The Program on International Financial Systems (PIFS) released a report that describes the Federal Reserve’s domestic standing Treasury repo facility (SRF_ and considers whether expanding access to the standing Treasury repo facility would enhance the liquidity and stability of US Treasury markets, as has been argued by financial market experts.
An important issue remains as to whether the SRF provides broad enough access to market participants, which depends crucially on the current participation in Treasury repo markets as well as various trade-offs between limiting or expanding the scope of the access. If access were to be broadened beyond primary dealers and eligible depository institutions, it would be important to be accompanied with a central clearing mandate and increased supervision of SRF counterparties.
Limiting access to the SRF to only primary dealers and approved depository institutions, as is currently the case with the SRF, may not provide an adequate liquidity backstop to the Treasury repo market. As noted above, primary dealers have become less and less significant in the Treasury repo markets, constituting less than half of the market in 2021 and continuing to trend downward.
The lack of access to the SRF liquidity backstop may prevent non-primary dealers from providing necessary liquidity in the cash Treasury markets during times of stress. Given the increasingly limited role of primary dealers in Treasury repo markets, it is crucial that non-primary dealers be able to increase their repo activity to meet market demands in times of crisis. However, such dealers may be reluctant or unable to do so without the backstop funding provided by the SRF. Opening access to the SRF for these dealers would solve this problem.