2021_07_28 — “FOMC Established 2 Standing Repurchase Agreement Facilities”
July 28, 2021
A QUICK NOTE
The FOMC Established 2 Standing Repurchase (repo) Agreement Facilities
In my opinion, the big news out of the #Fed today is not that rates are unchanged, but that the #FOMC established two (2) standing repurchase agreement (#repo) facilities to support #moneymarkets and facilitate the effective implementation of monetary policy.
I believe the press has not made a big deal about this because:
1. Most people don’t understand repos,
2. The press doesn’t want to explain a hard to comprehend news item, and
3. Much like electricity, no one seems to worry about it (or repos) until the grid gets shut down
Technically: The Fed facilities will conduct daily overnight repo operations on #Treasury securities, agency debt securities, and agency mortgage-backed securities (#MBS), with an operation size of up to $500 billion.
Under the foreign repo facility, the #FederalReserve will enter into overnight #repurchaseagreements with official foreign institutions against their holdings of Treasury securities held at the Federal Reserve Bank of New York (FRBNY). The facility will have a limit of $60 billion per counterparty and a minimum rate of 25 basis points (bps).
In English: Analogous to electricity, #repos are a huge factor in #liquidity that allows everything else in the capital markets to work. What the new facilities mean is that if there is a #cashcrunch in the markets (like what happened in March 2020 with the Pandemic #panic), primary dealers, banks, deposit facilities, and large foreign entities will have a readily available place to borrow #dollars overnight at a 0.25% (annual rate) by putting up U.S. government securities. This could help avoid panic selling of assets to raise cash and thus provide more market stability.
In the past, the Fed has had to make a special announcement during a panic to create a temporary borrowing window and re-establish calm, but it was always a little to late for a few players.
FOMC officially stands for Federal Open Market Committee, but in this case it seems to stand for Fear of Missing Cash.
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Note: Here is a copy of today’s FEDERAL RESERVE PRESS RELEASE at 2 p.m. EDT July 28, 2021:
The #FederalOpenMarketCommittee 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 #primarydealers 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.
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Sincerely yours,
Michael Ashley Schulman, CFA
Partner, Chief Investment Officer
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#interestrates #economy #Powell #markets #bonds #stocks #fomo #macroeconomics #familyoffice
Disclosure: The views and opinions expressed are those of Michael Ashley Schulman, CFA and are subject to change without notice. The views and opinions referenced are as of the date of initial publication, may be modified due to changes in the market or economic conditions, and may not necessarily come to pass. Forward-looking statements cannot be guaranteed; neither can backward-looking nor current-looking statements. This material is provided for informational purposes only and does not constitute an offer or solicitation to purchase or sell any security or commodity or invest in any specific strategy. It is not intended as investment advice and does not take into account each person’s or investor’s unique circumstances. Information has been obtained from sources believed to be reliable, but its accuracy, completeness and interpretation cannot be guaranteed. Past performance is no guarantee of future results.
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