On Friday, the Federal Reserve Bank of New York released a "Statement to Revise Terms of Overnight Fixed-Rate Reverse Repurchase Agreement Operational Exercise," which says, "As noted in the September 20, 2013 Statement Regarding Overnight Fixed-Rate Reverse Repurchase Agreement Operational Exercise, the Open Market Trading Desk (the Desk) at the Federal Reserve Bank of New York has been conducting daily, overnight fixed-rate reverse repo operations as part of an operational readiness exercise. Beginning with the operation to be conducted on Monday, October 21, the Desk will increase the fixed rate offered in these operations from one basis point to two basis points. All other terms of the exercise will remain the same."

The new statement adds, "As an operational readiness exercise, this work is a matter of prudent advance planning by the Federal Reserve. These operations do not represent a 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."

The NY Fed's original "Statement Regarding Overnight Fixed-Rate Reverse Repurchase Agreement Operational Exercise," explained, "As noted in the October 19, 2009, Statement Regarding Reverse Repurchase Agreements, the Open Market Trading Desk (the Desk) at the Federal Reserve Bank of New York (New York Fed) has been working internally and with market participants on operational aspects of tri-party reverse repurchase agreements (RRPs) to ensure that this tool will be ready to support the monetary policy objectives of the Federal Open Market Committee (Committee). RRPs are a tool that can be used for managing money market interest rates, and are expected to provide the Federal Reserve with greater control over short-term rates."

The statement explained, "The Desk continues to enhance operational readiness through technical exercises that are limited in size and scope. This week, the Committee instructed the Desk to further examine how a potential overnight, fixed-rate full-allotment RRP facility might work and how it might affect short-term interest rates. In support of this goal, and within the context of a limited technical exercise, the Committee authorized the Desk to conduct a series of daily overnight, fixed-rate RRP operations beginning the week of September 23, 2013 and potentially extending through January 29, 2014."

It added, "This exercise may be somewhat larger in size than past operational exercises and will be ongoing for at least a period of weeks to gain operational experience with larger transactional flows and to provide additional information about how such operations might improve interest rate control regardless of the size of the Federal Reserve's balance sheet."

The New York Fed continued, "Like prior technical exercises, this exercise is not intended to materially affect the current level of short-term interest rates. To reinforce this, each eligible counterparty will be initially limited to a maximum bid amount of $500 million. In addition, the initial fixed rate for the RRP operations will be set at 0.01 percent (one basis point), which is below current market rates. The maximum bid amount and rate may vary over the life of the exercise, but as authorized by the Committee, will not exceed $1 billion and 0.05 percent (five basis points), respectively. Changes to the maximum bid amount and rate for these RRP operations will be announced with at least one business day prior notice on the New York Fed's public website."

Finally, their original statement said, "The operations will be open to all eligible RRP counterparties, will use Treasury collateral, will settle same-day, and will have an overnight tenor. The RRP operations will be held, at least initially, from 11:15 am to 11:45 am (Eastern Time). Like earlier operational readiness exercises, this work is a matter of prudent advance planning by the Federal Reserve. These operations do not represent a 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."

As we mentioned in our Oct. 14 News, "Portfolio Holdings Show Jump in Repo on Fed Program; Drop in Europe", the New York Fed is now the second largest "issuer" of repo to money market funds with $44.7 billion of repo outstanding (9.1% of the total) as of Sept. 30, 2013.

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