FAQs: Overnight Reverse Repurchase Agreement Operational Exercise

Effective September 19, 2014

What are the overnight reverse repurchase agreements (ON RRPs) conducted by the Desk?
The Open Market Trading Desk (the Desk) at the Federal Reserve Bank of New York (New York Fed) is responsible for conducting open market operations under the authorization and direction of the Federal Open Market Committee (FOMC).  A reverse repurchase agreement, also called a “reverse repo” or “RRP,” is an open market operation in which the Desk sells a security to an eligible RRP counterparty with an agreement to repurchase that same security at a specified price at a specific time in the future. The difference between the sale price and the repurchase price, together with the length of time between the sale and purchase, implies a rate of interest paid by the Federal Reserve on the cash invested by the RRP counterparty.

When the Desk conducts an overnight RRP, as in the current ON RRP exercise, it is selling an asset held in the System Open Market Account (SOMA) with an agreement to buy it back on the next business day.  This leaves the SOMA portfolio the same size, but changes some of the liabilities on the Federal Reserve’s balance sheet from deposits to reverse repos while the trade is outstanding.

Why is the Fed testing ON RRPs?
The Desk has been testing ON RRPs since September 2013, and the Committee has indicated in the normalization principles released in September 2014 that it intends to use an ON RRP facility as a tool in the normalization of policy as needed.  In that regard, it has directed the Desk to continue testing to further examine how the ON RRP facility might be best structured to help control the federal funds rate while also limiting the potential for unintended effects in financial markets.

Does this operational exercise represent a change in the stance of monetary policy?
Like earlier operational readiness exercises, these operations are a matter of prudent advance planning by the Federal Reserve.  They do not represent a change in the stance of monetary policy, and no inference should be drawn about the timing of any future change in the stance of monetary policy.  Additionally, the operations are technical exercises that are not intended to have a material impact on short-term interest rates.

How long will this operational exercise last?
The FOMC has authorized the Desk to conduct these overnight operations through January 30, 2015.

What collateral will be used for these operations?
The RRPs during this operational exercise are expected to be collateralized by Treasury securities.  SOMA’s holdings of agency debentures and agency mortgage-backed securities are also available, but will not be used in this exercise.

At what time of day will operations be conducted?
ON RRP operations will generally be conducted from 12:45 p.m. to 1:15 p.m. (Eastern Time).

How will the operations be conducted?
The operations will be conducted using the Desk’s FedTrade system.

How are bids submitted in each ON RRP operation?
Beginning with the operation conducted on Monday, September 22, each counterparty is permitted to submit one bid of up to $30 billion in each operation, an increase from the prior $10 billion limit, and each bid must also specify a rate of interest.  The rate submitted must be at or below the specified offering rate, currently 0.05 percent (five basis points), and must be submitted in percent form in increments of one basis point.  The minimum bid size is $1 million, with a minimum increment of $1 million.

Can negative rates be submitted?
Yes, the rate submitted as part of each bid is subject to a maximum, referred to as the “offering rate,” but rates below this level, including negative rates, are permitted.

Is there a maximum size for each operation?
Yes, the total amount awarded in any operation is subject to an overall size limit, which will be set to $300 billion beginning with the operation conducted on Monday, September 22.

What rate of interest is paid on ON RRP operations?
Beginning with the operation conducted on Monday, September 22, if the total amount of bids received is less than or equal to the $300 billion overall size limit, awards will be made at the offering rate (discussed above) to all counterparties that submit bids.  If the sum of all bids received exceeds the overall size limit, awards will be made at the rate at which the overall size limit was achieved (the “stopout rate”), with all bids below this rate awarded in full and all bids at this rate awarded on a pro rata basis.  The stopout rate will be determined by evaluating all bids in ascending order by submitted rate up to the point at which the total quantity of offers equals the overall size limit.

Example 1:  5 bids are submitted, each for $5 billion, at rates of 1, 2, 3, 4, and 5 basis points.  Since the total amount of bids submitted ($25 billion) is less than $300 billion, each bids is awarded at 5 basis points.

Example 2: 20 bids are submitted, each for $20 billion, with 4 bids submitted at each of 1, 2, 3, 4, and 5 basis points.  Since the total amount of bids submitted ($400 billion) exceeds $300 billion, each bid submitted at 1, 2, and 3 basis points is awarded in full, each bid submitted at 4 basis points is awarded 75% of the amount bid (i.e. $15 billion), and each bid submitted at 5 basis points is not awarded, for a total award amount of $300 billion.

Can an ON RRP operation have a negative stopout rate?
Yes.  If $300 billion or more in bids are submitted at negative rates, the outcome determined by the award process specified above would result in a negative stopout rate.

What is the difference between the offering rate, the bid rates submitted by counterparties, and the stopout rate?
The offering rate is the rate at which all awards will be made if the total amount of bids received is less than or equal to $300 billion.  This rate, which is authorized to vary between zero and five basis points, is currently set at five basis points.

The bid rate is the rate submitted by counterparties that must be at or below the offering rate in effect for a given operation.

 The stopout rate is the rate determined by evaluating all bids in ascending order by bid rate up to the point at which the total quantity of offers equals the overall size limit.

How will the offering rate, per-counterparty bid limit, and overall size limit change for the operations?
Any changes to these parameters must be approved by the Chair, and will be subject to the limits specified by the Committee in its latest authorization to the Desk.  Following the September 2014 FOMC meeting, the FOMC authorized the Desk to conduct ON RRPs at an offering rate that may vary from zero to five basis points, subject to a per-counterparty bid limit of up to $30 billion per day, and subject to an overall size limit of up to $300 billion per day.  For at least the first several weeks following the implementation of several changes on September 22, the Desk intends to leave the offering rate, per-counterparty bid limit, and overall size limit unchanged.

How will changes to the ON RRP operations be communicated?
Any future changes to the ON RRP operations will be announced with at least one business day prior notice on the New York Fed’s website, so that all parameters are known to all market participants before each day’s trading session.

Who is eligible to participate in the operations?
Participation in the operations is open to all of the Federal Reserve’s RRP counterparties.  The Federal Reserve currently has 140 RRP counterparties, covering a wide range of entities—94 of the largest 2a-7 money market funds, six government-sponsored enterprises (Fannie Mae, Freddie Mac, and four Federal Home Loan Banks), 18 banks, and the 22 primary dealers.  Additional details on the RRP counterparties are available on the New York Fed’s website.

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