The Fed raises the ON RRP per-counterparty limit from $30 billion to $80 billion.

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traderlmd
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The Fed raises the ON RRP per-counterparty limit from $30 billion to $80 billion.

Post by traderlmd »

The Fed had been holding the overnight reverse repo per-counterparty limit at $30 billion per day since at least 2015. Yesterday, in their minutes, the Fed announced that this limit will now be raised to $80 billion per day. The Fed kept the offering rate unchanged at 0.00 percent.



If I understand correctly, this just means that banks can now do a max of $80 billion per day instead of $30 billion per day of repo with the Fed. But banks can also do repos / reverse repos with each other, correct? Or does this limit not only refer to repos which can be done with the Fed but also refer to interbank repos?



What do you think the importance of this is? And why do you think the Fed is doing it now?
Topic Author
traderlmd
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Re: The Fed raises the ON RRP per-counterparty limit from $30 billion to $80 billion.

Post by traderlmd »

Anyone?
grok87
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Re: The Fed raises the ON RRP per-counterparty limit from $30 billion to $80 billion.

Post by grok87 »

traderlmd wrote: Mon Apr 12, 2021 12:28 pmAnyone?
Does this have to do with the treasury market meltdown a year ago? Ie wanting to avoid a repeat?
RIP Mr. Bogle.
luckyducky99
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Re: The Fed raises the ON RRP per-counterparty limit from $30 billion to $80 billion.

Post by luckyducky99 »

traderlmd wrote: Thu Apr 08, 2021 10:44 am this just means that banks can now do a max of $80 billion per day instead of $30 billion per day of repo with the Fed.
I think it's the opposite: banks can now do a max of $80B reverse repo with the Fed. Normal Fed repo is:

Bank: "hey, here's some stuff (treasuries) -- please lend me dollars at the repo rate and hold that stuff as collateral"

but reverse repo is

Bank: "hey Fed, I'll lend you dollars for treasuries at the repo rate, would you like to borrow from us?"
traderlmd wrote: Thu Apr 08, 2021 10:44 am What do you think the importance of this is? And why do you think the Fed is doing it now?
Dunno? Obviously the Fed has no need to borrow dollars. I guess if they were worried about inflation they could use RRP to try to keep a lid on that by offering a competitive repo rate but 100% risk-free to banks, and increasing the limit just lets them do that more.
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traderlmd
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Re: The Fed raises the ON RRP per-counterparty limit from $30 billion to $80 billion.

Post by traderlmd »

luckyducky99 wrote: Mon Apr 12, 2021 4:49 pm
traderlmd wrote: Thu Apr 08, 2021 10:44 am this just means that banks can now do a max of $80 billion per day instead of $30 billion per day of repo with the Fed.
I think it's the opposite: banks can now do a max of $80B reverse repo with the Fed. Normal Fed repo is:

Bank: "hey, here's some stuff (treasuries) -- please lend me dollars at the repo rate and hold that stuff as collateral"

but reverse repo is

Bank: "hey Fed, I'll lend you dollars for treasuries at the repo rate, would you like to borrow from us?"
Oh right. So, basically, this move is increasing the potential for liquidity to be sucked from the system?
luckyducky99
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Re: The Fed raises the ON RRP per-counterparty limit from $30 billion to $80 billion.

Post by luckyducky99 »

traderlmd wrote: Mon Apr 12, 2021 8:03 pm
luckyducky99 wrote: Mon Apr 12, 2021 4:49 pm
traderlmd wrote: Thu Apr 08, 2021 10:44 am this just means that banks can now do a max of $80 billion per day instead of $30 billion per day of repo with the Fed.
I think it's the opposite: banks can now do a max of $80B reverse repo with the Fed. Normal Fed repo is:

Bank: "hey, here's some stuff (treasuries) -- please lend me dollars at the repo rate and hold that stuff as collateral"

but reverse repo is

Bank: "hey Fed, I'll lend you dollars for treasuries at the repo rate, would you like to borrow from us?"
Oh right. So, basically, this move is increasing the potential for liquidity to be sucked from the system?
Yeah, that's my (amateur) reading of the situation.
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Beensabu
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Re: The Fed raises the ON RRP per-counterparty limit from $30 billion to $80 billion.

Post by Beensabu »

This is the only thing I could find without a paywall:

https://www.reuters.com/article/us-usa- ... SKBN2BA24Y

Something about cash flooding into money market funds plus SLR exemption expiring so even more cash expected to do continue to do that over time, and that there's also a shortage of Tbills, and so this move helps the money market funds be able to keep taking on those inflows and do something with that cash. I dunno. You tell me.
"The only thing that makes life possible is permanent, intolerable uncertainty; not knowing what comes next." ~Ursula LeGuin
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tooluser
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Re: The Fed raises the ON RRP per-counterparty limit from $30 billion to $80 billion.

