Fed Begins Tri-Party Reverse Repos With Expanded Counterparties

The Federal Reserve said it’s conducting tri-party reverse repurchase agreements with additional counterparties as policy makers prepare for the eventual withdrawal of monetary stimulus.

The transactions, part of a series of open-market operations that began in 2009, don’t represent any change in monetary policy, according to a statement on the Federal Reserve Bank of New York’s website yesterday. All eligible securities will be used as collateral today.

Eight banks and two primary dealer counterparties added last year will be included. Subsequent operations during this period will include all eligible counterparties, including designated money market mutual funds, Fannie Mae and Freddie Mac, as well as its complete list of primary dealers. The Fed began expanding its counterparties in 2010 to increase the capacity for the eventual draining of reserves as primary dealers shore up their own balance sheets after the worst financial crisis in decades.

In a reverse repo, the Fed lends securities for a set period, temporarily draining cash from the banking system. At maturity, the securities are returned to the Fed, and the cash to its counterparties. The central bank added more than $1 trillion in extra cash to its balance sheet as part of its effort to combat the financial crisis.

In a tri-party arrangement, a third party functions as the agent for the transaction and holds the security as collateral. JPMorgan Chase & Co. and Bank of New York Mellon Corp. are the only banks that serve in a trade-clearing capacity in the tri-party repo market.

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