Fed Reveals Rate Hike "Plumbing" Details: Removes Cap On Reverse Repos, Limits Each Counterparty To $30 Billion

Tyler Durden's picture

Perhaps even more important than the actual rate hike announcement, the one statement the market was particularly focused on was the Fed's "implementation note", which lays out the Fed's thought process on how it will actually raise rates in order to maintain the Fed Funds in the 0.25%-0.50% range. What it reveals is that in addition to removing the daily limit on aggregate borrowings through its overnight reverse repurchase facility, previously set at $300 billion (recall that according to Citi, the Fed may need to drain up to $1 trillion in excess liquidity to effect the 25 bps hike), it will have a per counterparty limit of $30 billion per day, which may or may not be enough.

Separately, the Simon Potter's desk at the NY Fed announced "that the Desk anticipates that around $2 trillion of Treasury securities will be available for ON RRP operations to fulfill the FOMC’s domestic policy directive."

What is missing from the analysis is how the Fed will approach the fact that securities pledged to the Fed remain outside of the traditional repo pathway, and thus the liquidity shortage among the treasury market is likely to continue if not worsen.

Most of these are in line with expectations. Now it remains to be seen if these theoretically necessary measures will also be practically sufficient.

The full details from the FED:

Decisions Regarding Monetary Policy Implementation

  • The Federal Reserve has made the following decisions to implement the monetary policy stance announced by the Federal Open Market Committee in its statement on December 16, 2015:
  • The Board of Governors of the Federal Reserve System voted unanimously to raise the interest rate paid on required and excess reserve balances to 0.50 percent, effective December 17, 2015.

As part of its policy decision, the Federal Open Market Committee voted to authorize and direct the Open Market Desk at the Federal Reserve Bank of New York, until instructed otherwise, to execute transactions in the System Open Market Account in accordance with the following domestic policy directive:


"Effective December 17, 2015, the Federal Open Market Committee directs the Desk to undertake open market operations as necessary to maintain the federal funds rate in a target range of 1/4 to 1/2 percent, including: (1) overnight reverse repurchase operations (and reverse repurchase operations with maturities of more than one day when necessary to accommodate weekend, holiday, or similar trading conventions) at an offering rate of 0.25 percent, in amounts limited only by the value of Treasury securities held outright in the System Open Market Account that are available for such operations and by a per-counterparty limit of $30 billion per day; and (2) term reverse repurchase operations to the extent approved in the resolution on term RRP operations approved by the Committee at its March 17-18, 2015, meeting.


The Committee directs the Desk to continue rolling over maturing Treasury securities at auction and to continue reinvesting principal payments on all agency debt and agency mortgage-backed securities in agency mortgage-backed securities. The Committee also directs the Desk to engage in dollar roll and coupon swap transactions as necessary to facilitate settlement of the Federal Reserve's agency mortgage-backed securities transactions."


More information regarding open market operations may be found on the Federal Reserve Bank of New York's website.


In a related action, the Board of Governors of the Federal Reserve System voted unanimously to approve a 1/4 percentage point increase in the discount rate (the primary credit rate) to 1.00 percent, effective December 17, 2015. In taking this action, the Board approved requests submitted by the Boards of Directors of the Federal Reserve Banks of Boston, Philadelphia, Cleveland, Richmond, Atlanta, Chicago, St. Louis, Kansas City, Dallas, and San Francisco.


This information will be updated as appropriate to reflect decisions of the Federal Open Market Committee or the Board of Governors regarding details of the Federal Reserve's operational tools and approach used to implement monetary policy.

And from the NY Fed:

During its meeting on December 15–16, 2015, the Federal Open Market Committee (FOMC) directed the Open Market Trading Desk (the Desk) at the Federal Reserve Bank of New York (New York Fed), effective December 17, 2015, to undertake open market operations as necessary to maintain the federal funds rate in a target range of ¼ to ½ percent, including overnight reverse repurchase operations (ON RRPs) at an offering rate of 0.25 percent, in amounts limited only by the value of Treasury securities held outright in the System Open Market Account (SOMA) that are available for such operations and by a per-counterparty limit of $30 billion per day.


To determine the value of Treasury securities available for ON RRP operations, several factors need to be taken into account, as not all Treasury securities held outright in the SOMA will be available for use in such operations. First, some of the Treasury securities held outright in the SOMA are needed to conduct reverse repurchase agreements with foreign official and international accounts. Second, some Treasury securities are needed to support the securities lending operations conducted by the Desk. Additionally, buffers are needed to provide for possible changes in demand for these activities and for possible changes in the market value of the SOMA’s holdings of Treasury securities.


