The Federal Reserve Bank of New York said it will include domestic money market funds as counterparties when it begins to drain the record amount of cash added to the financial system.
The additional companies to be used in reverse repurchase agreements are "intended to enhance the capacity of such operations to drain reserves beyond what could likely be conducted through" the use of the central bank's 18 primary dealers, the New York Fed said Monday. This is "prudent planning" and does not signal any change in monetary policy, the Fed said.
Policymakers are debating how to withdraw the emergency liquidity intended to revive the economy without disrupting financial markets or bank liquidity as the recovery gains strength. Along with raising the overnight bank lending rate, Fed Chairman Ben S. Bernanke has said officials may use reverse repos, interest on excess bank reserves and securities sales directly to investors to withdraw or neutralize cash in the banking system.
The Fed is looking to expand its counterparties as primary dealers work to shore up their own balance sheets from the effects of the worst financial crisis in decades, probably limiting their capacity to handle the transactions planned to remove or neutralize more than $1 trillion in extra cash from the central bank's balance sheet.In a reverse repo, the Fed lends securities for a set period, draining cash from the banking system. At maturity, the securities are returned to the Fed, and the cash to the primary dealer.
Companies applying to act as counterparties must have net assets of no less than $20 billion for six consecutive months and be consistent investors in the tri-party repo market, the Fed said. A bid by a money market fund for reverse repos must be $1 billion or bigger.