J.​P. Morgan Securities' latest "Short-​Term Market Research Note" is a piece entitled, "Fed RRP: Why the Surge?" "Yesterday (​June 30, 2014), the Fed'​s overnight reverse repo facility (​RRP) program allotted a record $​340B to 97 approved program counterparties. There is a history of quarter-​end surges in use of the RRP program, although this is by far the largest. All else equal, an increase in overnight RRP balances reduces reserves on the Fed'​s balance sheet by an equal amount. The converse holds true for decreases in overnight RRP balances," states the update, written by Alex Roever, Teresa Ho, and John Iborg. It continues: "[​The] Drop in bank reserves means banks are leaving fewer deposits at the Fed.... Across the financial system, demand for very liquid overnight assets surges around quarter-​ends. This is a well established phenomenon that predates the financial crisis. Historically, this practice increases demand for bank deposits and close substitutes including money market instruments. Recent changes in bank capital and liquidity rules (​Basel III) make banks' use of wholesale funding sources like repo and overnight time deposits more costly. These added costs limit banks' ability to scale balance sheets to meet quarter-​end surges in demand." It concludes: "Since the advent of the Fed'​s overnight RRP facility in September 2013, excess demand can flow through money market funds (​MMFs) and other approved counterparties to the Fed. As a result of banks' desire to limit balance sheet size around quarter-​end, more money is finding its way into the RRP facility as an alternative. Counterparties are substituting RRP for their overnight repo and time deposit holdings at quarter-​end. This pattern of increased RRP usage at quarter-​ends should continue for the foreseeable future. As bank regulations continue to be implemented, banks' use of balance sheets will continue to be more limited. In the future, to limit these quarter-​end surges, the Fed may impose a cap on overall facility usage. We think this is a controversial solution, because it doesn’​t address the root issue of there being very high demand for short-​term liquid assets at quarter-​ends, and it actually aggravates the issue by limiting supply relative to demand. A possible result of imposing a cap could be to push overnight rates below the RRP." (​See also the New York Fed'​s "​Temporary Open Market Operations" page, which shows these statistics.)

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