A new reverse repurchase agreement (repo) facility under consideration by the US Federal Reserve may prove attractive to money market funds (MMFs), according to Fitch Ratings.
The repo facility, as proposed, would be an appropriate investment for rated MMFs and would be exempt from Fitch's normal counterparty limits. It could help offset the diminishing supply of eligible short-term securities.
While the Fed has expressed an interest in this facility, there has been no indication of when this tool would be implemented, if at all.
The US Federal Reserve's minutes from its recent 30-31 July meeting discussed establishing a fixed-rate, overnight repo facility wherein market participants, including certain MMFs, would be eligible to lend cash to the US Federal Reserve on an overnight basis, collateralised by securities held by the US Federal Reserve. The repo facility is an additional tool for the US Federal Reserve to manage a reversal of its quantitative easing programme and money market interest rates by lending securities for a set period of time in order to withdraw cash from the banking system.
This facility could provide much needed supply of short-term, liquid investments for money market funds, as traditional banking counterparties are reducing the amount of available short-term repo in response to regulatory pressures and structural changes in the repo markets.
Fitch's current MMF rating criteria caps repo exposures backed by government and agency securities at 25 per cent for counterparties rated 'A' or better. However, given the essentially risk-free nature of the US Federal Reserve as counterparty and the preliminary terms of the structure, participation in this programme would not be subject to this 25 per cent limit. The programme would expand MMFs' investment opportunities in light of constrained asset supply and offer a high quality, liquid investment option.