Drawing on the standing repo facility (SRF) when the rate is economical is a sound way for a primary dealer to serve the market, said Lorie Logan, president of the Dallas Federal Reserve, in a recent speech.
“With rates averaging higher than they were just a few months ago, the likelihood of the SRF rate becoming economical on some days is higher. Dealers may now need to step up their readiness to access the SRF in response to rate moves,” she said.
On the same day she was speaking, banks borrowed a record $50 billion at the SRF, while the overnight reverse repo facility spiked to $52 billion in the opposite direction.
Logan also noted that central clearing would further strengthen the facility’s effectiveness because the Fed’s counterparties could net down centrally cleared SRF borrowing against onward lending to other firms.
“Netting would reduce counterparties’ costs and risks of intermediating SRF funds to the broader market, helping liquidity to flow efficiently through the financial system. Streamlined SRF borrowing could be particularly helpful in the event of financial stress,” she said.
Moreover, central clearing of Fed operations would align with the private-sector repo market’s ongoing shift toward central clearing. Broader central clearing of Treasury repos will support financial stability by netting down many risks and providing strong, standardized risk management and transparency for the risks that remain.
“Effective ceiling tools will allow the FOMC [Federal Open Market Committee] to permit modest interest rate fluctuations without risking large upward spikes in rates,” she said.