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Fed To Test Repo Agreements

NEW YORK CITY-The New York Fed will test tri-party reverse repurchase agreements 'to ensure operational readiness' if the Federal Open Market Committee decides to use them.

By Paul Bubny | Updated on November 30, 2009

NEW YORK CITY-The Federal Reserve Bank of New York said Monday it would conduct a series of “small-scale, real-value” triparty reverse repurchase agreements over the next several weeks. The repos are being undertaken as a test of the New York Fed’s exit strategy for gradually winding down the massive securities program it implemented after the near-collapse of the financial markets last fall, in which it purchased more than $1.5 trillion in Treasury bonds and agency mortgage-backed securities to help drive down interest rates.

In a statement, the New York Fed emphasized that the tests are being conducted “to ensure operational readiness at the Federal Reserve, the tri-party repo clearing banks and the primary dealers” should the Federal Open Market Committee decide that reverse repos should be used. This round of testing “does not represent any change in the stance of monetary policy, and no inference should be drawn about the timing of any change in the stance of monetary policy in the future,” according to the statement. “Specifically, the aggregate amount of outstanding transactions will be very small relative to the level of excess reserves, and the transactions will be conducted at current market rates.”

The New York Fed had signaled the possibility of conducting the tests in a statement it issued in mid-October. “Numerous Federal Reserve communications have indicated that reverse repos are a tool that could be used to support a reduction in monetary accommodation at the appropriate time,” according to the Oct. 19 statement.

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