May 3, 2023
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 transaction is outstanding. These RRP operations may be for overnight maturity or for a specified term.
What are the RRP operational parameters?
|Overnight Reverse Repurchase Agreement Parameters|
|Schedule:||Every business day from 12:45 p.m. to 1:15 p.m. (ET), unless otherwise stated.|
|Aggregate operation limit:||Limited by the value of Treasury securities held outright in the Systems Open Market Account (SOMA).
See below for additional details.
|Counterparty limit:||$160 billion.|
|Offering rate:||5.05 percent|
|Eligible counterparties:||Primary dealers and RRP counterparties, which include 2a-7 money market funds, banks, and government-sponsored enterprises.|
|Eligible securities:||U.S. Treasuries|
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. Securities that are not available for the ON RRP operations include Treasury securities held outright in the SOMA that are needed to conduct reverse repurchase agreements with foreign official and international accounts, securities needed to support the securities lending operations conducted by the Desk, and securities nearing maturity. Additionally should the Desk conduct term RRP, the Treasury securities serving as collateral for any outstanding term RRP operations would not be available to serve as collateral for ON RRP operations.
How are propositions submitted in RRP operations?
In 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 $160 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.
How will changes to RRP operations be communicated?
The FOMC directs the Desk to conduct RRP operations as detailed in its Continuing Directive for Domestic Open Market Operations and implementation note. Any changes to the operational parameters not provided by the FOMC’s Continuing Directive for Domestic Open Market Operations and implementation note will be announced on the New York Fed’s website.
How will the RRP operations be conducted?
The operations will be conducted using the Desk’s FedTrade system.
How does the Desk settle reverse repo transactions?
The Desk’s reverse repo transactions are cleared and settled on the triparty repo platform with Bank of New York Mellon as the triparty agent. In the triparty repo market, trades are settled on the books of a clearing bank. The clearing bank acts as an agent to the Desk and the Desk’s counterparty by taking custody of securities, valuing these securities, and settling the transactions.
How does the RRP impact the Fed’s balance sheet?
An RRP is a liability on the Federal Reserve’s balance sheet, like reserves, currency in circulation and the Treasury’s General Account. When RRP transactions are settled, the New York Fed’s triparty agent transfers the cash proceeds received from RRP counterparties to the New York Fed. This movement of funds from the clearing bank to the New York Fed reduces bank reserve liabilities on the Federal Reserve’s balance sheet, and increases RRP liabilities by an equal offsetting amount. When eligible counterparties use the facility, the RRP transactions and corresponding reduction in reserves broadens the liability base to other cash investors.
How will the Desk communicate operation results?
After the completion of a reverse repo operation, the Desk publishes a summary of results that provides the total amount submitted, total amount accepted, and the award rate.
Additional data detailing propositions accepted by counterparty type are added to the summary of results each month with data lagged by one month. These details are made available within the first five business days of each month and can be found using the Search Repo/Reverse Repo operation results feature.
In addition, Section 11 of the Federal Reserve Act, as amended by section 1103 of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, requires that Historical Transaction Data operational results be released two years after each quarterly transaction period.