Fed Officially Announces The Fixed-Rate Full-Allotment RRP

In August, the Fed dropped a bombshell on the market when they partially announced a new Fixed-Rate Full-Allotment Reverse-Repo Facility (FRFARRP). There was considerable debate as to what the July FOMC minutes really meant. Problem solved! It was announced today. The Federal Reserve issued a Press Release describing the details of the new program. Here they are:

• The Fed will begin FRFARRP operations on September 23 (this Monday) and a trial period will extend through January 29, 2014
• The Fixed-Rate will start at .01% – one basis point – and be allowed to increase as high as .05% – as authorized by the FOMC.
• Each reverse-repo counterparty is allowed to invest up to $500 million cash at the Fed, with the counterparty limit possibly increased to $1 billion. There are 139 different reverse-repo counterparties on the Fed’s website. That means the FRFARRP can put between $69.5 billion and $70 billion in securities into the market on any given day.
• The trades will only be overnight
• The facility will be active between 11:15 am to 11:45 am each day – the Fed brought back “Fed Time”

What Does It Mean?

That’s easy. The Fed is attempting to put a floor on general collateral rates. At lease a floor up until 11:45 am each day. It doesn’t mean that GC rates can’t drop into the negatives later in the day. As of Monday, the GC rate floor is set at .01%, but it could be raised as high as .05%. Clearly, the Fed is worried about the impact of QE purchases on the Repo market. Throughout June and July GC was trending toward 0% and the Fed was worried about possible Repo market distorts. No doubt they are conscious of preventing a collateral shortage. And, I’d like to note, the FRFARRP is not about planning for a fed funds tightening in 2014. The Fed announcement stressed not just once, but twice, that the facility does not imply any kind of policy change in short-term rates.