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Fed To Proceed With Reverse Repos Every Two Months

Submitted by Tyler Durden on 08/12/2011 10:23 -0400

The Fed just announced that going forward it will proceed with reverse repo series every two months. The reason? "The operations have been designed to have no material impact on the availability of reserves or on market rates. Specifically, the aggregate amount of outstanding reverse repo transactions will be very small relative to the level of excess reserves, and the transactions will be conducted at current market rates." With liquidity already being very scarce courtesy of the FDIC assessment, of Europe wreaking havoc with money markets, of repos pulling out of the market at a record pace, of O/N General Collateral trading with the same volatility as the S&P, this will surely have no impact at all on anything, just like all other centrally planned, and carefully thought through actions.

Statement Regarding Reverse Repurchase Agreements

As noted in the October 19, 2009, Statement Regarding Reverse Repurchase Agreements, the Federal Reserve Bank of New York has been working internally and with market participants on operational aspects of triparty reverse repurchase agreements to ensure that this tool will be ready if the Federal Open Market Committee decides it should be used. Beginning Monday, August 15, the New York Fed intends to conduct another series of small-scale reverse repurchase (repo) transactions using all eligible collateral types. The first operation will be conducted using only the expanded reverse repo counterparties announced on July 27, 2011. Subsequent operations in this series will be open to all eligible reverse repo counterparties.

Going forward, the Federal Reserve plans to conduct a series of small-scale reverse repurchase transactions about every two months, which will bring the frequency of these operational exercises in line with that of the Term Deposit Facility exercises.

Like the earlier operational readiness exercises, this work is a matter of prudent advance planning by the Federal Reserve. The operations have been designed to have no material impact on the availability of reserves or on market rates. Specifically, the aggregate amount of outstanding reverse repo transactions will be very small relative to the level of excess reserves, and the transactions will be conducted at current market rates. These operations do not represent a change in the stance of monetary policy, and no inference should be drawn about the timing of any change in the stance of monetary policy in the future.

The results of these operations will be posted on the public website of the Federal Reserve Bank of New York, together with the results for other temporary open market operations. The outstanding amounts of reverse repos are reported as a factor absorbing reserves in Table 1 in the Federal Reserve's H.4.1 statistical release and as liability items in Tables 8 and 9 of that release.

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Fri, 08/12/2011 - 10:25 | 1554073 collegepunk

Anyone know how long these TOMO positions usually last?

Fri, 08/12/2011 - 13:03 | 1554631 knukles

The term of each operation is announced at the time of the undertaking's official preceding announcement.

Fri, 08/12/2011 - 13:09 | 1554644 Takingbets

Said in true FED form, it can't be made any clearer than that!

Fri, 08/12/2011 - 15:21 | 1555215 TruthInSunshine

WTF ALERT -

FT Alphaville

Weren’t we all conditioned to think that reverse-repo operations were meant to be an exit strategy? Weren’t they supposed to be deployed as a way to soak up all those excess reserves?

Why on earth would the Fed be choosing to soak up excess reserves at a time when the panic in the markets has reached highs not seen since 2008, and at a time when most of the market is calling for more liquidity and quantitative easing?

Well, we would argue it’s because the Fed believs the financial system may have crashed through a critically important juncture. Actually perhaps a rabbit hole or a looking glass are more accurate.

QE is no longer the cure. It has now become a poison.

Which would explain why the Fed did not announce more QE at the last FOMC meeting, despite rampant calls for the opposite.

It’s now very possible that the majority of the FOMC voting committee believes more QE could plunge the system into a desperate capital preservation frenzy, resulting in nothing else than self-imposed and voluntary capital destruction.

That the system is so broken, it doesn’t matter how much liquidity the Fed creates because it won’t be able to get any further than the immediate banking community. And that’s because banks still can’t find enough credit worthy people to lend to. That the majority of loans still have a greater default risk than the banks are prepared to weather. That loans equal capital deterioration. And only loans to the most credit worthy people (of which there are not enough) are worthwhile.

