As Foreign Central Banks Quietly Park $250 Billion In Cash At The Fed, A Mystery Emerges

Tyler Durden's picture

When the Fed unveiled its reverse repo program several years ago, it was meant to be a means for the Federal Reserve to soak up excess liquidity from domestic financial institutions when the Fed eventually proceeded to hike interest rates, as it did in mid-December. However, one look at the chart below shows something odd: while the liquidity which the domestic financial sector parked at the Fed clearly spikes at quarter and year end, this has been solely for window dressing purposes to make bank and money market balance sheets appear strong than they are for regulatory purposes, overall usage of the Fed's domestic reverse repo has actually declined since the Fed's rate hike.

There has been much confusion why this is, with experts such as Wedbush's Scott Skyrm scratching their heads and deciding that there continues to be a substantial mismatch between what the prevailing liquidity level should be at a Fed Funds rate of 25 - 50 bps, and what is actually taking place in the open market if such a thing even exists.  The implication is that banks continue to find better uses for their cash than giving it to the Fed to receive the guaranteed rate which on the domestic facility is about 0.25%.

However, while use of the Fed's domestic reverse repo program has declined in recent weeks, an unexpected market participant has taken the place of domestic financial entities: foreign central banks.

As the chart below shows, the Fed's offshore peers have been aggressively parking their overnight deposits at the Fed's reverse repo facility designed for "foreign official and international accounts", one which was has been around in some iteration ever since the 1970s, and whose usage has soared by $50 billion since the Fed's rate hike and by a whopping $150 billion since the beginning of 2015.


Why the dramatic surge? 

The answer is not exactly clear, but has to do with the interest that the Fed is paying on the foreign reverse repo. While the Fed for unknown reasons does not disclose what rate it pays its foreign central bank peers, according to the WSJ, analysts estimate it to be between 0.33% to 0.35%. By comparison the domestic facility is about 10 basis points lower.

As the WSJ writes, questions related to this murky facility abound: “we would like to know how the rate is determined because we want to have a clearer understanding of how the program is interrelated with the demand for bills,” said Joseph Abate, money markets analyst at Barclays PLC.

Zoltan Pozsar, a researcher at Credit Suisse Group AG , wrote in a client note this month that the rate on the foreign repo pool has been rising, giving incentive to foreign account holders to put their money there, and it would be useful if the Fed provided more information. The Fed “has some explaining to do,” he wrote.

The Fed itself keeps disclosure on the facility to a minimum. This is what the NY Fed says on its website:

The New York Fed provides limited investment services to its foreign official and international account holders. Principal among these is the foreign repurchase agreement pool (foreign repo pool). This investment service operates as follows: at the end of each business day, cash balances across these accounts are swept and invested in an overnight repurchase agreement using securities held in the System Open Market Account (SOMA). At maturity, on the following business day, the securities are repurchased at a repurchase price reflecting a rate of return tied to comparable market-based Treasury repo rates.


The foreign repo pool is a short-term liquid, U.S. dollar investment option for account holders and supports daily cash management needs to clear and settle securities. This investment service has been a standard provision of the New York Fed to foreign public sector account holders for many years and is separate from monetary policy operations, including the overnight and term reverse repo operations.

That's about all that is known about the program: the Fed keeps most details of the foreign repo program confidential, including users’ identities, the daily market-based rate, and how that rate is derived, in part to protect activity by foreign official institutions. Unlike some fixed rates, foreign reverse repo rates aren’t published daily. When asked by the WSJ, the Fed declined to comment on them.

As the WSJ's Katy Burne writes, "the program now seems to be at the center of how they are building a liquidity cushion at a time of heightened market uncertainty and relatively unattractive rates on bank customer deposits."

To be sure, the global dollar shortage first profiled here nearly a year ago is a factor:

Lately, market conditions have put a premium on the availability of U.S. dollars and lent new importance to the facility, as investor anticipation of additional Fed rate increases has squeezed emerging-market economies with weakening currencies. Because institutions have flocked to dollar assets, borrowers overseas may now struggle to raise enough cash to pay down debts.


Already, central banks in emerging markets have run down their foreign-currency reserves at the fastest pace since the financial crisis.

And yet here they are, sweeping dollar deposits and parking them at the Fed in hopes of collecting a meager interest boost.

A key factor likely has to do with with arbing short term Treasury bills: as noted above, the rate on the facility is estimate at 0.33% to 0.35%. A such it provide an immediate arbitrage to the 0.26% rate available on one-month Treasury bills.

Ironically, while the Fed's facility provide far better liquidity options, in that the cash is only locked up overnight, it also pays a higher interest than Bills that have a far longer maturity; Bills which when if sold move the market and may result in capital losses.

