The Fed sure loves those tri-party repos. From allowing bankrupt stocks as collateral when Lehman blew up, to extracting all the value out of insolvent companies when the time comes to extract liquidity (some time in 3000 AD), here is what the NY Fed thinks of the initial forray into liquidity management. With triparty repo counterparts apparently expanding to virtually all market players (just in case the Blessed 18 all are tied up with stocks trading at $0.01 or money markets) soon, watch for this development to impact the dollar adversely in our new banana economy. In other news, expect repos and MBS purchases to work side by side for the (un)foreseeable future. Guess who will win in toppling the dollar further.

Statement Regarding Reverse Repurchase Agreements

Numerous Federal Reserve communications have indicated that reverse repurchase agreements are a tool that could be used to support a reduction in monetary accommodation at the appropriate time. Over the past year, the Federal Reserve Bank of New York has been working internally and with market participants on operational aspects of reverse repos to ensure that this tool will be ready when and if the Federal Open Market Committee decides they should be used. This work is a matter of prudent advance planning by the Federal Reserve, and no inference should be drawn about the timing of monetary policy tightening.

Repos and reverse repos have been in the Federal Reserve's toolkit for years, and the Federal Reserve has conducted both as recently as December 2008. The focus of recent work has been to expand our existing capability to conduct reverse repos with Primary Dealers to include "triparty" settlement.¹ This has involved working with the triparty clearing banks and Primary Dealers to implement the necessary changes and updates. We have recently begun testing this capability with all involved parties and systems, and it is likely that the Federal Reserve will engage in additional tests in the future. No actual operations have been conducted as part of these tests.

Recent Federal Reserve communications have also raised the possibility of expanding the set of counterparties the Desk might employ for conducting reverse repos beyond the Primary Dealers. The Federal Reserve continues to study this issue, and no decisions have been made regarding the types of firms that may be included. We will engage market participants on this subject as appropriate going forward.

1. The Fed has conducted triparty repos with the primary dealers since 1999.