Taking these factors into account, the Desk anticipates that around $2 trillion of Treasury securities will
be available for ON RRP operations to fulfill the FOMC’s domestic
policy directive
. In the highly unlikely event that the value of bids received in an ON RRP operation exceeds the amount of available securities, the Desk will allocate awards using a single-price auction based on the stop-out rate at which the overall size limit is reached, with all bids below this rate awarded in full at the stop-out rate and all bids at this rate awarded on a pro rata basis at the stop-out rate.


These ON RRP operations will be open to all eligible RRP counterparties, will settle same-day, and will have an overnight tenor unless a longer term is warranted to accommodate weekend, holiday, and other similar trading conventions. Each eligible counterparty is permitted to submit one proposition for each ON RRP operation, in a size not to exceed $30 billion and at a rate not to exceed the specified offering rate. The operations will take place from 12:45 p.m. to 1:15 p.m. (Eastern Time). Any changes to these terms will be announced with at least one business day’s prior notice on the New York Fed’s website.

The results of these operations will be posted on the New York Fed’s website. The outstanding amounts of RRPs are reported on the Federal Reserve’s H.4.1 statistical release as a factor absorbing reserves in Table 1 and as a liability item in Tables 5 and 6.

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Occident Mortal's picture

More down to Citadel's fiat capacitor than Yellen's Jawboning.

NidStyles's picture

Does anyone else find it funny that they hiked the rates only after the COP 21 bullshit was signed?

JohnG's picture

"Removes cap on reverse repos......"

Holy Fuck they are expecting carnage.

NotApplicable's picture

It kills me to think that the entire financial world now rests upon the shoulders of single day, reverse repos.

JohnG's picture

Bottemless pit of digital fiat.  Seems legit to me.....shows the rot.

Squid-puppets a-go-go's picture

6 years of ZH and the intricacies of the bond market still eludes me somewhat. Can someone simply for for me: Is this assertion true or false:

 in order for the Fed to raise rates, the Repo market drainage of liquidity is a necessity because there's no effective point in them raising rates if the market can just buy 2nd hand bonds from non-Fed financial giants, - which were previously issued at a lower price.

So the Fed has to buy back previously issued bonds to force the market to buy new bonds at its adjusted rate

(edit - ive got it wrong way around, yeh? Fed has to sell up to $1T of bonds to the market - credit which would otherwise be going into stawx - to replace previous bonds that yeild lower interest - otherwise the rate raise has no real immediate effect and what effect there is only happens glacially as various bonds from zirp eventually mature - yeh?)

Soul Glow's picture

Look, the Fed has no idea what they are doing.  They created a monster and now they are going to let it out of the dungeon.  We can recap what they have to do in order to maintain a rise in rates, but it makes no sense.  Let's go over this shitshow.

First in order to raise rates the Fed needs to sell securites.  Securites are "stocks and bonds".  We know the Fed, the BoJ, and many other central banks own stocks (the Swiss own a huge amount of APPL stock).  They also own a shit tonne of bonds (shit tonne being a financial term a la 2008 whence the Fed decided to explode their balance sheet).  They need to sell these securities to raise rates.  This in turn will lead to lower inflation - meeting the Fed's mandate of "stable" inflation, whatever the fuck stable inflation means.

Yet like ZH discussed per how the BoJ will sell their "securities" - there is no buyer other than the BoJ - where will the liquidity come from?  You are familiar with article after article discussing the breadth and low liquidity in the market, and the fact that bond funds are seeing an amazing outflow of market cap, so once again, where will the liquidity come from?

Yes, they need to sell trillions of dollars worth of securities, you have that right.  How will they do that and when?  Well maybe the BIS buys some?  Maybe the IMF?  but do they want to be left holding the bag?  Isn't the overall goal of the elite to crush the lower class and create a NWO?  So wouldn't the IMF, World Bank, and BIS wan the Fed et al to crash and burn?

Squid all I can say is - THERE ARE NO ANSWERS, ONLY QUESTIONS.  Keep asking....