Indeed, as the WSJ notes, recently, yields on ultra-short-dated bills have been climbing, in part because the U.S. Treasury Department has issued more of them. The drop in price has reversed the premium demanded last year when the bills were in tight supply. But the rate on the foreign repo pool remains higher than the rate on one-month bills and the domestic repo program.

What also explains this drop in price is that as foreign institutions increasingly use the Fed's facility, they move some of their dollars out of Treasurys and into the facility, the price of Treasurys falls and the yield rises.

As expected, according to ICAP's Lou Crandall, "much of the recent activity can be explained by Japanese officials liquidating U.S. Treasury notes and parking the proceeds in the foreign facility, judging from the changing reserve assets reported by Japanese authorities."

Others agree: "Peter Yi, who oversees about $230 billion of short-term fixed income products at Northern Trust Asset Management, said central bank’s use of the foreign repo pool has been contributing to higher Treasury bill rates."

And of course, if indeed the Fed is paying a premium to comparably risky securities, then there is no question why foreign central banks would be rushing into the safety of the printer of the world's reserve currency.

The question is why is the Fed effectively allowing this arbitrage, one which reduces foreign demand for short-term securities, in the process boosting their yield, while providing what amounts to yet another handout to offshore entities.

Recall that as we first reported in 2011, it was the Fed's generous payment of interest on excess reserves to foreign commercial banks that provided a big boost to those same deeply insolvent banks, who had parked hudnreds of billions in excess reserves with the Fed during QE1, 2 and 3, which incidentally is the Fed's own money created out of thin air.


In fact, according to the latest Fed data, foreign banks remain the single biggest beneficiary of the Fed's generous excess reserve policy, with some $1.1 trillion in reserves - more than either large or small domestic commercial banks - parked at the Fed belonging to foreign commercial banks: these reserves now collect a rate of 0.50% per year, a rate which is set to rise with every incremental rate hike.

While it is debatable if the billions in interest the Fed paid to foreign banks was equivalent to a slow-motion cash bailout (one set to increase), what is not debatable is that the same Fed which for 7 years provide generous funding to offshore commercial banks, is now granting foreign central banks the same arbitrage privilege, one which worst of all, is almost entirely shrouded in secrecy.

Perhaps during the next congressional testimony, instead of populist pandering, the Fed can ask Janet Yellen just why the Federal Reserve is making its reverse repo facility be a more attractive "investment" for foreign central banks than the ultra short-term securities issued by the Treasury of the world's reserve currency. In effect, the Fed has made its own "product offering" a more attractive investment than the government which it, by definition, is supposed to serve.

And finally one last question: if U.S. citizen savers get a 0.0% interest rate courtesy of the Fed despite the Fed's rate hike, why are foreign central banks getting 0.35% from the Fed?

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Supernova Born's picture

"Populist pandering?"

Yeah, the Fed is all about pandering to main street.

Trump calls for Fed audit.

Look in the mirror, succubus.

ultraticum's picture

Ending the Fed would be the first step in the right direction.  None of the "red midgets" in the contest, let alone their court jester, would have the right combination of intelligence and backbone to call for that.

order66's picture

The entire ponzi is co-ordinated between Central Wanks.

NoDebt's picture

There really is no end to the fuckery these assholes at the Fed can engage in.  

In the end, I see no real mystery to this- foreign CBs are parking funds there to gain a higher rate of interest than they could elsewhere, plus a perceived "safe haven" compared to other possible destinations. Still, the question of WHY the Fed is encouraging this via an elevated rate of return vis-a-vis that available on short-dated TSYs or other domestic facilities, I have no idea.  Maybe it's a simple matter of gathering as much of the world's assets as possible before they abscond with them in the next crisis.

One thing for sure- there's a shit-ton of printed money sloshing around the globe with nowhere productive to go.

Minions's picture
Minions (not verified) NoDebt Feb 22, 2016 9:21 PM

This mystery is more dangerous:

WW1: LENIN + Christian Demonization
WW2: HITLER + Jewish Demonization
WW3: TRUMP + Muslim Demonization

Trump and the Israeli Lobby >>

tmosley's picture

Fed gets to sterilize inflation by hoarding dollars that might otherwise be used to buy real goods, foreigners get interest in a ZIRP or NIRP environment.

There, explained in one sentence.

KesselRunin12Parsecs's picture
KesselRunin12Parsecs (not verified) summerof71 Feb 22, 2016 10:02 PM

The entire ponzi is co-ordinated between [JEW] Central Wanks.


there, fixed it

gattaca's picture

Related, it seems more to me like the domestic reverse repo facility has been ineffective in setting the floor, due to foreign reserves running away from nirp landing in treasury. So this tool has been expanded to soak that up and move rates a little higher where they want them. Floor from reverse repo and cieling from ioer. 

