Demand For Fed's Repo Program Surges, Aided By Money-Market Fund Rules
29 September 2016 - 07:43AM
Dow Jones News
By Katy Burne
The Federal Reserve Bank of New York is seeing earlier than
normal demand for its overnight "repo" facility in part thanks to
new rules impacting money-market funds, indirectly lifting a key
measure of short-term borrowing costs on Wall Street.
The rush to put money in the repo program, which the Fed
designed to soak up excess cash in money markets and help the
central bank control interest rates, is sucking cash from the
private market for the overnight loans known formally as repurchase
agreements.
The cost of one type of repo loan used by securities dealers,
against batches of general government bond collateral, on Wednesday
reached 0.85%, according to Scott Skyrm, managing director in fixed
income financing, futures and rates at broker dealer Wedbush
Securities Inc. It averaged 0.51% from Sept. 1 to Sept. 26, he
said.
The interest rate on the Fed program is fixed, but in the
private repo market, cash going to the central bank facility means
there is less money available on Wall Street to finance the same
amount of securities.
The Fed's facility is a boon to money-market funds, many of whom
are choosing to convert to holding government only securities in
advance of new rules taking effect October 14. The Fed facility
helps them because it pays participants interest on their cash and
gives them U.S. Treasury bonds as collateral overnight out of the
Fed's portfolio.
Demand for the program also comes as banks are reining in their
activities around month- and quarter-end dates to make their
balance sheet snapshots appear safer under postcrisis
regulations.
The Fed's overnight repo program on Wednesday, two days before
quarter end, took in $272 billion from banks and money-market funds
eligible to trade with the New York Fed, its seventh highest volume
since the Fed began testing it in 2013.
Some traders said the day's tally alone wasn't as surprising as
how many days firms have been preparing for quarter-end compliance
with the regulations by parking their cash at the Fed facility
early. The Fed program, nicknamed the "RRP," has seen in excess of
$200 billion from participants every day this week.
Typically, the days immediately preceding quarter end are higher
than average but not suggestive of a quarter end date in
themselves, said Mr. Skyrm. "Today is trading like a quarter end,"
he said.
Russ Certo, a managing director at investment banking boutique
Brean Capital LLC, wrote in a research note that the total was the
"highest ever for a non-quarter end" and some market participants
have "very few alternatives."
The volumes also are notable because at various points earlier
in the year the overnight repo program had fallen out of favor. The
lower demand, particularly in the spring, came even as the Fed
lifted its daily limits on the program to $2 trillion from $300
billion in December 2015 in anticipation of higher usage.
The facility itself was introduced by the Fed three years ago to
help it control interest rates. The interest rate the Fed pays on
cash invested through it is 0.25%, marking the bottom of the target
rate for its benchmark federal-funds rate, while another program
paying deposit-taking banks 0.5% in interest on their reserves sits
at the top of the range.
The repo program's highest ever day was December 31, 2015, at
$474.6 billion. The day before, on Dec. 30, it took in $277.4
billion. This year, the volume for March 30 at the end of the first
quarter was $303.8 billion and for June 30 it was $278.8 billion,
but preceding days in both cases were only about half of that
amount.
Write to Katy Burne at katy.burne@wsj.com
(END) Dow Jones Newswires
September 28, 2016 17:28 ET (21:28 GMT)
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