PS reverse repos, still researching how this mechinism will affect markets....

scubapro's picture


if a bond pro could respond to these that'd be great.

so yes, if to raise rates, they sell securities, draining cash.    sell to whom?  the b/ds HAVE to dance to what the fed plays.  but b/ds dont want to see prices move.    if equities were to decline, moneymight flow into bonds....but rates need to stay level;  so stox down bonds flat?  weve been seeing that for 7 months now....breakdown of traditional correlations.  

so the fed is simply going to park a trillion worht of bonds day after day, night after night  ??   thats a very large hot potato.   

so far no one seems to give a shit, risk assets bought hand over fist....nothing to see here, move along (which is exactly how the sheeple need to feel about it)   

mkkby's picture

The fed funds rate is an OVER NIGHT RATE.  We are talking 24-72 hour notes.  Not longer term notes or bonds.

And it is only for intra bank financing.  Therefore the change happens right away.  There is no waiting for older notes to expire and be replaced.

Furthermore, we also know most of the printing (QE, twist, etc) over the years has just been sitting on the balance sheets of large banks.  Remember how the velocity has gone almost infinite?

The fed HAS NOT said they are selling treasuries or agency bonds bought during QE/twist.  Therefore, we should expect those bonds to sit at the fed until they mature.  They may even be buying more to offset matures.  Nobody know that for sure.

In conclusion, this affects bank balance sheets.  It should ultimately affect how much gets parked in stocks, bonds, junk, currencies... everything.  In the past, emerging markets got hacked up first.

JohnG's picture

A rise in EFF from 0.15 to 0.25 is a 67% (!) rise.  Can the fed cover draining two thirds of QE('s) all at once?  No. Even the fed is not that deep.

We could be in for a real show.

mkkby's picture

Fuck off, drama boy.  A 5mph wind is 400% greater than a 1mph wind.  Still not a fucking hurricane.

herkomilchen's picture

Liquidity is relative to price.  They'll just keep lowering the price until they all sell.  No ordinary seller could survive selling $1T in bonds at 90 cents on the dollar, but the Fed can.  Fed don't care about losses.  It has a printing press, so can pass the losses onto all of us.

Soul Glow's picture

Printing at a loss is still a loss.  The loss is absolutely reflected on the balance sheet.  If the Fed's balance sheet is as bad as it looks they will go broke or break the dollar.  If they break the dollar the underlying asset of the world is wiped out, leaving the world without a means to find value.

This would result in hyperinflation.

ayufan's picture

the problem with having a loss on the balance is that it only matters when someone reads it.

No one have the ability (except the fed) to read the balance sheet.  Therefore, no loss is "reported" as they are hidden. 

Arnold's picture

Hilsenrath will 'splain it all.

He just ran out of column space.

.300WinMag's picture

Breaking the dollar and the context of the world as a tinderbox:


- It could just as well be that this WolfowitzBanking cabal is simply so arrogant as to assume that they can foist this on the rest of the globe. Why not, right? I mean the world has stood by and watched the US default and violate the shit outta Bretton Woods. Their just leaning on the dollar a bit, ain't breaking nothing but the EMs.


- Conversely, we're poking the Bear, saying F*ck You to his Chinaman friend, and we're up to our ass in it in the ME.....you know how it goes: if enough folks start asking - what exactly does back the dollar and what is this petrodollar supremacy bullshit you speak of? Someone is gonna get hit in the mouth....

sun tzu's picture

It might not affect the Fed, but it will affect everyone else holding bonds. As yields start to increase, bond prices decrease. Everyone who owns bonds right now will be seeing losses

HopefulCynic's picture

Maybe, just maybe, they do know perfectly well what they are doing. They can influence publicly and privately every single majour asset, they have their PPT and can print as much as they can. It is just that to you it seems illogical, because you are thinking about what is better for the US economy, and thy are acting on behalf of their own economy. It is no secret that the Meny Makers get richer and richer with their own "F*ck ups". Do you think it is good Karma that they have, or a better understanding of how to push where to push and when to push to get more?


What is better than to buy tresuries under economic uncertainty? They have managed to create that and now 2 T. USD will be syphoned via treasuries and all of the dirty shannanigans that can come with UST's.

This is the biggest BTFD so far, in my opinion. 

Soul Glow's picture

Look at the macro though.  Inflation is off the hook except for oil.  And oil is signaling a depression.  Now they reverse trade USTs for cash at a rate of ,25% while those banks are forced to pull the cash off their balance sheets, the cash being the only way said banks can leverage their debt.

