Fed reviews fixed-rate reverse repo facility as aid to exit

Reverse Repos

The Fed has been conducting tri-party reverse repurchase agreements this month with primary dealers and its expanded list of counterparties including money market mutual funds. The transactions, part of a series of open-market operations first announced in December 2009, don’t represent any change in monetary policy.

Yesterday the Fed drained $5 billion in cash from the banking system through reverse repos for Treasury collateral as part of these tests. The Fed has been expanding its reverse repo counterparties over the last few years given reduced dealer balance sheets, as banks worked to shore up balance sheets after the financial crisis.

The Fed has said these tri-party reverse repos are just a way for the central bank to work on “operational aspects” for the eventual withdrawal of monetary stimulus.

The Fed uses repos and reverse repos to help maintain the level of money in the banking system to keep overnight interest rates close to the central bank’s target. The Fed has held its target rate for overnight loans between banks in a range of zero to 0.25% since December 2008.

‘Quantitative Easing’

In a reverse repo, the Fed lends securities for a set period, temporarily draining cash from the banking system. At maturity, the securities are returned to the Fed, and the cash to its counterparties.

In a tri-party arrangement, a third party functions as the agent for the transaction and holds the security as collateral. JPMorgan Chase & Co. and Bank of New York Mellon Corp. are the only banks that serve in a trade-clearing capacity in the tri- party repo market.

The central bank’s large-scale asset purchases, known as quantitative easing, have swelled its balance sheet to more than $3.6 trillion, as policy makers have sought to reduce borrowing costs and stimulate growth.

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