icon
icon
icon
icon
$300 Off
$300 Off

News /

Articles /

Fed's Repo Backstop Falters: Barclays Sounds Alarm on Market Turmoil

Wesley ParkTuesday, Nov 19, 2024 3:26 pm ET
4min read
The Federal Reserve's (Fed) repo backstop, designed to dampen upward pressures in repo markets, has struggled to contain recent turmoil, according to a recent report by Barclays. The repo rate surge on Monday, September 19, 2022, indicated heightened funding pressure, with the DTCC GCF Treasury Repo Index rising to 5.221%, 32 bps above the interest on reserve balances (IORB). Despite the Fed's Standing Repo Facility (SRF) lending $2.6 billion on Monday, it was insufficient to prevent repo market turmoil. Factors contributing to the backstop's ineffectiveness include banks' reduced liquidity and increased demand for cash, exacerbated by quarter-end reporting and tax deadlines.



The Fed's balance sheet reduction and changes in reserve management have also contributed to repo market pressures. From October 2017, the Fed began unwinding its balance sheet, taking a major buyer of Treasuries out of the market. This increased demand for government debt, as banks and other investors stepped in, reducing their cash reserves and available for overnight lending. Additionally, the Fed's shift to an 'ample reserves regime' in 2019, where it relied on administered rates and facilities to control short-term interest rates, reduced its active management of reserve supply. This lack of reserve management exacerbated repo market pressures, as seen in the September 2019 cash crunch.

SLN, MBLY, APLD, SYM, BTDR...Turnover Rate, Trading Volume


The repo market's structural changes, particularly the increased participation of non-bank financial institutions, have also contributed to the turmoil. Non-bank entities, such as money market funds and government-sponsored enterprises, have become significant players in the repo market, accounting for over 40% of total repo trading volume (Source: Federal Reserve Bank of New York). Their increased presence has led to a more diverse range of counterparties, potentially introducing new dynamics and risks. Additionally, non-bank entities may have different funding needs and behaviors, which could exacerbate market pressures during periods of stress.

The repo market turmoil of 2019 highlighted the limitations of the Fed's key backstop facilities, such as the Standing Repo Facility (SRF) and the Overnight Reverse Repo Facility (ON RRP), in containing market pressures (Source 1, 2, 3). Despite these facilities, repo rates surged, indicating a lack of effective control over short-term funding costs. The Fed's reliance on administered rates and ample reserves regime may not be sufficient to manage market dynamics, especially during periods of high demand for cash (Source 5). To enhance future monetary policy implementation and market management, the Fed should consider expanding its toolkit, potentially including more active management of reserve supply and broader access to backstop facilities. Additionally, the Fed should remain vigilant in monitoring market conditions and be prepared to adjust its policies as needed to maintain financial stability.

In conclusion, the repo market turmoil underscores the need for the Fed to reassess its backstop facilities and consider additional measures to effectively manage market pressures. As the repo market evolves with increased participation from non-bank entities, the Fed must adapt its policies to ensure financial stability and maintain control over short-term funding costs. By doing so, the Fed can help prevent future market turmoil and promote a more resilient financial system.
Comments

Add a public comment...
Post
User avatar and name identifying the post author
r2002
11/19
$OKTA Barclays starts coverage with an equal-weight rating and sets a PT of $81.
0
Reply
Disclaimer: The news articles available on this platform are generated in whole or in part by artificial intelligence and may not have been reviewed or fact checked by human editors. While we make reasonable efforts to ensure the quality and accuracy of the content, we make no representations or warranties, express or implied, as to the truthfulness, reliability, completeness, or timeliness of any information provided. It is your sole responsibility to independently verify any facts, statements, or claims prior to acting upon them. Ainvest Fintech Inc expressly disclaims all liability for any loss, damage, or harm arising from the use of or reliance on AI-generated content, including but not limited to direct, indirect, incidental, or consequential damages.
You Can Understand News Better with AI.
Whats the News impact on stock market?
Its impact is
fork
logo
AInvest
Aime Coplilot
Invest Smarter With AI Power.
Open App