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Report
Overnight RRP operations as a monetary policy tool: some design considerations
We review recent changes in monetary policy that have led to development and testing of an overnight reverse repurchase agreement (ON RRP) facility, an innovative tool for implementing monetary policy during the normalization process. Making ON RRPs available to a broad set of investors, including nonbank institutions that are significant lenders in money markets, could complement the use of the interest on excess reserves (IOER) and help control short-term interest rates. We examine some potentially important secondary effects of an ON RRP facility, both positive and negative, including ...
Discussion Paper
Are New Repo Participants Gaining Ground?
Following the 2007-09 financial crisis, regulations were introduced that increased the cost of entering into repurchase agreements (repo) for bank holding companies (BHC). As a consequence, banks and securities dealers associated with BHCs, a set of firms which dominates the repo market, were predicted to pull back from the market. In this blog post, we examine whether this changed environment allowed new participants, particularly those not subject to the new regulations, to emerge. We find that although new participants have come on the scene and made gains, they remain a small part of the ...
Discussion Paper
Intraday Timing of General Collateral Repo Markets
Market participants have often noted that general collateral (GC) repo trades happen very early in the morning, with most activity being completed soon after markets open at 7 a.m. Data on intraday repo volumes timing are not publicly available however, obscuring those dynamics to outside observers. In this post, we use confidential data collected by the Office of Financial Research (OFR) to describe the intraday timing dynamics of GC repo in the interdealer market. We demonstrate that a significant majority of interdealer overnight Treasury repo is completed prior to 8:30 a.m. (all times ...
Journal Article
The Fed and Its Shadow: A Historical View
Central bank policies have always incorporated both a discretionary or active component and a passive component. Successful central banking has required a coordination of the two components. After a period of apparent dormancy, the passive component of monetary policy has emerged from the shadows and become relevant for Federal Reserve policy today.
Discussion Paper
How Competitive are U.S. Treasury Repo Markets?
The Treasury repo market is at the center of the U.S. financial system, serving as a source of secured funding as well as providing liquidity for Treasuries in the secondary market. Recently, results published by the Bank for International Settlements (BIS) raised concerns that the repo market may be dominated by as few as four banks. In this post, we show that the secured funding portion of the repo market is competitive by demonstrating that trading is not concentrated overall and explaining how the pricing of inter-dealer repo trades is available to a wide range of market participants. By ...
Report
ECB monetary operations and the interbank repo market
We examine the relationship between monetary policy operations and interbank borrowing and lending of funds using sovereign bonds as collateral. We first establish that, in the precrisis period, there are important but rather weak relations between these funding sources and that this relationship varies within maintenance periods and at the end of the year. Official funding conditions did not meaningfully constrain repo market activity in the 2003-05 period but, in the immediate precrisis period, rate increases led to a sharp contraction in repo activity. Focusing on the crisis period, we ...
Discussion Paper
Investigating the Proposed Overnight Treasury GC Repo Benchmark Rates
In its recent ?Statement Regarding the Publication of Overnight Treasury GC Repo Rates,? the Federal Reserve Bank of New York, in cooperation with the U.S. Treasury Department?s Office of Financial Research, announced the potential publication of three overnight Treasury general collateral (GC) repurchase (repo) benchmark rates. Each of the proposed rates is designed to capture a particular segment of repo market activity. All three rates, as currently envisioned, would initially be based on transaction-level overnight GC repo trades occurring on tri-party repo platforms. The first rate would ...
Working Paper
Liquidity Windfalls: The Consequences of Repo Rehypothecation
This paper presents a model of repo rehypothecation in which dealers intermediate funds and collateral between cash lenders (e.g., money market funds) and prime brokerage clients (e.g., hedge funds). Dealers take advantage of their position as intermediaries, setting different repo terms with each counterparty. In particular, the difference in haircuts represents a positive cash balance for the dealer that can be an important source of liquidity. The model shows that dealers with higher default risk are more exposed to runs by collateral providers than to runs by cash lenders, who are ...
Speech
Liquidity Shocks: Lessons Learned from the Global Financial Crisis and the Pandemic
Remarks at the 2021 Financial Crisis Forum, Panel on Lessons for Emergency Lending (delivered via videoconference).
Working Paper
Overnight RRP Operations as a Monetary Policy Tool: Some Design Considerations
We review recent changes in monetary policy that have led to development and testing of an overnight reverse repurchase agreement (ON RRP) facility, an innovative tool for implementing monetary policy during the normalization process. Making ON RRPs available to a broad set of investors, including nonbank institutions that are significant lenders in money markets, could complement the use of the interest on excess reserves (IOER) and help control short-term interest rates. We examine some potentially important secondary effects of an ON RRP facility, both positive and negative, including ...