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Fed Announces Expansion Of Reverse Repo Program, Adds Money Market Funds To List Of Eligible Counterparties
Over the weekend we posted a very critical paper by the Minneapolis Fed discussing the potential weakness with the various liquidity extraction mechanisms (in the absence of a Fed Funds rate hike). Today, the Fed goes one step further, after noting increasing pressure by its own members to commence a tightening policy, and has announced the expansion of its reverse repo program with Primary Dealers, by adding additional counterparties. And guess who the first expansion wave focuses on - why Money Market mutual funds of course. Let's just do all we can to drain the money market system asap, shall we.
Statement Regarding Counterparties for Reverse Repurchase Agreements
The Federal Reserve Bank of New York today announced the beginning of a program to expand its counterparties for conducting reverse repurchase agreement transactions ("reverse repos"). This expansion is intended to enhance the capacity of such operations to drain reserves beyond what could likely be conducted through the New York Fed's traditional counterparties, the Primary Dealers. This announcement is pursuant to the October 19, 2009, Statement Regarding Reverse Repurchase Agreements, which announced that the New York Fed was studying the possibility of expanding its counterparties for these operations. The additional counterparties will not be eligible to participate in transactions conducted by the New York Fed other than reverse repos. This expansion of counterparties for the reverse repo program is a matter of prudent advance planning, and no inference should be drawn about the timing of any prospective monetary policy operation.
The initial efforts of the New York Fed will be aimed at firms that typically provide large amounts of short-term funding to the financial markets. This approach will ensure that the Federal Reserve quickly achieves significant capacity for conducting reverse repo operations while allowing the Trading Desk at the New York Fed to utilize its current infrastructure for conducting and settling such operations. Over time, the New York Fed expects it will modify the counterparty criteria to include a broader set of counterparties.
In this context, the New York Fed also published today eligibility criteria for the first set of expanded counterparties, domestic money market mutual funds. The eligibility criteria are intended to identify funds that conduct sizable transactions in the tri-party repo market and that the New York Fed anticipates would participate meaningfully in any reverse repo program it may be directed to implement. (See the Reverse Repo Counterparty Eligibility Criteria for Money Funds document for more details on the criteria.) In the coming months, the New York Fed anticipates that it will publish criteria for additional types of firms and for expanded eligibility within previously identified types of firms. Moreover, it anticipates publishing a New York Fed Master Repo (legal) agreement for money market mutual funds in approximately one
month.
The ultimate size and terms of reverse repo operations will depend on the directive from the Federal Open Market Committee to conduct such operations. In terms of operational details, the New York Fed
anticipates that any transactions would be:
- offered to primary dealers and the broader set of counterparties,
- conducted at auction for a fixed (not floating) rate,
- settled through the tri-party repo system, and
- held against all major types of collateral in the System Open Market Account (SOMA), including Treasury securities, agency debt securities, and agency MBS securities.
Further program parameters will be decided and announced at future dates.
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"Revere" Repo
Truly revolutionary.
Is there any way one can avoid having their IRA money market funds misused for such purposes (other than a forced withdrawal) ??
What does this mean? In laymans terms?
There's a huge supply of short-term money but not a huge supply of short-term debt. On the flipside, there's a huge supply of long-term debt and not a huge supply of long-term money.
By lending to the Fed, MM funds can at least make something on their many single bucks. The Fed can get some liquidity out of all those long-term assets they've been buying without driving up yields at the long end, which are already threatening to break loose.
One interpretation, anyway.
Those issues needs a little more clarifaction for those of us who are not very well versed in the bond markets,but trying hard to get a grasp on al things (it seems impossible). So does that mean that the FED is trying to unload the MBS papers that it bought from banks into money markets mutual funds(if I remeber correctly,PDs where not very excited about buying them). And if so,what makes said mutual funds buy them,when they know that PDs are not interested in them?
The Fed's quantitative easing program has raised excess reserves in the banking system from <50bln before the crisis to nearly 1200bln as of the latest estimates. These excess reserves are generally the funds which the banks won't lend. They sit at the Fed and gain interest on Reserves (currently .25bps). Moreover, because GSEs do not get interest on reserves, they are by and large a big provider of Funds to banks (at a discount) which banks then earn reserves on (but this is another conversation).