If banks do indeed perceive that capital deterioration risk from lending is much greater than a self-imposed haircut on the most liquid and safe security, they’re prepared to take that haircut — especially in a world with no alternative — because it guarantees some sort of remaining capital preservation. The haircut, of course, is the negative interest rate.

If that is the case, the worse thing the Fed could do is more asset purchases. It would only take out more supply of quality collateral out of the market, heightening the pressure to take a self-imposed haircut just in order to get your hands on the security. A fact echoed by the number of above par bids at this week’s 30-year Treasury auction.

As we’ve already noted, Ben Bernanke discussed that the Great Depression was arguably catlaysed by a move towards voluntary capital destruction via a frenzied fight for the remaining quality collateral.

Back then, the Fed also deployed so-called quantitative easing to flood the system with liquidity. It only made the situation worse.

Fri, 08/12/2011 - 10:29 | 1554083 cowdiddly

I don't think the Fed has ever got their minds wrapped around the idea that "There is no free lunch" thingy.

Fri, 08/12/2011 - 10:28 | 1554087 iNull

Phew. Tyler, you're the man. And I don't want to detract, or be dismissive of the fact, that you are the Man.

But doesn't anyone get tired of this.? The fucks, the absolute fucking FUCKS in Washington. Is it not time for a new government?

Fri, 08/12/2011 - 10:32 | 1554105 papaswamp

The masses have no clue what is going on and for the most part don't care as long as the cable TV works and McNasties keeps prices low.

Fri, 08/12/2011 - 10:33 | 1554115 Kina

They are indeed plugged into the matrix.

Fri, 08/12/2011 - 10:35 | 1554119 espirit

Show me some McPasties, and i'll be interested.

Fri, 08/12/2011 - 10:40 | 1554153 iNull

Strange. I was just about to head out and order my #2 Sausage McMuffin.

What blatant hyrocrisy. I flaggelate myself with the cat o' 9.

Now that that's done, I feel no better. Same stupid bitches riding around in their Ford Explorers and GM Yukons taking their daughters to ballet practice, and sons to soccer.

Am I the only one who sees how fucked up this system is?

Fri, 08/12/2011 - 10:44 | 1554174 slaughterer

No, you are not the only one. Meet Zero Hedge.

Fri, 08/12/2011 - 10:52 | 1554215 iNull

Thanks for the kind words. I really do feel, and am planning for, however, the inevitable and inneluctable collapse of werstern civilization.

You may say "What a loonie." Add some more tin foil to your helmet. OK. I accept all those criticisms, and more.

But the fact is, Wetern Civ is going down. And no amount of debate or counterargument (although sometimes it CAN be entertaining) in the meantime is going to change that.

We're fucked. That's basically the gist of it.

Fri, 08/12/2011 - 11:05 | 1554265 espirit

Try this. goto Collapse & Transformation / Graphic Presentation Pt. 3 / .pdf pg. 10

http://www.bestfutures.org/

Fri, 08/12/2011 - 10:33 | 1554116 espirit

They see Euro fail, and this is an only boolit to keep the dollah down.

Must have great CONfidence that reducing liquidity will prop the markets.

...and another epic fail.

Fri, 08/12/2011 - 10:39 | 1554144 collegepunk

At one time the comments on ZH were actually enlightening, where people provided their insights and opinions on the topic at hand. I'm just as bearish as most of you, but today the comments are all doom-mongering and trolls. its the same shit recycled on every post

Fri, 08/12/2011 - 10:46 | 1554188 slaughterer

Exactly. We have among us now a vast pool of wacked out discontents. Bring back the "junk" button and make it have consequences. More than 30 junks, and you are out for the day.

Fri, 08/12/2011 - 11:03 | 1554254 malikai

Junking doesn't work when you upset the cult with undesired truth.

Fri, 08/12/2011 - 11:09 | 1554279 Smiddywesson

That's a great idea.

I have an idea to fix everything.

Kick the can,

Acquire as much gold as possible,

Run up tremendous debt

Announce a "gold standard"

Ramp gold prices to the moon, thereby making the chief holders of gold, the central banks and the nation states, solvent.

