Section 5: Relationship between the Fed and Repo

Understanding the Federal Reserve (FED) > Section V -Relationship between the Fed and Repo

The Fed is also one of the major users of Repo.
Almost every Friday afternoon, the Fed wants to inject more liquidity to the banks.
So what our Fed would like to do is to do Repo with the customer.
Literally, what our central bank does most Friday afternoons is our Fed says, this to the primary dealers.

Look, if you lend your bonds to me, I will lend you cash.
This is the Fed’s way of injecting new cash into the banking system.
On Friday, the Fed will contact the dealers saying, lend us your collateral, we’ll put new cash into the system.
On Monday, the Fed gives the dealers back the bonds it was holding as collateral and they give them back the money they had borrowed plus a rate of interest and that would then pull that cash up.

On a daily basis, we can often see the Fed in here fine tuning the amount of cash in the US banking system on a daily basis.
As this product grew, it actually became a problem because all of these treasuries and collateral were sent over the Fed wire system.
This has been partially addressed behind the Tri-Party Repo.

The customer would keep an account at the custodian and it would simply be moving the securities from one account to the other, the cash from one account to the other, but none of them, the cash nor securities, actually leaving this custodial bank, so as not to overtax the Fed wire system.

In today’s market when we price a Repo, we assume that you are using a Tri-Party custodial arrangement.
Then the last thing I would mention about the Fed relative to this transaction is that the Fed is a creature of habit.
If the Fed is ever going to be interceding into the market, they traditionally do it at 10 o’clock in the morning.
Which I just want to caution you, the the bond market at 10 o’clock is focused on that the fed might be doing.
If they’re going be coming in and either doing Repo or outright coupons passes, that is the time of day when they tend to come into the market.
Which does mean that if the Fed were to come in later in the day, there’s nothing that says they couldn’t.
The marketplace would say, well, what are you seeing at 3 o’clock that you didn’t see at 10 o’clock? So the time of day that the Fed actually intercedes is also extremely critical, as well.