It can be argued that as the economy normalizes and banks decide to lend this cash, we can experience the inflationary scenerios many have been warning about. In order to control these inflationary scenerios the Fed wants to drain these excess reserves. There are a number of tools with which to do that. Rasing Interest on reserves to encourage banks to keep from lending that $$. Direct Asset sales(admitedly Bernankes least favorite option), which could have a destabalizing effect on the markets the Fed just bent over backwards to stabilize. And draining throuh Money Mkt operations such as issuance of SFP bills and Reverse Repos. SFP bills are already being issued, to the tune of $200bln which should all be outstanding by 4/22. Reverse Repos should afford the central bank more control.
Currently there are 18 primary dealers, traditionally these were the dealers that would interact with the Fed's open market operations group when they executed Reverse Repos, and Repos. The amount of Repo these dealers can engage in with the Fed is limited by their balance sheet sizes. In order to overcome this hurdle the Fed has decided to expand its counterparties beyond primary dealers into money market funds.
IF the fed decides to execute these Term reverse Triparty repos, they will lend securities to their counterparties(dealers and funds) and borrow cash, thereby draining the system. The fed will conduct these operations across collateral classes, but since the bulk of their balance sheet is in AGY/MBS collateral, it is likely that this will be the preferred class. These AREN'T asset sales. They are borrows/lends with specific maturity dates.
Currently, money market funds engage in Triparty (and DVP) repo with dealers in TSY, AGY and MBS space. These triparty reverse repos will only differ from the current operational profile in that they will be conducted with the Fed rather than with a dealer. The worry that this will make the Money Market funds less safe is unfounded. If anything(politics aside) the Fed is a more credit-worthy counterparty than a primary dealer.
I will mention 1 glitch to the Fed's plan. A revision to the rules governing Money funds was recently made, and it will be implemented at the start of May. These revisions to the 2A-7 rules are intended to make money funds safer by decreasing their Weighted Average Maturities, Weighted Average lifes, and limiting the proportion of illiquid investments they can partake in. Currently, an illiquid investment is deemed one in which no ready market can be found. For repos this has legally been defined as a term longer than 7days, this rule is bypassed in the market by giving all repos a legal right of unwind. The Fed is requesting that the counterparties to their Reverse Repo program comitt to 65day trades. At the same time, illiquid securities by money funds musts be decreased from 10% to 5% of their portfolio. Unfortunately, for the Fed, the current market conventions does not allow for the Fed to give this right of unwind. -c
Wait, am I reading this right: tri-party repo with MBS and Agency securities as collateral?
Flashback!
Revere Repos? We could sure use some Paul Revere types these days.
Tightening is coming, tightening is coming!
+2 (1 for the witty historical bend, 1 for it coming from a horseman)
1 if by Land...
2 if by Fiat...
We're going to tighten things... no, no, I'm really serious, this time! Tightening will commence shortly! No, this is not a drill, we're going to go medieval - to protect the currency... and don't forget, we are, sing it with me: I-N-D-E-P-E-N-D-E-N-T, and we're gonna tighten things up whether you like it or not! Ok, ok, just a few more weeks, but soon though, watch out!
Tyler: Fed Announces Expansion Of Revere Repo Program, Adds Money Market Funds To List Of Eligible Counterparties
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"Eligible counterparties"? Funny. More like targets with cash that will be ordered to lend the Fed money.
"dentify funds that conduct sizable transactions in the tri-party repo market and that the New York Fed anticipates would participate meaningfully in any reverse repo program it may be directed to implement."
It depends on whether the last "it" in this statement refers to the NY FED or to the Money Market fund. If the latter, the FED will be directing the MM fund to participate. Can the FED do that ?
So Zimbabwe Ben is going to increase reverse repos, while still adding to his hoard of MBS?
Someone needs to inform Zimben the Apprentice that illusive effects of sleight of hand tend to abruptly disappear when said tricks are performed too slowly.
