Barclays Abate on SCAs, RRP
Barclays' strategist Joseph Abate writes in his latest "Money Market Update," "This week the FOMC announced plans to extend its testing of the overnight RRP program for another year. At the same time, it shelved plans to develop an alternative monetary policy tool - the segregated cash account (SCA)." On the SCA he writes, "The Fed's latest tool had a very brief and not so wondrous life. The SCA drew considerable market attention after a vague two-sentence mention in last October's FOMC minutes. As we understood the proposal, investors would be able to open a bank account that was collateralized by an equal amount of bank reserves maintained at a segregated account at the Federal Reserve. The SCA would effectively enable depositors - through the intermediation of a willing bank - to earn IOER. The bank and the depositor would share the interest earned on their reserve balance at the Fed. Strong demand for these accounts would be necessary to drain the $2trn or so in bank reserves needed to create torque under the effective fed funds rate. But the SCA would have faced a number of regulatory and practical challenges.... Less than 2m after making its first official FOMC appearance, the SCA proposal has been sidelined." Abate also comments, "However, the Fed may not need the SCA or any additional tools. This week, the FOMC announced plans to extend testing of the overnight RRP program for another year (through January 29, 2016). Under the terms of the extension, the overnight offering rate range will remain at 0-5bp and the daily operation cap and counterparty limit will stay at $300bn and $30bn, respectively. As written, the language provides authorization for overnight operations only. Recall that the FOMC sets these parameters, giving the New York Fed permission to change the offering rate within the pre-established range subject to approval from Fed Chair Janet Yellen."
