10 June 2016

Global
Economic Research

Global Money Notes #6

Research Analysts
Zoltan Pozsar
212 538 3779
[email protected] QE, Basel III and the Fed’s New Target Rate
QE and Basel III have forever changed the way money markets trade.
Changes are so fundamental that one's knowledge of markets pre-crisis may
be a hindrance to successfully trading money markets today. And judging from
the Fed's narrative on money markets after liftoff, policymakers too are still in
the early stages of making sense of the numbers they see on their screens.
Forget everything you know, and start from a blank page. Everything's in play…
There was a time when banks deployed massive amounts of balance sheet to
arbitrage. The typical day of a money market trader involved borrowing and
lending within and across various money markets segments both onshore and
offshore: arbitraging small differences between fed funds and eurodollar rates
and between various unsecured and secured (repo) rates were the norm.
Banks' aim was to conduct arbitrage until spreads became so narrow and the
relationship across the entire spectrum of money market rates so tight that
arbitrage was no longer possible. Policing these money market relationships –
ensuring that spreads remained tight at all times – was the name of the game.
Policing the tightness of spreads required “endless” amounts of balance sheet.
One can either control prices or quantities, but not both. Under the old regime,
the focus was on prices and tightness. Quantities (balance sheet) were
endless and an afterthought, and the volume of matched money market books
that accumulated through banks’ money dealing activities – borrowing in one
segment of the money market in order to lend in another – were massive indeed.
Matched money market books also meant that for the largest of global banks
– the main arbitrageurs in the system – liquidity buffers were interbank loans.
Liquidity was stored inside the system.
The Great Financial Crisis taught bankers and regulators alike that "inside"
liquidity is the least reliable when most needed. The system needed a reboot.
Basel III tore up the old model and forced banks to hold liquidity buffers with the
sovereign instead of banks. Liquidity is now being stored outside the system.
Money is now less “inside” and more “outside”.
Understanding the implications of this regime shift must be at the center of
evaluating the performance of money markets after liftoff. Analyses that don’t do
that lack in perspective and confuse rather than illuminate at a time of change.
No change is more important than the choice of an alternative reference rate and
the related choice of the Fed’s new target rate. While at the moment the OBFR
is the only possible candidate, a recent speech by President Dudley hints that
the Fed may be laying ground for a repo rate as the preferred alternative.

DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES AND ANALYST
CERTIFICATIONS.
 10 June 2016

QE and Basel III have euthanized interbank money markets.1

There isn’t much happening in interbank money markets in general in a banking system
awash with massive amounts of reserves that banks are required to hoard in order to
comply with new rules designed to ensure they can survive a 30-day liquidity storm.
Compared to the past, when banks traded scarce reserves frantically to settle interbank
payments, banks today have abundant pools of reserves and settle payments leisurely.
There are no better tell-tale signs of this than the facts that interbank settlements occur
much earlier in the day and intraday credit extended by the Fed is nil today (see here).
This is in sharp contrast to the pre-crisis era, when banks had incentives to delay interbank
payments until late in the day and drew massive volumes of intraday credit from the Fed.
Intraday credit (daylight overdrafts) meant an increase in liabilities for the deficit banks
(those making the payments) and an increase in excess reserves for the surplus banks
(those receiving the payments) and the Fed intermediating between them – during the day.
Intraday credit had to be repaid by the end of the day (before sundown) and the shifting of
intraday credit and corresponding excess reserves from the Fed’s balance sheet onto
banks’ balance sheet happened in the overnight fed funds market – during the night.
Fed funds are thus overnight credit not daylight credit, and interbank credit not Fed credit…
…or at least they were until QE and Basel III changed everything.
Historically, the overnight interbank fed funds market was where the Fed set its policy rate,
but with QE and Basel III taking the life out of what once was a vibrant market, the Fed will
have no choice but to switch to a new target rate and OIS markets to a new reference rate.
This issue of Global Money Notes explores the ways in which QE and Basel III have
influenced the hierarchy and trading pattern of various money market interest rates and
how they impact the search for an alternative reference rate and the Fed’s new policy rate.
Its centerpiece is an interactive slide deck (see here) that guides the reader through the
new money market landscape one step at a time. The deck starts with a blank page
(literally) and explains the hierarchy between and behavior of all relevant money market
rates in the post-QE, post-Basel III world. We do so through a careful review of each
market participant’s balance sheet – who they lend to and who they borrow from and why.
It is not for the faint-hearted: it runs close to 100 pages.
The deck builds on earlier work: first came the mapping of the shadow banking system
(see Pozsar et al, 2010); then came mapping the hierarchy of money (see Pozsar, 2014);
now comes mapping the hierarchy of interest rates that comes with the hierarchy of money.
The deck’s target audience is anyone who trades money markets on a daily basis, the
central banking community and members of the Alternative Reference Rate Committee.
We recommend reading the slide deck one click at a time in electronic (not hard copy)
form and on a computer screen (not a tablet device).
Reading the deck is not essential for everyone, but do know that putting it together helped
us understand money markets to the core and reach the conclusions summarized below.