Get everybody who doesn't hold physical gold to pay for everything, because when gold goes up in value, everything else immediately goes down. The gold standard, the newest stealth tax. Once they have dug themselves out and called each other heroes, they can slowly undermine the gold standard and rewrite history.

Next stop, the fiat standard. Rinse and repeat.

Fri, 08/12/2011 - 11:11 | 1554285 Smiddywesson

In other words, BEING on a gold standard is a good thing, but moving to a gold standard is going to be no fun at all for people without gold.

They are going to slowly be handed the bill as the gold is slowly released upon the markets.

Fri, 08/12/2011 - 14:54 | 1555109 CosmicBuddha

Nice norks man!

Fri, 08/12/2011 - 10:48 | 1554197 Herman Strandsc...

'...... its the same shit recycled on every post'

"Where there's shit thars brass"- as we say in Yorkshire

Fri, 08/12/2011 - 11:13 | 1554295 IQ 101

Or "Where theirs muck,theres money",

But I never heard a Yorkshireman say Reverse repurchase,

The statement defies logic,people would think you were daft or a liar,

I think I will go and reverse repurchase a new Harley today, i wonder what the police will say when they find out it is legal.

This arcane gobbledygook should be outlawed.

Fri, 08/12/2011 - 10:58 | 1554237 mendigo

agreed

but at least we still have robo

wish tyler could elevate some comments and leave the rest to the heap

btw

could someone explain the rational for repo or reverse repo at this stage - is there excess reserves? why

Fri, 08/12/2011 - 11:40 | 1554372 collegepunk

http://en.wikipedia.org/wiki/Repurchase_agreement#United_States_Federal_Reserve_use_of_repos

Fri, 08/12/2011 - 10:39 | 1554147 DonutBoy

Not only are the masses clueless, I'm clueless. If these operations are designed to have no impact - why do them? It doesn't effect the Fed's balance sheets? It doesn't effect reserves, the fractional base for the money supply is unchanged - so what does it do?

Fri, 08/12/2011 - 11:00 | 1554246 DeadFred

I'll take a stab and either show my ignorance or help. As I understand it the reverse repo program at the small level it's being done is a pilot program for the <mythical> time when the Fed decides it's time to get rid of the assets it's put on it's balance sheet. They are saying here the show will go on and it won't cause any problems. If they canceled due to current liquidity conditions they would be admitting that there is a serious threat to the system. It's like having the band on the Titanic stop playing, it would upset the passengers.

Liquidity is drying up day by day and judging by the graphs of the past, when things break it's gone very quickly. Small reverse repos sucking a bit of liquidity out at this time is a bad idea but so is causing panic on a listing ship. The Fed is saying they prefer form over substance, likely because they have no substance left to give. The bullets are all gone.

Fri, 08/12/2011 - 11:05 | 1554267 mendigo

thanks a trillion

Fri, 08/12/2011 - 13:15 | 1554667 knukles

Exactamunod.
Now, back in my day, reverses were as normal as repos. No big fucking deal. And the operations are exactly the same except the flow of fiunds and securities is reversed.

(Get it? Reverse repo? Genius! WTF, let's Davinci Code this to Death.)

Now, what we have here is a failure to communicate.

Why, if we know how these are done, and central banks and major recognized dealers better fucking know... bid a price (rate) write a ticket and wire some fucking money and securities around... then WTF is this doing it periodically if nothing is to be accomplished other than practice?
My neighbor's daughter gives recitals, Elton John does not.

Agachh xphlft...
"Fed in, reversing all Credibility!"

Fri, 08/12/2011 - 13:19 | 1554687 hardcleareye

"Fed reverse repos are settled DVP, where securities are moved against simultaneous payment. In this case, the Fed sends collateral to the dealers’ clearing bank, which triggers a simultaneous movement of money against the security. At this point, reserve balances are extinguished. When the deal matures, the dealer sends the collateral back to the Fed DVP, which triggers the simultaneous return of the dealer’s funds. This act re-creates the reserve balances that were extinguished on the front leg of the transaction."

