Repo Madness: Overnight Operations Jump to $150 Billion on New Year’s Eve

The size of the Fed’s overnight repo market assistance will be ramped up on $150 billion on December 31 and January 2, 2020, the Federal Reserve Bank of New York said Thursday.

The Fed said overnight repo operations will continue through at least January 14, 2020.

“Overnight repo operations will continue to be held each day.  On December 31, 2019 and January 2, 2020, the overnight repo offering will increase to at least $150 billion.  In addition, on December 30, 2019, the Desk will offer a $75 billion repo that settles on December 31, 2019 and matures on January 2, 2020,” the New York Fed said.

The NY Fed will also continue to offer two-week term repos twice per week, four of which span year-end. In addition, it will also offer another longer-maturity term repo operation that spans year-end. The amount offered in this operation will be at least $50 billion.

On Wednesday, Fed chair Jerome Powell said that the central bank was prepared to deal with any liquidity crunch that could come at the end of the year. Several market watchers have warned that cash necessary to fund securities portfolios at broker-dealers could become scarce around the end of the year because big banks such as J.P. Morgan Chase are expected to want to maximize their won liquidity, in part to meet regulatory requirements.

The Fed operations have been ongoing since mid-September when interest rates spiked beyond the Fed’s target interest rate for overnight bank funding in a different market, the federal funds market. Typically, the implied rate for repo borrowings is within the range for fed funds targeted by monetary policy.

Prior to the spike in interest rates, the market was typically settled without Fed intervention. Investors, such as money market funds and Federal Home Loan Banks, provided cash to Wall Street securities firms on an overnight basis, collateralized by ultra-safe securities such as Treasuries and mortgage-backed securities guaranteed by Fannie Mae and Freddie Mac.

The precise cause of the repo market’s misbehavior is not known. It is widely thought to be a result of the combined effect of regulations requiring banks to hold liquid assets, the Fed’s reversal of quantitative easing removing dollars from the financial system, the expansion of the federal deficit adding Treasurys, and the quarter-end timing at the end of September.