JPM on Fed RRP Counterparties
JP Morgan's latest "Short Term Fixed Income Strategy" comments on the Federal Reserve Bank of New York's recent expansion of Reverse Repo Counterparties (among other things). JPM says, "Regarding the Fed's normalization efforts, on January 16th the FRBNY announced the addition of 25 new counterparties eligible to participate in its reverse repo program (RRP). The additions included 7 banks, 6 GSEs (Farmer Mac along with 5 regional FHLBs), and 12 money market mutual funds -- 6 government funds, 4 prime funds, and 2 muni funds with a combined AuM of $131bn. All new counterparties are eligible to participate once operationally enabled, and are subject to the existing facility terms. In aggregate, we believe that these additions will increase demand for the RRP going forward. However, the magnitude of such increased demand remains unclear. As discussed in our previous note, banks historically have not been significant users of RRP, averaging less than 2% of daily usage since the facility's inception. Although GSEs have been larger users ... it is hard to gauge how much Farmer Mac and the 5 extra FHLBs will tap the facility, and the possible effects on the Fed Funds effective rate should they choose to use the RRP as a substitute to using the Fed Funds market. Finally, while the 12 new MMFs will certainly see the RRP as a source of supply, their usage capacity is relatively small compared to the existing MMF counterparties ($131bn vs. $2.1tn in AUM), and it is possible that they only have a marginal impact on demand. Furthermore, regardless of the effect on demand that the new counterparty additions may have, the Fed still has plenty of time to tweak other parameters of the RRP, with an additional year of testing pre-authorized. At some point throughout the course of the year, the Fed is likely to test higher rates, although it is unclear as to how much higher and when." See also, Citi's Andrew Hollenhorst on the Fed's RRP expansion. He comments, "Money funds (MMF) are the largest investors in the facility, averaging 85% of total cash in RRP. Each individual fund (rather than the fund family) counts as an RRP counterparty and the 12 new funds come from 9 fund families. (Figure 2) Of the 12 funds, 5 come from families that previously had no RRP eligible funds. According to regulatory filings the newly added MMF manage $137 billion or about 5% of total money fund assets." The new funds include: AllianceBernstein LP Government STIF Portfolio, Columbia Short-Term Cash Fund Prime, Dimensional Fund Advisors Short Term Investment Fund Prime, Fidelity Govt MMF, Goldman Sachs Financial Square Federal Fund, Financial Square Tax Free Fund, J.P. Morgan 100% UST MMF, Tax Free MMF, PFM Asset Management Prime, Reich & Tang Asset Management Daily Income Fund, SSgA Institutional US Govt MMF and US Treasury MMF.
