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TEXT-Fitch: Fed opens door for expanded MMF reverse repo role
August 21, 2012 / 4:17 PM / 5 years ago

TEXT-Fitch: Fed opens door for expanded MMF reverse repo role

Aug 21 - Fitch sees the Federal Reserve's expansion of eligibility criteria
for money market funds (MMFs) conducting reverse repo operations with the Fed as
a further reflection of the important financial utility roles played by money
funds. The multiple roles money funds play within the broader financial system
underscore their importance beyond the fund industry.

An Aug. 16 announcement by the New York Fed indicated that MMFs with assets
exceeding $5 billion and meeting other eligibility criteria would be considered
for future participation in reverse repo operations. Through these transactions
with a small number of Fed counterparties, liquidity can be withdrawn from the
financial system at the direction of the Federal Open Market Committee (FOMC).
This will likely become an important monetary policy tool when the Fed seeks to
tighten credit conditions.

We see the broader eligibility criteria as potentially significant in that they
allow MMFs to fill a void in reverse repo transactions with the Fed. As some
primary dealers and government-sponsored enterprises (GSEs) become less
important in Fed open market operations, the importance of MMFs could grow in
response.

Beyond their relationship with the Fed, MMFs remain important as a vehicle for
corporate cash management. This is particularly true at a time when many
corporate treasurers are looking for ways to limit excessive exposure to a
single financial institution. Should regulation lead to changes in the
availability of cash management options, treasurers will likely be forced to
evaluate alternatives such as separately-managed accounts or private comingled
pools.
In addition, MMFs continue to account for a substantial share of volume in the
tripartite repo market.

The above article originally appeared as a post on the Fitch Wire credit market
commentary page. The original article can be accessed at www.fitchratings.com.
All opinions expressed are those of Fitch Ratings.

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