High Demand for Fed’s Repurchase Agreement Program as Money Market Fund Reform Deadline Nears

The U.S. short-term financing markets experienced a tumultuous end to the third quarter as the industry prepared for the October 14, 2016 compliance date of the SEC’s money market fund reforms.  According to market reports, the Federal Reserve Bank of New York saw earlier than normal demand for its overnight repurchase agreement program, which was designed to absorb excess cash in money markets and help the central bank control interest rates. Under the money market reform rules, institutional prime and tax-exempt money funds will no longer maintain share prices at a fixed $1 daily asset value but will instead have floating daily net asset values. Money market funds that invest in government-only securities are not required to have floating net asset values. Since the adoption of the regulatory reforms, significant assets have been moved from these traditional money funds and into funds focused on government debt, such as Treasury bills and the Fed’s repurchase agreement program. Market watchers observed that the amount of money going to the Fed’s overnight reverse repurchase program surpassed $270 billion two days before the end of the third quarter, one of the highest levels since officials began testing the program in 2013 and also noted that Treasury repurchase rates have reached their highest since 2008. According to market reports, demand for the Fed’s repurchase agreement program also comes as banks cut back lending activity around quarter-end to make their balance sheets appear safer. The Fed’s repurchase agreement program benefits money market funds because it pays participants interest and provides U.S. Treasury bonds as collateral overnight out of the Fed’s portfolio.