Revese Repo's don't get rid of the asset on the balance sheet of the fed because they come back when the deal matures. I must be missing something, there has to be more to this?

Could the Reverse Repo have a clause that says the fed doesn't have to buy the asset back when the deal matures? If so were do you go to find the "fine print" for these deals?

Fri, 08/12/2011 - 10:43 | 1554170 rubearish10

Yes, practice the operational procedure that well never be executed materially. Not much else to do but say a few words more on how Mr Chairsatan continues with dollar destruction.

Fri, 08/12/2011 - 10:43 | 1554172 Manthong

Is it me, or is Ponzi a way too generous and flattering term to use for the back alley shell game that the future is now dependent on?

Fri, 08/12/2011 - 10:45 | 1554181 snowball777

"amount of outstanding reverse repo transactions will be very small relative to the level of excess reserves"

At this point, that's a foregone conclusion.

Fri, 08/12/2011 - 10:46 | 1554186 buzzsaw99

Isn't this the fed saying that it is just a "little bit" pregnant?

Fri, 08/12/2011 - 10:53 | 1554220 Jackson A-Hole

I'd say so. They're experimenting their centrally planned techniques for use in the future when everything goes to shit.

Fri, 08/12/2011 - 10:56 | 1554231 buzzsaw99

Maybe they need to pull one of their fingers out of the dike so they can plug a worser[sic] hole? Love the nic btw.

Fri, 08/12/2011 - 10:48 | 1554198 slaughterer

"Like the earlier operational readiness exercises, this work is a matter of prudent advance planning by the Federal Reserve."

"Prudent advance planning" for what? Certainly not for what most on ZH are thinking.

Fri, 08/12/2011 - 12:07 | 1554471 fuu

Cover those things up, people read this shit at work.

Fri, 08/12/2011 - 13:16 | 1554676 knukles

Does that mean Goldmanites don't work during working hours?

Fri, 08/12/2011 - 14:30 | 1554993 fuu

Fri, 08/12/2011 - 13:22 | 1554700 Takingbets

I agree with the poster above, have your girl put a shirt on. I'd hate to see one of our men losing his job over an avatar.

Fri, 08/12/2011 - 14:55 | 1554997 fuu

What would be worse is if the site winds up on the blocked list. Not having a gig would suck, not having ZH would be worse.

Fri, 08/12/2011 - 10:54 | 1554223 TaxSlave

prudent advance planning ...

Like a fallout shelter?

Fri, 08/12/2011 - 10:58 | 1554238 dropdeadfed

"The operations have been designed to have no material impact on the availability of reserves or on market rates. Specifically, the aggregate amount of outstanding reverse repo transactions will be very small relative to the level of excess reserves, and the transactions will be conducted at current market rates."

See, everytime they come out and say this kind of stuff I'm more apt to believe that the truth is the exact opposite. What would be the point otherwise?

Fri, 08/12/2011 - 11:03 | 1554257 MAGICWIZARD

agree college, instead of the insightful and intelligent discussion of old, we are reduced to the mere rabble that abounds the land....

c'mon people, most on the planet don't even understand this stuff much less are brave enough to comment on it. let's add something to the discussion....

Fri, 08/12/2011 - 11:12 | 1554289 Antifederalist

"no material impact" my ass. If the FED can create and distribute $14 Trillion out of whole cloth and show no balance sheet changes, and no disclosure, just imagine what they are doing behind the scenes now. If the average American would just focus on that one fact they would get it. The whole thing is a fraud. Contrary to other ZH posters I think some people are starting to get it. Not enough yet, but more than before. Soon......critical mass.

