During its meeting on September 19-20, 2017, the Federal Open Market Committee (FOMC) directed the Open Market Trading Desk (the Desk) at the Federal Reserve Bank of New York (New York Fed), effective September 21, 2017, to undertake open market operations as necessary to maintain the federal funds rate in a target range of 1 to 1¼ percent, including overnight reverse repurchase operations (ON RRPs) at an offering rate of 1.00 percent, in amounts limited only by the value of Treasury securities held outright in the System Open Market Account (SOMA) that are available for such operations and by a per-counterparty limit of $30 billion per day. The FOMC also directed the Desk to initiate the program to gradually reduce the reinvestment of principal payments from the Federal Reserve’s holdings of Treasury securities, agency debt, and agency mortgage-backed securities (MBS), effective beginning in October 2017.
To determine the value of Treasury securities available for ON RRP operations, the Desk takes several factors into account, as not all Treasury securities held outright in the SOMA are available for use in such operations. First, some of the Treasury securities held outright in the SOMA are needed to conduct reverse repurchase agreements with foreign official and international accounts.1 Second, some Treasury securities are needed to support the securities lending operations conducted by the Desk. Additionally, the Treasury securities serving as collateral for any outstanding term RRP operations would not be available to serve as collateral for ON RRP operations.
Taking these factors into account, as of the beginning of the implementation of the FOMC’s balance sheet normalization program, the Desk has determined that around $2 trillion of Treasury securities are available for ON RRP operations to fulfill the FOMC’s domestic policy directive. As the amount of Treasury securities held in the SOMA gradually declines over time pursuant to the FOMC’s Policy Normalization Principles and Plans, this amount is expected to decrease. While the Desk does not plan to provide regular updates on the precise amount of ON RRP to be offered each day, this amount can be approximated by taking the above-mentioned factors into account.
Even as the amount of Treasury securities available for RRP operations decreases, it remains highly unlikely that the value of propositions received in an ON RRP operation will exceed the amount of available securities on a given day. In the highly unlikely event that the value of bids received in an ON RRP operation exceeds the amount of available securities, the Desk will allocate awards using a single-price auction based on the stop-out rate at which the overall size limit is reached, with all bids below this rate awarded in full at the stop-out rate and all bids at this rate awarded on a pro rata basis at the stop-out rate.
These ON RRP operations will be open to all eligible RRP counterparties, will settle same-day, and will have an overnight tenor unless a longer term is warranted to accommodate weekend, holiday, and other similar trading conventions. Each eligible counterparty is permitted to submit one proposition for each ON RRP operation, in a size not to exceed $30 billion and at a rate not to exceed the specified offering rate. The operations will take place from 12:45 p.m. to 1:15 p.m. (Eastern Time). Any changes to these terms will be announced with at least one business day’s prior notice on the New York Fed’s website.
The results of these operations will be posted on the New York Fed’s website. The outstanding amounts of ON RRPs are reported on the Federal Reserve’s H.4.1 statistical release as a factor absorbing reserves under the heading “Reverse repurchase agreements, Others” in Table 1 and as a component of the liability item “Reverse repurchase agreements” in Tables 5 and 6.
1 The outstanding amounts of RRPs with foreign official and international accounts are reported on the Federal Reserve’s H.4.1 statistical release as a factor absorbing reserves under the heading “Reverse repurchase agreements, Foreign official and international accounts” in Table 1 and as a component of the liability item “Reverse repurchase agreements” in Tables 5 and 6.