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I think Eli Wallach did an outstanding job in Wall Street II.
https://www.youtube.com/watch?v=X0s4vehHxV4
luckyducky99
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Re: The Fed raises the ON RRP per-counterparty limit from $30 billion to $80 billion.

Post by luckyducky99 »

traderlmd wrote: Mon Apr 12, 2021 8:03 pm Oh right. So, basically, this move is increasing the potential for liquidity to be sucked from the system?
Interesting article about this here: https://www.bloomberg.com/news/articles ... ng-nothing
Bloomberg wrote: There’s so much spare cash sloshing around U.S. funding markets that investors are choosing to park almost half a trillion dollars at the central bank -- earning absolutely nothing.

Usage of the Federal Reserve’s reverse repo facility -- a mechanism that’s part of the central bank’s arsenal for helping to steer short-term interest rates -- surged on Thursday to an unprecedented $485.3 billion. [...] While the offering rate on the Fed reverse repo facility is 0%, there is a lack of alternative places to safely stash money for very short periods.
Article goes on to make it sound like the Fed's spent so many dollars buying bonds that there's nowhere for that money to go. So it's, wait for it... going back into storage at the Fed. Things just keep getting weirder.
Ramjet
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Re: The Fed raises the ON RRP per-counterparty limit from $30 billion to $80 billion.

Post by Ramjet »

luckyducky99 wrote: Thu May 27, 2021 9:44 pm
traderlmd wrote: Mon Apr 12, 2021 8:03 pm Oh right. So, basically, this move is increasing the potential for liquidity to be sucked from the system?
Interesting article about this here: https://www.bloomberg.com/news/articles ... ng-nothing
Bloomberg wrote: There’s so much spare cash sloshing around U.S. funding markets that investors are choosing to park almost half a trillion dollars at the central bank -- earning absolutely nothing.

Usage of the Federal Reserve’s reverse repo facility -- a mechanism that’s part of the central bank’s arsenal for helping to steer short-term interest rates -- surged on Thursday to an unprecedented $485.3 billion. [...] While the offering rate on the Fed reverse repo facility is 0%, there is a lack of alternative places to safely stash money for very short periods.
Article goes on to make it sound like the Fed's spent so many dollars buying bonds that there's nowhere for that money to go. So it's, wait for it... going back into storage at the Fed. Things just keep getting weirder.
That's a head scratcher
taojaxx
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Re: The Fed raises the ON RRP per-counterparty limit from $30 billion to $80 billion.

Post by taojaxx »

Reviving this for the explanation:non banks and money market funds awash in liquidity couldn't invest this with banks even at 0% as, since the SLR exemption disappeared, this extra money would trigger extra capital coverage for the banks. So banks would only take it at negative rates. The Fed target rate is 0 to .25% so this money threatened to breach the 0% floor, hence the Fed prefers to have it parked back on its balance sheet through the Reverse Repo window. Basically reverse QE.
Half a trillion as of today. That's negating 4 months of QE ($120Bn a month since June 2020). Looks like the market is "tapering" on behalf of the Fed.
Better lucky than smart.
luckyducky99
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Re: The Fed raises the ON RRP per-counterparty limit from $30 billion to $80 billion.

Post by luckyducky99 »

taojaxx wrote: Mon May 31, 2021 6:48 pm Reviving this for the explanation:non banks and money market funds awash in liquidity couldn't invest this with banks even at 0% as, since the SLR exemption disappeared, this extra money would trigger extra capital coverage for the banks. So banks would only take it at negative rates. The Fed target rate is 0 to .25% so this money threatened to breach the 0% floor, hence the Fed prefers to have it parked back on its balance sheet through the Reverse Repo window. Basically reverse QE.
Half a trillion as of today. That's negating 4 months of QE ($120Bn a month since June 2020). Looks like the market is "tapering" on behalf of the Fed.
I mean, I don’t really know anything, but it seems weird to me that the Fed seems to be implicitly endorsing this while also not actually tapering themselves. Is that weird or is there something else going on that I don’t get?
taojaxx
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Re: The Fed raises the ON RRP per-counterparty limit from $30 billion to $80 billion.

Post by taojaxx »

luckyducky99 wrote: Mon May 31, 2021 7:14 pm
taojaxx wrote: Mon May 31, 2021 6:48 pm Reviving this for the explanation:non banks and money market funds awash in liquidity couldn't invest this with banks even at 0% as, since the SLR exemption disappeared, this extra money would trigger extra capital coverage for the banks. So banks would only take it at negative rates. The Fed target rate is 0 to .25% so this money threatened to breach the 0% floor, hence the Fed prefers to have it parked back on its balance sheet through the Reverse Repo window. Basically reverse QE.
Half a trillion as of today. That's negating 4 months of QE ($120Bn a month since June 2020). Looks like the market is "tapering" on behalf of the Fed.
I mean, I don’t really know anything, but it seems weird to me that the Fed seems to be implicitly endorsing this while also not actually tapering themselves. Is that weird or is there something else going on that I don’t get?
The Fed wants to control the price (no crossing the zero bound for Overnight money) and the quantity as well (through QE). Nobody can do that, not even the Fed. So they decided to control the price -they reverse repo anything that threatens the zero bound- at the cost of sterilizing QE: 4 months of it returning on their balance sheet.
No wonder they start "talking about talking about tapering": the market has started doing it for them. It is kind of weird: just hitting the limit of overfeeding the market with liquidity to stay in line with their communication ("economy needs help") but massive monetary and fiscal stimulus coupled to reopening bumps into the limit of the exercise.
Better lucky than smart.
smectym
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Re: The Fed raises the ON RRP per-counterparty limit from $30 billion to $80 billion.

