In a recent speech, Roberto Perli, manager of the System Open Market Account (SOMA) at the New York Federal Reserve, discussed current issues in monetary policy, including an assessment of current reserve conditions; how Treasury debt limit dynamics might temporarily cloud that assessment; the composition of the SOMA portfolio; and steps the NY Fed has been taking to enhance the effectiveness of the Standing Repo Facility (SRF) within the tri-party segment of the repo market, where it operates.
There is evidence that pressures in the repo market have been gradually increasing. One gauge of conditions in that market, which shows the share of transactions in the interdealer market that take place at or above interest rate on reserve balances (IORB), is noticeably higher than it was this time last year.
Other repo market measures—including those focused on the client-to-dealer segment—indicate increased tightness, albeit from very low levels, especially around reporting and Treasury settlement dates, along with the reemergence of month-end repo rate volatility.
“I would characterize these developments in the repo market as a sign that the market is returning toward more normal conditions after a period in which very abundant liquidity suppressed nearly all volatility. For now, these signals from the repo market suggest no cause for concern,” he said.
SRF effectiveness
For some primary dealers and depository institutions, various frictions imply that the efficacy of the SRF, as currently implemented, might be improved. One of these frictions has to do with timing — SRF auctions typically occur in the afternoon, whereas the repo market typically trades in the morning. This means that dealers seeking to intermediate the market by obtaining funding at the SRF and on-lending to clients would face some funding uncertainty.
“Over the year-end just passed, we conducted an experiment, by running morning SRF auctions in addition to the regular afternoon auctions. The feedback we received was that the morning auctions were helpful in addressing that funding uncertainty, and they may even have contributed some to a relatively smooth year-end period, although they did not address some other frictions associated with SRF usage — including that those morning auctions still settled in the afternoon,” said Perli.