And that may not be the end of the story. As soon as the Fed puts in place a US Treasury repo mechanism, the next time the system is stressed, there will be considerable pressure to increase acceptable collateral (but in case of different haircuts). In other words, as is the case with discount loans, a bank would be able to take virtually all the collateral from the Fed and keep reserves. In fact, Selgin suggests going there from the beginning. When the Desk conducts open market transactions, it sells securities held on the Open Market Account (SOMA) to eligible RSO counterparties, with the agreement to repurchase the assets on the specified maturity date of the CRR. Therefore, the SOMA portfolio remains the same, given that securities temporarily sold in the context of retirement operations continue to be recorded as assets held by SOMA in accordance with generally accepted accounting principles, but the transaction defers part of the liabilities of the Federal Reserve`s balance sheet from deposits held by custodian banks (also known as bank reserves), to reverse rest while trade has not taken place. Such EIA operations may be due on an overnight due date or for a fixed period of time. In a repo transaction, a trader sells securities to a counterparty with the agreement to buy them back later at a higher price. The trader raises short-term funds at an advantageous interest rate with low risk of loss. The transaction is concluded by a reverse repo. In other words, the counterparty resold them to the trader as agreed. The ON RRP offer interest rate (the maximum interest rate the Federal Reserve is willing to pay for ON-RRP transactions) plays a similar role for ON-RRP counterparties as the excess reserve interest rate for custodian banks.
In other words, any counterparty that can use the ON-RSO facility should not be willing to invest funds overnight with another counterparty at a rate below the ON-RRSP rate, just as any deposit-taking institution with the right to earn interest on reserves should not be willing to invest money overnight with another counterparty at a rate below the rate. interest on excess reserves. The Federal Reserve currently conducts ON-RRP transactions with many counterparties covering a wide range of companies (the list of ON-RRP counterparties is available here). A large repo factory has a strong resemblance to Mervyn King`s proposal for a pawnshop for all seasons. A few years ago, when we were writing about the idea of the pawnshop (see here), we discovered the risks that the haircut calendar could become a lending mechanism in the economy. Given that the Fed`s permanent repo mechanism would likely have counterparties beyond the banks, that risk seems much greater here. Second, our results indicate that the implementation of the ON-RRP facility helped to: reduce intraday volatility at the end of the month – about 3/4 basis point compared to the end of the month`s fines prior to the introduction of the ON-RRP – which likely contributed to a slight reduction in the repo rate due to balance sheet adjustments.16 Klee et al. (2016) show that repo interest rate volatility increases at the end of the month (and quarter). .