Post by smectym »

This short article from early May, out of Chicago Booth (University of Chicago business school, seems to presage the shift at the Fed, and proffers some sort of explanation

https://review.chicagobooth.edu/economi ... rest-rates
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Beensabu
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Re: The Fed raises the ON RRP per-counterparty limit from $30 billion to $80 billion.

Post by Beensabu »

taojaxx wrote: Mon May 31, 2021 7:32 pm So they decided to control the price -they reverse repo anything that threatens the zero bound- at the cost of sterilizing QE: 4 months of it returning on their balance sheet.
How long and how far? Not too low on the one end, not too high on the other. "Don't ask us why, go ask your mother."
"The only thing that makes life possible is permanent, intolerable uncertainty; not knowing what comes next." ~Ursula LeGuin
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Re: The Fed raises the ON RRP per-counterparty limit from $30 billion to $80 billion.

Post by Northern Flicker »

I don't have expertise or background on repurchase agreements, but I wonder if this is because the Fed will use reverse repos to get the Fed rate moving up when they start raising rates, and there is so much liquidity sloshing around now that maybe they will need the higher limit to drain liquidity at a fast enough rate to achieve the needed Fed rate increases when the time comes to do it.
Virus4762
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Re: The Fed raises the ON RRP per-counterparty limit from $30 billion to $80 billion.

Post by Virus4762 »

taojaxx wrote: Mon May 31, 2021 6:48 pm Reviving this for the explanation:non banks and money market funds awash in liquidity couldn't invest this with banks even at 0% as, since the SLR exemption disappeared, this extra money would trigger extra capital coverage for the banks. So banks would only take it at negative rates. The Fed target rate is 0 to .25% so this money threatened to breach the 0% floor, hence the Fed prefers to have it parked back on its balance sheet through the Reverse Repo window. Basically reverse QE.
Half a trillion as of today. That's negating 4 months of QE ($120Bn a month since June 2020). Looks like the market is "tapering" on behalf of the Fed.
Wait. I thought the SLR exemption just excluded U.S. Treasury securities from counting as assets on banks' balance sheets (allowing banks to hold "limitless" treasuries). Why would banks have to hold extra capital/equity when other institutions deposit money at those banks?
taojaxx
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Re: The Fed raises the ON RRP per-counterparty limit from $30 billion to $80 billion.

Post by taojaxx »

Virus4762 wrote: Tue Jun 08, 2021 11:14 pm
taojaxx wrote: Mon May 31, 2021 6:48 pm Reviving this for the explanation:non banks and money market funds awash in liquidity couldn't invest this with banks even at 0% as, since the SLR exemption disappeared, this extra money would trigger extra capital coverage for the banks. So banks would only take it at negative rates. The Fed target rate is 0 to .25% so this money threatened to breach the 0% floor, hence the Fed prefers to have it parked back on its balance sheet through the Reverse Repo window. Basically reverse QE.
Half a trillion as of today. That's negating 4 months of QE ($120Bn a month since June 2020). Looks like the market is "tapering" on behalf of the Fed.
Wait. I thought the SLR exemption just excluded U.S. Treasury securities from counting as assets on banks' balance sheets (allowing banks to hold "limitless" treasuries). Why would banks have to hold extra capital/equity when other institutions deposit money at those banks?
SLR (Supplemental Leverage Ratio) is meant to be a simple and comprehensive ratio covering EVERYTHING on the balance sheet. Kind of the opposite of the Basel 2 arcane quant-based ratios which brought us the GFC. So EVERYTHING means cash as well, hence the banks balking at receiving deposits. There's actually an article today in the Wall Street Journal explaining this (may be paywall protected):
https://www.wsj.com/articles/banks-to-c ... _lead_pos5
Better lucky than smart.
Virus4762
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Re: The Fed raises the ON RRP per-counterparty limit from $30 billion to $80 billion.

Post by Virus4762 »

taojaxx wrote: Mon May 31, 2021 6:48 pm this extra money would trigger extra capital coverage for the banks. So banks would only take it at negative rates.

Can you explain this? So it's not that banks were 100% incapable of taking on more deposits, its just that they would have to pay a fee for doing so?
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