Sorry, but the Fed is screwed.

socalbeach's picture

I don't think either version of what you wrote is accurate, but don't feel bad I don't fully understand it either.  Read this: http://www.federalreserve.gov/econresdata/feds/2015/files/2015010pap.pdf

besnook's picture

basically the fed flooded the system with cash for the expected redemptions of the now loser bonds to match the new price and other possible aig type counterparty rehypothecated derivative crap the fed has no idea of. the wink, wink is that no matter what happens the fed will make sure .5 sticks no matter what it will cost you.

fiftybagger's picture

PIRP - panicked interest rate policy

buzzsaw99's picture

the clutch is busted and the transmission is shot but it runs great on regular zirple

ultraticum's picture

+1  Reminds me of an old CW McCall tune about a '57 Chevy pickup truck: 

. . . her shaft is bent and the rear end leaks

use a nail to start 'er I lost the key

don't pay no mind to that whirring sound

she'll use a little oil, but outside a that she's cherry.

ultraticum's picture

blah blah blah . . . . central planning of interest rates that should be market based . . . . blah blah blah

stant's picture

Well fuck this , she pulled the pin, i am going out to shoot Bambi be back later to read the aftermath

pebblewriter's picture

Classic misdirection.  All this focus on the rate rise, when the real impact comes from manipulating oil, bond futures and currencies.  The yen carry trade is still all that's driving stocks higher.


BandGap's picture

See, that didn't hurt at all!

Rainman's picture

It will take the machines a while to figure out if this is a Three-Card Monte con.

socalbeach's picture

The banks will make even more money, as the interest on reserves is being raised from 0.25% to 0.5%.  And they will get 0.25% on their reserves by lending the Fed money in return for Treasuries. If they had just undone QE by the required amount the banks wouldn't have profited.


buzzsaw99's picture

yes this move helps the big banks at the expense of the small. business as usual.

socalbeach's picture

Do you know who keeps the Treasury interest when the banks send reserves to the Fed in exchange for Treasuries?  Presumably the banks or they would be better off just getting 0.5% on their reserves on deposit with the Fed.

buzzsaw99's picture

possession is nine tenths of the law in those matters i do believe. as for whether they would be better off, well, they sure do help themselves at all times so don't worry about that too much.

Soul Glow's picture

A week ago raising rates 25bps is gpoing to take a sale of $500B, then $1T, now $2T!  where is the demand going to come from?  Not China and Russia, as they and others dumped a net $50B worth of USTs last month, after dumping $200B last summer.

Bond funds are going broke left and right, so no liquidity there.  The ECB and BoJ say they too have reigned in their purchases.  So where is the demand?

Oil is at $35, down another 5% today.  The "lifeblood of the economy" is signalling a massive deflation.  

If we had any doubt that economics was a house built on lies, we do no moar.

socalbeach's picture

My understanding is the Fed isn't going to be selling Treasuries into the market, but instead exchanging their Treasuries for banks' reserves in mostly 1 day reverse-repos.

Arnold's picture

That should look ok for the next stress test that few really pass, and occasionally fail miserably (deutschebank).

herkomilchen's picture

Remember, they don't care how bad a price they get, they'll just lower the price as far as it takes to sell them.

Yen Cross's picture

   Bubbles... tiny bubbles.

   The fed. can't even cut the rate on excess reserves--- Pathetic.

 Moar smoke and mirrors/ I can't wait to see how the PBoC reacts later. Were they front running the fed. with that huge YUAN devaluation?

 Inquiring minds would like to know. Who's picking up the slack in treasury and bond pricing? [the curve]

Soul Glow's picture

The Bank of Unicorns will be buying the excess reserves and picking up the slack of demand.

Squid-puppets a-go-go's picture

who better to run the Fed than a gnome when they have to stable unicorns?

Yen Cross's picture

Would that be the reinstated EX-IM or Belgium?

Arnold's picture

Somehow by magic, a target appeared, front and back of my 'Been there, Done that' T shirt.

It was right around 2:05:11 this afternoon.



Any body else have that happen?

Publicus_Reanimated's picture

Make no mistake the U.S. and China are already at economic war.  Their strategists forecast the Fed would rise and they took protective measures.  Maybe us plebes will find out soon...

jerry_theking_lawler's picture

TD, et al...how much is the non-federal reserve rolling over monthly now? Is this what old yeller means by saying policy is still accomodative? (its more than the $30B RRP)?

HopefulCynic's picture

I think this is going to be the biggest BTFD opportunity, there is still a lot of juice that can be extracted from the masses. 

besnook's picture

so a giant pillow(2tril!) is the cushion for anyone who thinks about having to jump out of a window.


a word of warning. a trillion here, a trillion there and pretty soon you're talking about real money.

Arnold's picture

Nice for a new guy, but off topic?