Reverse Repurchase (RRP) Operations

Transcription

1 Reverse Repurchase (RRP) Operations Kyle Lee Money Markets Directorate, FRBNY Markets Group September 29, 2015 Internal FR

2 Agenda What are Fed RRPs? History of RRP Exercises Operational Results 2

3 What are Fed RRPs? for internal use only

4 Fed RRP Basics 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 4

5 RRPs Currently Executed in Tri-party Platform Bilateral RRPs used occasionally pre-crisis Since October 2009, the Desk has been testing RRPs using the triparty 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 5

6 RRP Counterparties 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 6

7 ON RRP as a Policy Tool 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 7

8 History of RRP Exercises for internal use only

9 Start of ON RRP Operations 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 shortterm 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 9

10 Goals of ON RRP Exercise 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 10

11 Evolution of ON RRP Exercise Per-Counterparty Cap ($ bln.) Overall size limit ($ bln.) Rate (bps) Date 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. 11

12 Concerns Regarding a Large ON RRP 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 12

13 Evolution of Quarter-end Term RRP Exercise Tenor (days) Settlement Date Maturity Date Amount Offered ($ bln.) Max Offering Rate (bps) Operation December 28 12/8/2014 1/5/2015 $ /15/2014 1/5/2015 $ /22/2014 1/5/2015 $ /29/2014 1/5/2015 $ March 14 3/19/2015 4/2/2015 $ /30/2015 4/6/2015 $ June 7 6/25/2015 7/2/2015 $ /29/2015 7/1/2015 $100 8 September 7 9/24/ /1/2015 $ /30/ /2/2015 $150 8 Over the quarter-end term RRP testing period, the term RRP tests have become more similar to ON RRPs 13

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 14

15 Operational Results for internal use only

16 RRP Participation Primarily from MMFs $ bln RRP Participation by Counterparty Type Primary Dealers Banks GSEs MMF /1/2014 7/1/2014 1/1/2015 Source: FRBNY 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 16

17 ON RRP Participation is Rate Sensitive $ bln. 450 Overnight RRP Bids vs. Repo Rate Spread (May '14 to Aug '15) Treasury GCF Index less ON RRP Offering Rate (bps) Source: Bloomberg 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) 17

18 ON RRP Has Been an Effective Floor Under Rates bps /1/2014 7/1/2014 1/1/2015 7/1/2015 Source: Bloomberg Fed Funds ON RRP 1-Month T-Bill GCF TSY Index Money Market 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 18

19 Impact of ON RRP Rate Adjustments on Rates % of Volumes 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) Rate (%) Source: FRBNY (Presentation by Simon Potter, April 15, 2015). 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 19

20 Financial Statement Date Effects $ bln Total ON and Term RRP Participaiton Term RRP ON RRP 100% Share of Total Participation in ON RRP Exercise % 50% 25% Banks Primary Dealers GSEs MMFs - Gov MMFs - Prime 0 1/1/2014 7/1/2014 1/1/2015 7/1/2015 Source: FRBNY 0% Non-Quarter-End Dates Quarter-End Dates Source: FRBNY (Presentation by Simon Potter, Sept. 5, 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 20

21 Recent Quarter-end RRP Dynamics and term RRPs bps Money Market Rates on Quarter- End GCF TSY Index Fed Funds ON RRP Award Rate Prior to quarter-end term RRP testing 9/30/ /31/2014 3/31/2015 6/30/2015 Source: FRBNY Quarter-end RRP Demand $ bln 500 ON RRP (not awarded) Term RRP (awarded) ON RRP (awarded) /30/ /31/2014 3/31/2015 6/30/2015 Source: FRBNY 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 21

22 High Substitutability Between Term and ON RRPs $ bln Non-Quarter-End Term RRP Operations in 2015 Term RRP ON RRP /11 2/12 2/18 2/19 2/25 2/26 3/5 3/6 Source: FRBNY 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 22