarter-end

term RRP

testing

22

High Substitutability Between Term and ON RRPs

Tests suggest a high degree of substitutability between overnight and

term RRPs

For example, non-quarter-end term RRP awards were followed by

a similar decline in ON RRP awards

0

40

80

120

160

200

2/11 2/12 2/18 2/19 2/25 2/26 3/5 3/6

$ bln.

Source: FRBNY

Non-Quarter-End Term RRP Operations in

2015

Term RRP

ON RRP