On October 21, I posted this. The Fed recently offered the Primary Dealer (PD) network reverse repos up to $100 billion and the Primary Dealers didn’t bite. Apparently the banks are finding better ways to use their reserves, possibly facilitating a carry trade in the dollar that in turn is keeping various markets inflated. So meanwhile the Fed is considering reverse repos with the money market funds (MMF) industry. It is a much larger capital pool, and it supports non-banking corporations by rolling their debt.
But now they’ve given that up, apparently. According to Stephen K. Beckner,
After growing somewhat frustrated with the feasibility of doing large-scale reverse repurchase agreements with non-traditional counterparties, the Federal Reserve has begun to focus more on doing these reserve-draining operations with the primary dealer community when the time comes. …
The Fed has been informed by dealers that they would be willing to enter into very sizable amounts of reverse repos with the Fed, if asked to do so, provided they could get some relief from Tier I capital constraints …
Some officials believe the Fed need not resort to large reverse repos or asset sales, arguing that its ability to pay interest on excess reserves will set a floor under the federal funds rate and also enable the Fed to disincentivize banks from lending the reserves into the economy if necessary. …
Fed … asset purchases promise to continue expanding the balance sheet. This has raised concern among other Federal Reserve presidents who argue that the Fed needs to manage down the size of reserves (as well as) the monetary base.
And so the Fed has been looking closely at (reverse repos). And it said “the focus of recent work has been to expand our existing capability to conduct reverse repos with Primary Dealers to include ‘triparty’ settlement. This has involved working with the triparty clearing banks and Primary Dealers to implement the necessary changes and updates.” …
The New York Fed (had) entered into discussions with money market funds and government sponsored enterprises as potential counterparties. But Market News understands that the technical and legal challenges of transacting with such non-traditional counterparties has proven somewhat daunting, leading the Fed to return its focus more on the dealer community.
Then the Fed sells securities to the dealers as part of a reverse repurchase agreement, it has the effect of reducing their capital to asset ratio below regulatory minimums, limiting the amount of reverse repos the dealers are able or willing (able?) to do.
But if the Fed and other bank regulators were willing to grant an exemption from Tier One capital requirements for the reverse repos, the Fed has been informed that the dealers would be willing to do much more than they originally said — perhaps up to $1 trillion.
The Fed is said to be very receptive desperate. (Fed Debating Need for Reserve Draining vs. Interest on Reserves as posted in Zero Hedge)
