Fed Doubles Reverse Repo Counterparty Cap to Buoy Short-End

(Bloomberg) -- The Federal Reserve doubled the counterparty limit for its overnight reverse repurchase agreement on Wednesday to underpin short-term rates amid a cash glut that’s helped drive record demand for the facility. 

Policy makers directed the New York Fed to adjust its per-counterparty limit in the facility to $160 billion a day from $80 billion. The Fed kept its target range unchanged from 0% to 0.25%, and its offering yield on the RRP steady at 0.05%. 

The central bank has been tinkering with the facility this year as the Fed’s ongoing quantitative easing and Treasury’s drawdown of its cashpile have flooded the financial system with dollars at a time when assets like T-bills and other short-term assets are scarce. That has pushed usage for the reverse repo facility to successive all-time highs, reaching $1.28 trillion as of Wednesday.

Key Insights 

• The Fed in March boosted the size of the counterparty limit to $80 billion a day from $30 billion a day, the first increase since 2014.
• It took further steps to bolster the facility, such as making changes to counterparty eligibility criteria to make it more accessible.
• At its June meeting, policy makers made an upward shift to its so-called administered rates -- boosting yields on the RRP and interest on reserve balances rate -- as the glut of U.S. dollars in the short-term funding markets weighed on the front-end.
• Since then, the demand for the Fed’s RRP continues to make all-time highs, surpassing $1 trillion for the first time since the facility was introduced in 2013.
• The $80 billion counterparty limit has proven to be more of a constraint for the government sponsored enterprises, which cannot earn the IORB rate of 0.15% when it parks cash at the Fed. Yet it doesn’t appear to be hampering money funds as only a handful of individual funds reported RRP balances above $50 billion as of Aug. 31, Office of Financial Research data show.

Market Action 

• Usage at the Fed’s reverse repo facility rose to a fresh record for the fourth straight session Wednesday, with 77 counterparties taking $1.28 trillion

Get More

• Link to New York Fed statement
• FAQ on reverse repo facility

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