They are losing their grip a liftle though, and it makes me smile.

Beatscape's picture

That doesn't hold water 100% because the Fed and other Central Banks are more concerned about deflation than inflation.  They are pulling out all the stops to stoke inflation.  Plus, that is their number objective in order to debase their currency so that they pay back their debt with cheaper dollars.

Kudos to ZH for great analysis here -- this is why I come here. Key takeaway is "why the Federal Reserve is making its reverse repo facility be a more attractive 'investment' for foreign central banks than the ultra short-term securities issued by the Treasury of the world's reserve currency. In effect, the Fed has made its own 'product offering' a more attractive investment than the government which it, by definition, is supposed to serve."

I agree with poster NoDebt that this is more CB 'fuckery'.  They are helping out their CB brethern at the expense of the USA, just because they can.  I'm sure their overt and media-ready intentions are to stabilize the world and prevent another financial implosion that they are creating.  In reality, they are blowing gigantic and unsustainable financial bubbles with phantom $$ that is causing oversupply, paradoxically deflation and ultimately a financial collapse of the highest order.

r0mulus's picture


Not only that, but this helps foreign banks recapitalize quietly while the rest of their economy gets NIRPed. .33% is a lot more than -3.0%

I've thought about this quite a bit the last few days. It seems like it almost would work if not for the reality that it helps support prices that are too high already (bubble). It may recapitalize banks, but it doesn't "recapitalize" domestic productivity. To me, it just looks like they are stuffing money into the banks hands so they can buy up real assets for pennies on the dollar as the non-bank (real) economy suffers.

I am pretty sure M1 (courtesy of shadow stats) saw an increase of almost 70% between 2007 until now, and is set to increase more. Unless they destroy the money (never happening), it seems we are assured a great deal more price inflation to occur in the future.

Oil is weird right now because of overt oversupplying of the market due to economic warfare. Maybe there is commodity deflation, but prices for real goods on main street have only risen in recent times, and will do so even more.

Shadowstats also puts unemployment at ~23% these days. Hmm... maybe that is why malls are empty!

rwe2late's picture


clearly, you must believe it to be a Buddhist plot

back to basics's picture

So if I understand this correctly, basically the FED, in secrecy and without being accountable to anyone, is printing fiat US dollars and handing them to foreign central banks in order for them to make up for the shortfall of US dollars in foreign commercial banks caused by defaulting loans issued in US dollars which would render them insolvent, and which in turn would collapse the entire highly interconnected global financial system.

Did I miss anything?

jm's picture

It keeps USD down and likely keeps EM economies from implosion. 

MsCreant's picture

They did it when Japan's markets were collapsing during the Fukushima meltdown. Tracked it practically live right here with Tyler(s). They did swaps with Europe during the 2008 financial crisis. Whoever is stong does not want to be, whoever is weak is trying not to implode. Imploding also means collateral/margin calls. Don't want those, they will cascade through the world. I think of it in terms of a hydraulic model of fiat value. 

Under pressure...

Librarian's picture

I don't suppose there is any way to know if these funds are available for the Fed to use as liquidity in its daily market operations and for reciprocal currency swaps?

This would go a long way to exposing that the world economy has been in coma since 2008 and is only being kept alive by "the matrix".

MsCreant's picture

I might be wrong, but the level of criminality that has been proved, never mind what we suspect, shows me they will do anything.

Why not just print it any time you want it? Oh wait, you say it is all electronic now? Even better. Digitally put it there. The others do it too. No one announces it though. Independence and all... 

See how sleazy, er, uh, I mean easy that was?


We keep trying to make sense of a crime syndicate as if there was a free market based on fundamentals. This is a market based on fraud, fundamentals try to assert themselves, then the Fed(s) intervene.

logically possible's picture

QE is now QEE 1. Quantitive European Easing.

back to basics's picture

Deleted follow up post upon further reflection. Sorry everyone.


we all have our moments, nature of the beast!  ooh-la-la   ; )

tarabel's picture



Look, this is what happens when you hand out Discover Cards to a bunch of Foreign Bank Wogs.

Cash back on every purchase.

surf0766's picture

hahah "Trump calls for Fed audit."  That is funny. They guy who has how many shares in Goldman saying he wants to audit the sugar daddy.


Yea right.

Supernova Born's picture

They guy he is.

Cruz they guy he ain't. Married to Goldman.

Surf0321 won't say who it supports.

Hulk's picture

That Bitch is going to get nirped !!!

MsCreant's picture

Stimulating, or so she thinks...