I don't know about you, but I'm betting that one of the major couterparties in these reverse repos are the sizable money market firms run by... wait for it... I'm sure you guessed it...
Goldman Sachs.
Hmmm... money market you say? Aren't these the same things that a recent law was passed so that those with investment in money market can be locked/frozen out of gaining access to their funds. Why yes, yes it is!
AVOID MONEY MARKET FUND AS YOU CAN BE LOCKED OUT.
But this is exactly what the "Club", "Syndicate", NWO wants- people moving savings to equities so they can be front run & dumped in 2016 (8.6 year business cycle, approximately started from 1971 when we went off fixed gold money).
Equities? Smart investors are bailing out and getting physical gold/silver. Many paper financial products will 'burn', so they are to be avoided. as is anything with counterparty risk at this point.
The Federal Reserve is a Den of Thieves. Filthy Fucking Thieves!
"In this context, the New York Fed also published today eligibility criteria for the first set of expanded counterparties, domestic money market mutual funds. The eligibility criteria are intended to identify funds that conduct sizable transactions in the tri-party repo market and that the New York Fed anticipates would participate meaningfully in any reverse repo program it may be directed to implement. (See the RRP Eligibility Criteria for Money Funds document for more details.) In the coming months, the New York Fed anticipates that it will publish criteria for additional types of firms and for expanded eligibility within previously identified types of firms. Moreover, it anticipates publishing a New York Fed Master Repo (legal) agreement for money market mutual funds in approximately one month."
...for the "first set" of expanded counterparties? (MMMFs)
...the New York Fed anticipates that it will publish critieria for "additional types" of firms and for "expanded eligilibity"...
So that means we now run screaming from MMMFs at warp speed, but run to what?
Who will be the "additional types" of firms?
I bet Chumbawamba has the answer. I'll wait and let him say it.
Give me a "G"! Give me an "O"!....
Gimme an "L"! Gimme a "D"!.... whats that spell?!!!
GLOD?
They want to force that money market $ into the markets, they can't lower interest rates anymore to force it out.
Those in 401K's can't put it in gold or short, their choice will be the market or let the government get their hands on it.
Am a total amateur Perma Bear but am powerless if my MM fund (run by JPM) chooses to toe the Fed's line - of course like somebody else commented, we sheeple have the (far worse) option of going into bonds or equities..haha
Wonder if ZH will be able to research and track which MM funds are going to jump into this New trade with Da Fed ? Thanks for following up on this issue.
Don't play their game. Buy gold and silver if you want to preserve your wealth. Buy it soon and you can capitalize on the demand growth that will be fueled by BS like this.
If you think that this is exciting news, just wait until those retards in Iceland realise that they are sitting on the most valuable resources on Earth.
One day, a slightly less retarded Icelandic chemist is going to be sitting there hoping to catch yet-another-stinky-fish for dinner and realise that their almost unlimited and inexpensive geothermal energy sources can be used to turn water into industrial hydrogen and industrial oxygen using the simple and safe process called Electrolysis (not the hair removal - the chemical process. You can read about it on Wikipedia.)
I was asked by a hydrogen fuel cell manufacturer this question several years ago : "Where are we going to get enough low-cost hydrogen?". I didn't answer.
Today, reading about the gross and disgusting response of the Icelandic government to the sensible results of the referendum I decided that it is time for this "little secret" to hit the airwaves.
So - to the folks in Iceland - you're welcome. And don't forget that the by-products are both pure drinking water and a massive reduction in greenhouse gas emissions.
Namke von Federlein
It’s only a small step from ALLOWING to REQUIRING to COMMANDEERING - as in using money market funds [along with IRAs] to purchase Treasuries.
Adding a MMMFto the list of eligible counterparties does not mandate their participation. Merely makes them eligible. Second, the Fed may well wind up offering superior rates than available in the open market in order to induce participation. Thirdly, the MMMF portfolio manager chooses what constitutes acceptable collateral.
This is not a nefarious underhanded activity. However, it is a step removed from executing such directly with the banking system, draining reserves directly there from and as such, fundamentally inefficient and thus, costly.
These fellows are 'supposed' to understand financial markets.
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