Money Markets after QE and Basel III

Basel III forced banks to replace eclectic interbank portfolios with high-quality liquid assets
(HQLA) in the form of reserves held at the Fed or Treasuries (reversed in or held outright).
Simplicity replaced diversity.
Basel III simplified things on the funding side, too. For an asset to qualify as HQLA, it must
be unencumbered, which means that it can never be funded secured, only unsecured.

1 QE and Basel III euthanized unsecured interbank money markets, but not secured interdealer money markets. We will discuss
trends in interdealer money markets on Page 6.

Global Money Notes #6 2

 10 June 2016

Figure 1 (overleaf) shows the resulting shift in the rate pairs that banks “play off” against
each other: the relevant pairs are no longer within and across private money market
segments but rather unsecured rates and IOER; unsecured rates and centrally cleared
(GCF) repo rates; and unsecured rates and the intermediate points on the Treasury curve.
Matched book money dealing – money market funding of money market lending – is no
longer private on both sides, but rather half private, half public. Banks don’t fund each
other anymore but rather the sovereign – the U.S. Treasury or its subsidiary, the Fed.
Figure 2 (overleaf) shows this shift in action through the matched money market books of
the New York branches of foreign banks. The size of matched books did not change much
since the crisis, but their asset side is entirely different: o/n and term loans to other banks
(fed funds and deposits, respectively) and interoffice loans are out, and HQLA (reserves)
are in. Reverses (or reverse repos, a source of HQLA) are less important but present still.
On the funding side too, interbank (fed funds) trades are gone and what remains are
funding from headquarters and unsecured funding from non-bank customers.
Basel III drove a wider wedge between the new rate pairs than the spread between the old
pairs used to be: the spread between o/n rates used to be razor thin (about a basis point
or two), but the spread between IOER and the effective fed funds rate is 12.5 bps today.
Why? Because banks need every penny of reserves as HQLA against short-term liabilities
(demand for which is driven by customer liquidity needs), and since HQLA is a low-margin
use of balance sheet and balance sheet is no longer infinite but scarce, o/n spreads have
settled structurally wider. Furthermore, Basel III limits leverage and by extension the
amount of balance sheet available to compress spreads – which is practically nil.
And so, high-volume, low-margin private money dealing gave way to Basel III compliance
through public-private money dealing at wider margins (see McCulley and Pozsar, 2014).
Basel III also interacts with QE.
Reserves – the quintessential byproduct of QE – are HQLA and reserves can only be held
by banks. By extension, QE influences the composition of banks’ HQLA portfolios.
During the initial rounds of QE, every penny of reserves added to the system were indeed
excess – in excess of the amount banks needed to comply with reserve requirements.
But when Basel III – and in particular, the Liquidity Coverage Ratio – went live, all reserves
became required: not to comply with reserve requirements but with the LCR (see here).
Banks have no incentive to either borrow or lend reserves these days.
Banks have no incentive to borrow reserves because they already hold more than what‘s
needed to comply with reserve requirements, and they have no incentive to lend reserves
either because if they do their HQLA portfolios would shrink and their LCR would worsen.
The reason why we still have a fed funds (FF) market is because Basel III does not apply
to a small corner of the U.S. banking system – the Federal Home Loan Banks (FHLBs).
The FHLBs are the only banks left in the system that still have an incentive to lend to other
banks on an unsecured basis on scale. On the flipside, the only banks that borrow from
the FHLBs are highly rated foreign banks with an aim to arbitrage the FF-IOER rate pair
and subject to a version of Basel III lighter than that that which applies to U.S. banks.
As we have discussed in previous issues of Global Money Notes (see here and here) the
small size of the FF market (about $60 billion), the small number of FF market participants
(10 lenders and a dozen or so borrowers) and the even balance of power between the two
sides of the FF market make the FF rate prone to trade along a suspiciously straight line.
It appears that informal agreements between the two sides of a small market that’s slowly
(but surely) fading into irrelevance have more to do with where the effective FF rate trades
than the Fed’s new operational framework or the magnetic pull of IOER (see here).
Scrapping the FF rate as the Fed’s policy target won’t be a choice but a necessity, in our view.