Clowns on Acid's picture

Now one knows why the neo Bolsheviks are encouraging unlimited migration into Europe and to the US. They need chaos as a deflection of their own policies which have blown up.

The unfettered migration makes absolutely no sense from a socio-economic viewpoint. There will be chaos one way or another. They will try and blame Trump. They will try to blame Boris Johnson (the new UK version of Trump). Anyone that gets in their way they will try to "FOX News" them to death. Because FOX News is sooo "conservative" don't ya know?

jerry_theking_lawler's picture

Actually, it does....any immigrant, if allowed to become a citizen, automatically becomes a US Debt instrument. Meaning the .gov needs this ponzi to keep going so it needs new debt instruments to borrow against. Makes perfect sense to me....but I'm just a dumb ole country boy.

max2205's picture

Bullish?  Or not?

tarabel's picture



More underground Fed support of the other parts of the crumbling world economy.

1) Foreign central bank nirp their captives, er clients.

2) They then deposit that nirp money in the Fed and get a small positive percentage gain.

Let's just do some rounding and call it a 1% spread. 

That is, in effect, a 1% tax on Americans that is paid to foreigners to keep their hollowed out shithole economies looking better on the balance sheet.

Stealing from America, pure and simple.

But it's okay with me-- provided that these funds are also unsecured creditors just like average American depositors. Let's blow this turkey up and keep their fucking money as a reminder that it's jsut as moral to rob a central bank as it is to rob some poor swineherd in the village.

jm's picture

I would bet a beer that Brazil's central bank has the biggest positioning.

But who knows?  EM sovereigns issue more local FX than USD. It's the corporate debt where USD funding dominates. Wouldn't be surprised if it was the ECB.


ebworthen's picture

And I thought we were getting raped with the 2008-2009 bailouts.

Wow, burn that fucking place to the ground!  Evil!

MsCreant's picture

AIG was worldwide baby! Just sayin'. They have already slid it in...just the tip, really.

Confundido's picture

Tiered central bank accounts which allow arbitrage paid for by said central bank are the cornerstone of a healthy quasifiscal deficit. In so many words, we are at the gates of an hyperinflationary process and nobody has noticed.

stant's picture

What's next ? Lady gaga as fed chair

tarabel's picture



She's got my vote, although I'd prefer Taylor Swift.

Anybody who actually works for a living.

stant's picture

And she's smart too , she would do a good job

CHoward's picture

She sure as hell couldn't do any worse.

rejected's picture

Maybe just get rid of it?

buzzsaw99's picture


that's more than they pay fucking americans. god damned assholes.

logically possible's picture

The Fed isn't paying that .35% interest, we are. The Fed is just the middle man.

john_connor's picture

How to run a ponzi, chapter 52.

ThrowAwayYourTV's picture

As I said, I paid about $2500 for a new car 50 years ago. Now that same car cost abour 30,000. Thats a 1500% increase in cost over 50 years.

Using that formula, a new car will cost your grand child about $450,000. Or $6000 per month. They are TOAST according to the syytem which everyone seems to want to cling to.

Let alone my father paid $14k for our first house 60 year ago. They, the middle class future is doomed. Pure and simple.

Already hearing commercials about how great it is to buy and own a house.

Take my word for it....Owning a house these days is a dead end money sucking endless workday money pit, like everything else these days.

izzee's picture

I bought a  car in 1988 for $5000, today I need to pay $250.year to resgister that car, $1200 per year to insure it.  If i Total it in a crash I get $500

mkkby's picture

It's IMPOSSIBLE to buy the same car as one from 30+ years ago.  Remember the base car was stipped down, and they made all their money on jacked up options?

No power door locks, no power windows, no A/C, basic AM/FM radio, no cruise control, no air bags, no power seat, no floor mats, etc...  Now all those things come standard whether you like it or not.

If you could get a stipped down car like that today it would cost about $8-10k.  All the rest is the junk larded on.

gattaca's picture

In 2012 i got one of the last stripped down badass mexico... Made vehicles. Manual transmission, manual windows and door locks, manual 4wd, rubber floors i can hose out. Sweet cummins diesel that gets 22mpg and 1000ft lb torque after i hijacked the ecu code. Ram 2500/cummins with mercedes g56/tranny slapped together in saltillo mexico. Diamond wrapped in a turd.

northern vigor's picture

The manufactureres make their money today selling On Star, wi-fi and other equivalents. $30/month for 84 months is over $2500. They get pissed off when you do not engage them. I buy new trucks every 36 months to optimize capital depreciation on my income taxes and only buy when they knock off $10,000 on the year end models. They make nothing but will sell it, because they expect everyone to take their GPS, and other satelite packages.They'll phone me for six months and finally give up.