JP Morgan Securities published a comment late last week entitled, "Fed Funds: New and Improved?" on a new formula for calculating the Fed funds rate. It says, "Next month the Federal Reserve will alter the way it calculates the Fed funds effective rate (​FFE). The new methodology captures a wider variety of overnight interbank transactions, and should result in a more robust benchmark. However, the Fed expects the resulting rate should be similar to the classic Fed funds formulation. As part of the roll-​out, the Fed will release more information about the Fed funds market than current practice. It will publish statistics summarizing the distribution of volumes each day, including the total dollar amount of transactions used to calculate the rate. However, even with this new information, the market will remain opaque in some ways.... In order to get a better understanding of market participants, we took an in-​depth look at quarterly bank call reports filed by US banks and foreign banks in the US. In these reports, each bank is required to disclose the amount of Fed funds sold and purchased, as of the end of each measurement period." It continues, "In aggregate, we estimate that as of 3Q15 (​the most recent data available) the size of the Fed funds market was around $​52bn, which is about 40% smaller than it was at year-​end 2012. We suspect that, like the repo markets, changes in regulation have created an incentive for some banks to reduce participation in Fed funds at quarter-​ends, and as a result, intra-​quarter balances are likely somewhat higher than what is reflected in call reports. Foreign banking organizations (​FBOs) in the US are the predominate borrowers of Fed funds. As of 3Q15, we estimate that FBOs represented about 52% (​or $​27bn) of all Fed funds purchased. Large and small US banks comprised 23% ($​12bn) and 26% ($​13bn) respectively. A closer look into the domiciles of FBOs reveals that the most consistent and largest borrowers of Fed funds have been non Japanese Asian banks. This is followed by German banks, Canadian banks, Japanese banks, and French banks. Fed funds purchased volumes are concentrated among a small subset of banks.... While Fed normalization hasn'​t significantly altered the dynamics of trading in the Fed funds market, there are some notable changes in the near future that may. However, we believe new US regulations that target large foreign banks should have only limited impact on FFE."

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