Global Money Notes #6 3

 10 June 2016

Figure 1: From “Inside” Liquidity to “Outside” Liquidity

From inside liquidity… Assets Liabilities Assets Liabilities

MML MMF FF FF
(private) (private) ED ED
CD CD
CP CP
Reverses RPs

…to outside liquidity… Assets Liabilities

HQLA MMF
(public) (private)

…reversed in or held outright… Assets Liabilities

Reserves MMF
(Fed) (private)
Reverses
(GCF)
Treasuries

…and funded unsecured. Assets Liabilities Assets Liabilities

Reserves Unsecured FF FF
(Fed) (customer) ED ED
Reverses CD CD
(GCF) CP CP
Treasuries Reverses RPs

Source: Credit Suisse

Figure 2: Money Dealing Now and Then

New York branches of foreign banks, $ billions
900

800

700

600

500

400

300

200

100

0
Assets Liabilities Assets Liabilities
June 30, 2007 December 31, 2015
HQLA (reserves) FF sold Balances w/ U.S. banks Balances w/ banks offshore Reverse repos
Loans to HQ (net) FF purchased CP Deposits Loans from HQ (net)

Source: FDIC, Credit Suisse

Global Money Notes #6 4

 10 June 2016

No problem, you say: we have the Fed’s new overnight bank funding rate (OBFR) as an
alternative to the FF rate. Unlike the FF market, the o/n eurodollar (ED) market frequented
by U.S.-based banks is deeper ($250 billion versus $60 billion), more populous (hundreds
of borrowers versus a dozen) and hence more reliable a yardstick of o/n bank funding
conditions. In addition, the OBFR trades on top of the FF rate and also along a straight
line, so the Fed’s operating framework must be doing something right, right? Not so fast…
That OBFR also trades along a straight line has to do with the fact that bank funding desks
use the FF rate as a reference point to price o/n ED deposits. Things get circular…
Furthermore, unlike the FF rate – a yardstick of o/n onshore interbank funding conditions –
the OBFR is a yardstick of mostly offshore (as opposed to onshore) funding conditions and
references mostly customer-to-bank (as opposed to interbank) trades. And that’s a big deal.
It is a big deal because switching from the FF rate to OBFR as the Fed’s policy target is
not without a broad set of existential questions. Were that switch to happen the Fed would
go from targeting an onshore rate to targeting an offshore rate; from targeting an interbank
rate to targeting a customer-to-bank rate; from an operating framework built around
TOMOs (or temporary open market operations) to one centered around POMOs
(permanent open market operations); and by extension, from targeting interest rates by
fine-tuning the amount of reserves to targeting the quantity of reserves in HQLA portfolios
through episodic rounds of asset purchases (regulatory as opposed to quantitative easing).

Alternative Reference Rates and Basel III

The reasons why banks don’t trade in the o/n FF market apply to all other unsecured
segments of the interbank money market, including the eurodollar market. Whatever the
volume of o/n eurodollar transactions there are no interbank trades there. Not one penny.
And that opens up an existential can of worms for the concept of “IBOR” in general.
IBOR stands for interbank offered rates and submissions are based on the hypothetical
question of “where you think you could get unsecured funding from other banks”.
From other banks… at a time when unsecured interbank markets have already faded as a
part of the ecosystem. LIBOR curves today (to the extent that submissions reflect actual
trades) are based exclusively on customer-to-bank and not interbank trades.
It must be tough around the FOMC today. Your policy target (FF) is questionable. The
OBFR is not a slam dunk to switch to. Benchmark (“IBOR”) curves no longer measure
what their name implies. Only the need for change is obvious. But not the direction.
A recent white paper of the Alternative Reference Rate Committee (ARRC) proposed two
alternatives to choose from: the OBFR and some o/n Treasury general collateral repo rate.
The question of alternative reference rates and alternative policy rates are intertwined:
ideally, they would be the same. So it is likely that the rate the ARRC will ultimately choose
will also be the Fed’s new target rate. But there are problems with both alternatives.
As discussed above, switching to the OBFR is not an easy deal (onshore versus offshore;
interbank versus customer-to-bank; TOMOs versus POMOs; prices versus quantities).
But switching to a repo rate won’t be simple either. In fact, it is impossible at present.
Why?
Because primary dealers do not have access to the discount window and so there is no
ex-ante mechanism in place that would enable the Fed to cap repo rates in a crisis.
And if you can’t cap it, you can’t target it…
That said, it would make total sense for the Fed to target an interdealer repo rate going
forward. In fact the new (post-Basel III) world order begs for it. Banks have access to
reserves at the Fed and reserves are the main form of HQLA they hold to survive a 30-day
liquidity storm as required by the LCR. In English this means that banks can bleed liquidity
(lose reserves) for weeks before they tap markets for liquidity or the Fed as the last resort.