Fri, 08/12/2011 - 11:13 | 1554290 mendigo

colud someone help me to understand the massive swings in the market?

the large dips seem rational given recent data, headlines, rumors

what would be driving the large up-swings? even if someone is bullish or a day trader or even an algo i would think they would would wait-out a falling market then BTFD

Fri, 08/12/2011 - 12:00 | 1554454 LongOfTooth

My suspicion is the "plunge protection team", the banks, the FED and others are juicing the market in order to keep it from collapsing.

bwidk

Fri, 08/12/2011 - 14:46 | 1555061 Flatchestynerdette

Well, beside's LongofTooth's maybe/probably/who the heck knows but its a reasonable guess - answer, you'd have to look at the interconnectedness of world markets. I stated last night that the dow's recent lows/then ramp high/then drop low/then ramp high was not schizophrenic but typical manic bipolarism. Schizophrenic thy name is Europe - some countries have one credit rating, others have something different, some look left, some look right. Classic schizophrenia. If you want OCD? That would be China. Now you've got the doctors Moody and S&P who have different views on the patients and different opinions on what to do for their patients. Seems none of these "doctors" wants to actually call the code (downgrade), that will necessitate bringing in the crash cart with the paddles to try and save them - before the country is a walking zombie. No, its only S&P that FINALLY said to the USA - hey, you've got problems, you're a walking 13 trillion heart attack waiting to happen and you need to go on weight loss regime now. What does S&P get for telling its patient that its sick? Get hauled before the SEC, various congressional committees, the public, the President tells the people that "the doctor (S&P)" isn't anything but a bunch of letters.

So why the wild gyrations? Because, now that I think about it, LongofTooth is more right than wrong - just add in the banks/brokerages & Euro/Chinese players because the retail players - those on day trading units in their homes aren't doing this stuff. They don't have the leverage.

Fri, 08/12/2011 - 19:37 | 1555937 jal

The algo cannot read the news headlines.

Who are the peons that are doing the inputs into the algo?

jal

Fri, 08/12/2011 - 11:13 | 1554291 choorles

the monetary revolution is accelerating www.silverrevolucion.com

Fri, 08/12/2011 - 11:42 | 1554395 Kina

The wilder the swings the closer we are to crashing out, like the drunken driver that keeps over-correcting, not in control, just a matter of a very short time before he crashes.

TPTB are having trouble keeping harmonic reinforcement dampened, in fact their equal and opposite correction to the dips is in phase and enhancing the harmonic, until it contains enough power to break free of control.

Fri, 08/12/2011 - 12:27 | 1554531 DCFusor

Yup, all basic signal processing theory. If you could make a Nyquist/Bode plot it would all be a little clearer. Ignoring the long term (low frequency) trends, you could imagine all the robots/algos as either gain (of either polarity) or signal generators. Add some time delay to the networks, partly created by a body of slower traders and their psychology, partly by speed of light issues, and partly by governments (who are also signal generators). Pretty complex "circuits" but not past all understanding.

In such a situation, it's really easy to make an oscillator, chatotic if the poles and zeros are complex enough (bad pun, sorry). Or something merely divergent.

Having seen my signal processing students, who are in the same IQ/knowledge class as the current crop of quants, fail to be able to close much simpler loops to stability, I now imagine them trying to do it under condtitions where a lot of other amateurs at this are also allowed to hook into the same circuit -- and with very predictable and now realized, results.

And going way back in the day, anyone who has ever hung scope probes on a lot of nodes and looked at time responses of systems with an impulse or noise injected will recognize these patterns the markets show very easily. We have them all, from the classic ringing and overshoot, to buildup of oscillation that gets quenched by a nonlinear element, the whole mess of impulse reponses a complex nonlinear circuit can produce.

I find this observational ability quite useful in my trading. I never knew what I was training for - but this is it. All my old, predictable and not so predictable friends I see every day, it's kind of cool, actually.

The long term consequences most know (and they're not just consequences of this alone). But till then -- I have no other choice -- I ride the waves and make hay while the sun shines.

Fri, 08/12/2011 - 12:01 | 1554459 GCT

I am ignorant on alot of finances, but why not just make the darn platinum coins and eliminate this stuff without increasing the deficit. Wouldn't this be alot better then what they are trying to do and then passing this stuff back to the taxpayers?

Yep it is tough to try to learn and educate yourself these days with all the doom and gloom it does indeed get old.

Fri, 08/12/2011 - 12:24 | 1554520 MrBoompi