Effective September 20, 2017
What are the reverse repurchase agreement operations (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 conducted by the Desk, also called a “reverse repo” or “RRP,” is a transaction in which the Desk sells a security to an eligible 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 transaction.
When the Desk conducts RRP open market operations, it sells securities held in the System Open Market Account (SOMA) to eligible RRP counterparties, with an agreement to buy the assets back on the RRP’s specified maturity date. This leaves the SOMA portfolio the same size, as securities sold temporarily under repurchase agreements continue to be shown as assets held by the SOMA in accordance with generally accepted accounting principles, but the transaction shifts some of the liabilities on the Federal Reserve’s balance sheet from deposits held by depository institutions (also known as bank reserves) to reverse repos while the trade is outstanding. These RRP operations may be for overnight maturity or for a specified term.
What securities are being used for RRP operations?
The FOMC has directed the Desk to undertake RRP operations using Treasury securities held in the SOMA. The SOMA’s holdings of agency debentures and agency mortgage-backed securities are not currently used in the Desk’s RRP operations.
How much of the portfolio of Treasury securities is available for use in RRP operations?
The FOMC directed the Desk to undertake overnight RRP (ON RRP) operations in amounts limited only by the value of Treasury securities held outright in the SOMA that are available for such operations. To determine this value, the Desk takes several factors 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, the Treasury securities serving as collateral for any outstanding term RRP operations would not be available to serve as collateral for ON RRP operations.
Taking these factors into account, as of the beginning of the implementation of the FOMC’s balance sheet normalization program, the Desk has determined that around $2 trillion of Treasury securities are available for ON RRP operations to fulfill the FOMC’s domestic policy directive. As the amount of Treasury securities held in the SOMA gradually declines over time pursuant to the FOMC’s Policy Normalization Principles and Plans, this amount is expected to decrease. Even as the amount of Treasury securities available for RRP operations decreases, the Treasury securities available for ON RRP operations will remain very large for several years and it remains highly unlikely that the value of propositions received in an ON RRP operation will exceed the amount of available securities on a given day.
How are propositions submitted in RRP operations?
In both ON RRP and term RRP operations, the minimum proposition size is $1 million, and propositions must be submitted in increments of $1 million. All awards are allocated in $1 million increments.
For ON RRP operations, each counterparty is permitted to submit one proposition in a size not to exceed $30 billion and at a rate not to exceed the specified offering rate for each ON RRP operation.
For term RRP operations, each counterparty is permitted to submit up to two propositions for each term RRP operation. Each proposition is subject to a maximum size equal to the total amount offered in a given term RRP operation, and must be submitted at a rate not to exceed the maximum offering rate specified in the announcement of that operation’s terms.
How is the rate of interest and the allocation amount determined in RRP operations?
For ON RRP operations, if the total amount of propositions received is less than or equal to the amount of available securities, awards will be made at the specified offering rate to all counterparties that submit propositions.
In the highly unlikely event that the value of propositions received exceeds the amount of available securities, awards will be made at the rate at which this size limit was achieved (the stop-out rate), with all propositions below this rate awarded in full and all propositions equal to this rate awarded on a pro rata basis. The stop-out rate, which can be any value at or below the specified offering rate (including a negative rate), will be determined by evaluating all propositions in ascending order by submitted rate up to the point at which the total quantity of propositions equals the overall size limit.
Example 1: The Desk conducts an ON RRP operation with an offering rate of 100 basis points and $2 trillion in available Treasury securities. Five propositions are submitted, each for $5 billion, at rates of 96, 97, 98, 99 and 100 basis points each. Since the total amount of propositions submitted ($25 billion) is less than $2 trillion, each proposition is awarded at the 100 basis point offering rate.
Example 2: The Desk conducts an ON RRP operation with an offering rate of 100 basis points and $2 trillion in available Treasury securities. One hundred propositions are submitted, each for $30 billion, with 20 propositions submitted at rates of 96, 97, 98, 99 or 100 basis points each. Since the total amount of propositions submitted ($3 trillion) exceeds $2 trillion, each proposition submitted at 96, 97, and 98 basis points is awarded in full, each proposition submitted at 99 basis points is awarded for one-third of the requested amount (i.e. $10 billion each), and propositions submitted at 100 basis points are not awarded, for a total accepted amount of $2 trillion.
For term RRP operations, if the total amount of propositions received is less than or equal to the amount offered, awards will be made to all counterparties at the highest rate submitted by any individual counterparty. If the total amount of propositions exceeds the amount offered, the rate and allocations are determined by the same process that is used for oversubscribed ON RRP operations, discussed above.
At what time of day will ON RRP and term RRP operations be conducted?
ON RRP operations will generally be conducted from 12:45 p.m. to 1:15 p.m. (Eastern Time). Term RRP operations will generally be conducted from 9:30 a.m. to 10:00 a.m. (Eastern Time). Any changes to the timing of the RRP operations will be announced on the New York Fed’s website, typically with at least one business day’s prior notice.
How will changes to RRP operations be communicated?
Any future changes to the operational conduct of RRP operations will be announced on the New York Fed’s website, typically with at least one business day’s prior notice.
How will the RRP operations be conducted?
The operations will be conducted using the Desk’s FedTrade system.
Who is eligible to participate in the operations?
Participation in the operations is open to the Federal Reserve’s primary dealers as well as its expanded RRP counterparties. Expanded RRP counterparties include a wide range of entities, including 2a-7 money market funds, banks, and government-sponsored enterprises. Additional details on the RRP counterparties are available on the New York Fed’s website.