Global Money Notes #6 5

 10 June 2016

These massive reserve holdings – representing weeks’ worth of liquidity needs – are the
reason why banks no longer trade liquidity among each other anymore. Everyone’s flush…
In contrast, broker-dealers do not have access to reserve accounts at the Fed. For them
HQLA is Treasuries reversed in through GCF repo trades or Treasuries held outright. In a
30-day storm, broker-dealers won’t have the luxury of running down reserve balances.
They will have to repo out HQLA (their unencumbered Treasury portfolio) from the get go.
In other words, dealers are flush with collateral, not reserves. And collateral ain’t money…
On a day-to-day basis, the interdealer GCF repo market is the main market where liquidity
gets redistributed within the dealer community (between primary and non-primary dealers).
The volatility of the o/n GCF repo rate is similar to what the volatility of the FF rate used to
be when banks too were liquidity constrained, similar to the way dealers are liquidity
constrained today. Figure 3 (overleaf) plots the behavior of the o/n GCF repo rate versus
that of the FF rate: like electrocardiograms, flickers mean life and flatlines the opposite of
life. The o/n GCF repo market is the only functioning money market left standing today.
But the GCF repo market is a market where broker-dealers account for the bulk of activity
and where banks are present only as opportunistic lenders and seldom ever as borrowers
(banks typically lend in the GCF repo market if the o/n GCF repo rate is above IOER and
typically don’t borrow as repos encumber collateral, reduce HQLA and worsen one’s LCR).
And because it is broker-dealers that do the bulk of borrowing and lending in interdealer
markets, capping a repo target rate in a crisis is possible only if dealers too have access to
the discount window (IOER serves as a ceiling for the o/n GCF rate only in normal times,
not crisis times). President Dudley’s recent speech on Amelia Island arguing for discount
window access for primary dealers should be understood in this context. In specific:
“Now that all major securities firms in the U.S. are part of bank holding companies and are
subject to enhanced prudential standards as well as capital and liquidity stress tests,
providing these firms with access to the Discount Window might be worth exploring.”
President Dudley’s call to emancipate the Fed from Lender of Last Resort (for banks) to
Dealer of Last Resort (for the system as a whole – both traditional and shadow) despite
the spirit of the Dodd-Frank Act (which limits the Fed’s 13(3) lending authority) may signal
the Fed’s discomfort with the OBFR as a target rate and preference for a repo rate instead.
After all, a local interdealer repo target rate would get around the global customer-to-bank
aspects of OBFR. But then the Fed has be comfortable with a target rate that’s a funding
rate for shadow banks, not banks – there… the devil’s ugly head popped up again.
And even then, don’t forget that before DoLR and a repo target rate become reality, the
Fed will have to get a lot of lawyering done in a climate that’s all but cooperative.
Until we hear more about DoLR, do know that the OBFR is the only game in town.
Is it essential that an alternative reference rate be capped by the Fed’s discount window?
Most definitely. When the relationship between the FF and Libor rates broke down in 2007
(i.e., when the par exchange rate between onshore and offshore dollars broke down) the
Fed had to roll out dollar swap lines to regain control of Libor (the old reference rate).
OBFR is capped by the swap lines (see here) but if the target becomes a repo rate, the
Fed – learning from experience – will prefer to have a mechanism for control in place…

Global Money Notes #6 6

 10 June 2016

Figure 3: An 'Electrocardiogram' of the U.S. Money Market

%
1.4 5.7

1.2 5.6

1.0 5.5

0.8 5.4

0.6 5.3

0.4 5.2

0.2 5.1

0.0 5.0
FF effective (July 1st 2003 - July 1st 2004) FF effective (November 1st, 2014 - November 1st, 2015)
o/n GCF Treasury repo (January 1st, 2015 - November 30th, 2015) FF effective (July 1st, 2006 - July 1st 2007) [RHS)

