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Introducing the Revised Broad Treasuries Financing Rate
The Federal Reserve Bank of New York, in cooperation with the Office of Financial Research, is proposing to publish three new overnight Treasury repurchase (repo) benchmark rates. Recently, the Federal Reserve decided to modify the construction of the broadest proposed benchmark rate (the other two proposed rates are expected to remain unchanged; see the Bank?s announcement on May 24). In this post, we describe the changes to this rate in further detail. We compare this revised rate to the originally proposed benchmark rate and show that, in the post-liftoff period, it trades higher, on average.
AUTHORS: Alyssa Cambron; Cipriani, Marco; Scott Sherman; Copeland, Adam; Kathryn Bayeux; Brett Solimine
Selected Deposits and the OBFR
The Federal Reserve Bank of New York recently decided to revise the composition of the Overnight Bank Funding Rate (OBFR), a reference rate measuring the cost banks face to borrow overnight in unsecured U.S. dollar-denominated money markets. Specifically, in addition to the federal funds and Eurodollar transactions currently comprising the OBFR, the OBFR now also includes overnight, interest-bearing demand deposits (at rates negotiated between the counterparties and excluding deposits payable on demand) booked within banks? U.S. offices, known as ?selected deposits.? In this post, we discuss the change in more detail, the reason for including selected deposits, and the likely impact on the OBFR?s published values.
AUTHORS: Scott Sherman; Timothy Wessel ; Cipriani, Marco; Romen Mookerjee; Alyssa Cambron; Joshua Jones; Brett Solimine
The SOMA Portfolio through Time
The System Open Market Account (SOMA) is a portfolio held by the Federal Reserve to support monetary policy implementation and reflects assets and liabilities (domestic, and some foreign) acquired through open market operations. The SOMA has attracted greater attention in recent years as, with the federal funds rate near its lower bound, the size and composition of the domestic portfolio has been used as an active monetary policy instrument. Earnings on the SOMA portfolio represent a significant amount of the Fed?s income and, given the substantial increase in the size of the portfolio and shift in its composition, income has increased notably, with remittances to the Treasury totaling $88.4 billion in 2012.
AUTHORS: Alyssa Cambron; Meryam Bukhari; Fleming, Michael J.; McCarthy, Jonathan; Remache, Julie
A History of SOMA Income
Historically, the Federal Reserve has held mostly interest-bearing securities on the asset side of its balance sheet and, up until 2008, mostly currency on its liability side, on which it pays no interest. Such a balance sheet naturally generates income, which is almost entirely remitted to the U.S. Treasury once operating expenses and statutory dividends on capital are paid and sufficient earnings are retained to equate surplus capital to capital paid in. The financial crisis that began in late 2007 prompted a number of changes to the balance sheet. First, the asset side of the balance sheet increased dramatically, a result of both the various liquidity facilities and the Large-Scale Asset Purchase programs (LSAPs) (see yesterday's post on the history of the Fed?s balance sheet). Second, this expansion of the balance sheet was financed in large part by issuing interest-bearing reserves instead of additional noninterest-bearing currency. As a consequence of these changes, future net income from the Fed?s portfolio will depend on a wider range of factors and may be more variable for a period of time?a topic that has generated increased discussion (see papers by Carpenter et al., Hall and Reis, and Greenlaw, Hamilton, Hooper, and Mishkin).
AUTHORS: Del Negro, Marco; Remache, Julie; Meryam Bukhari; Alyssa Cambron