Bond traders have pushed back against Federal Reserve officials urging them to use a key borrowing facility, complicating the central bank’s efforts to ease strains in the $12tn market for repurchase agreements. Primary dealers representing Wall Street banks told the officials at a meeting last week that borrowing directly from the central bank still carries a stigma and could be seen as a sign of trouble.That’s one reason they’ve been reluctant to use the Standing Repo Facility (SRF), according to people familiar with the discussion, who asked for anonymity to discuss details of private conversations. Others pointed to operational and balance-sheet constraints that made it difficult to access the facility, which was set up by the Federal Reserve in 2021 to serve as a backstop in money markets.The discussion on November 12 unfolded on the sidelines of a Treasury conference where New York Fed President John Williams and System Open Market Account manager Roberto Perli reiterated the facility’s importance as a monetary-policy tool. “It is best thought of as a way of making sure that the overall market has adequate liquidity consistent with the FOMC’s desired level of interest rates,” Williams told the conference, adding that use of the facility had been rising. “I fully expect that the SRF will continue to be actively used in this way and contain upward pressures on money market rates.” Williams then convened the New York Fed’s primary trading counterparties “to continue engagement on the purpose of the Standing Repo Facility as a tool of monetary policy implementation and to solicit feedback that ensures it remains effective for rate control,” according to a spokesperson.The primary dealers come from a group of financial institutions that trade government securities directly with the central bank. Short-term borrowing markets have been in the spotlight in recent weeks, as ebbing liquidity has kept rates stubbornly elevated and the Fed is scheduled to conclude its balance sheet unwind on December 1.Policymakers had anticipated that dwindling bank reserves would push up funding costs, eventually spurring more counterparties to use the SRF — a process that, in theory, would help keep a lid on repo rates. But while usage has increased periodically, officials said a notable amount of transactions still occur above the facility’s offering rate of 4%, according to Perli, suggesting dealers are hesitant to tap it.That has spurred calls on Wall Street for a more forceful response from the central bank to ease the pinch in a market that serves as a critical source of day-to-day funding. Dealers have floated ideas to make the facility more attractive, including allowing its transactions to be centrally cleared through the Fixed Income Clearing Corporation, according to the people familiar with the discussions.Since its inception as a permanent facility in July 2021, the SRF has been criticised by market participants for structural issues that make it inconvenient to use. “There were problems with the SRF from the beginning,” Curvature Securities executive vice president Scott Skyrm wrote in a note to clients on Monday. “The Fed added an 8:30am auction which helped with a timing issue, but primary dealers are still reluctant to use the facility and seem to want excessive spreads to intermediate.” For one, borrowing directly from the Fed requires banks to hold more capital against their positions than is required with some alternative repo trades.That means SRF transactions take up more room on the banks’ balance sheets, adding to the perception that they’re inefficient. The results of the Fed’s latest Senior Financial Officer survey released in March showed institutions rated public disclosures of counterparty information as the “most discouraging factor” in their decision-making around participating in the twice-daily operations.Some respondents added that transactions required approval from either funding desk management or even bank executives. At the meeting earlier this month, dealers told officials they should be communicating with bank executives about the issues instead, the people familiar with the discussion said.The Fed’s Perli underlined the importance of the SRF in public remarks at the conference in New York last week. “Stable, efficient and well-functioning repo markets are in everyone’s best interest and vital for ensuring rate control, and the SRF is a crucial tool in supporting those objectives,” he said. Institutions last month tapped the facility for a total of $50.4bn on the final trading day of October.That was the highest level since before the daily operations were made permanent more than four years ago as the result of the liquidity drain in the funding markets. Yet Dallas Fed President Lorie Logan said last month she was disappointed to see rates on a large share of tri-party repo transactions exceed the SRF rate during the final week of October.Logan, who before becoming president of the Dallas Fed in 2022, spent her career on the markets desk at the New York Fed, has urged the central bank to strengthen its tools. For Blake Gwinn, head of US interest rate strategy at RBC Capital Markets, part of the problem with SRF lies in its structure, which requires transactions to be run through banks’ treasury desks rather than as a typical repo operation. “Part of the original sin is the SRF is never what it should be,” he said “It was framed as a bank alternative to reserves, but it should’ve been a repo operation to begin with.”