Source: DTCC, Federal Reserve, Credit Suisse

Figure 4: New Curves, New Relationships – Everything’s in Play…

%
2.00
All yields as of May 18, 2016

1.75

1.50

1.25

1.00

0.75

IOER IOER IOER IOER

0.50

Unsecured < 30 days Unsecured < 30 days

0.25
o/n RRP o/n RRP o/n RRP

0.00
o/n 1M 3M 6M 1Y 2Y 3Y 5Y 7Y 10Y o/n 1M 3M 6M 1Y 2Y 3Y 5Y 7Y 10Y o/n 1M 3M 6M 12M o/n 1M 3M 6M 12M o/n 1M 3M 6M 12M o/n 1M 3M 6M 12M
Banks Primary Dealers Bank Funding Curve Primary Dealers Private Cash Pools Public Cash Pools
(HQLA curve) (HQLA curve) (unsecured) (matched books) (safe asset curves)

Source: Federal Reserve, DTCC, The Bank of New York, Credit Suisse

Global Money Notes #6 7

 10 June 2016

Rules of the Game

The New New Testament (Basel III) comes with its own set of Ten Commandments which
we list below and plot in Figure 4. Ignore them or face money market purgatory…
1. Unsecured interbank markets are dead. Long live secured interdealer markets. The
o/n interbank FF rate is not much of a measure of anything anymore, really. The o/n
interdealer GCF repo rate is the only meaningful money market rate today.
2. Focusing on where the effective FF rate trades within the Fed’s target range is like
missing the forest for the trees. The greatest story never told is that the Fed’s target
range is a de facto corridor for the o/n secured rates complex: the o/n RRP rate is a
hard floor under o/n tri-party Treasury repo rates and IOER is a soft ceiling for the o/n
GCF Treasury repo rate.2 The o/n tri-party and GCF Treasury repo rates represent
primary dealers’ core borrowing and lending rates on the liability and asset side of
their matched repo books, respectively. In that sense, the o/n RRP and IOER rates
set the range within which primary dealers can make two-way markets on an o/n
basis (the “inside” spread; see Exhibit 5 overleaf).
3. The o/n RRP rate will always provide a hard floor under o/n tri-party Treasury repo
rates as long as the o/n RRP facility remains full allotment.
4. Those calling for the o/n RRP facility to be abolished (citing low utilization rates)
should calm down and realize that o/n tri-party repos with dealers, Treasury bills
and o/n RRPs with the Fed are substitutes. The reason why usage of the o/n RRP
facility has been falling lately was due to a $400 billion increase in the effective bill
supply since the first rate hike (see here). More bills mean less need for o/n RRPs.
That said, low usage today does not mean low usage forever. If bill supply shrinks
and a full allotment RRP facility is not there to fill the void, the floor will leak.
5. The IOER rate will always provide a soft ceiling for the o/n GCF repo rate. Banks with
large reserve balances serve as opportunistic lenders in the GCF repo market and will
always pour money into it if the o/n GCF repo rate creeps above IOER. For banks,
this is an asset swap (swapping o/n reserves for Treasuries reversed in through an
o/n GCF repo trade) with zero impact on liquidity (LCR), leverage (SLR) or capital
(RWA) positions. Not all banks that have access to the GCF repo market will do this
arbitrage trade – only those banks that have built their HQLA portfolios with an eye to
harvest the option value of reserves. These banks – and one in particular (JPM) – are
the system’s main money dealers today.
6. Embrace the HQLA curve: for the bank operating subsidiaries of global banks the
HQLA curve is IOER up to the point where Treasuries start yielding more and for
their dealer subsidiaries the HQLA curve is the GCF repo curve up to the point
where Treasuries held outright start yielding more than Treasuries reversed in.
7. O/n unsecured rates (OBFR) are a soft floor under o/n GCF repo rates. O/n GCF
trades are a source of HQLA and because HQLA must be unencumbered at all
times, they cannot be funded secured, only unsecured. Primary dealers will never
let o/n GCF repo rates settle below OBFR; if they did, funding HQLA reversed in via
o/n GCF repos would be a negative carry trade (see Exhibit 6 overleaf).
8. Closely related, for as long as banks are subject to the Liquidity Coverage Ratio and
there are more reserves in the system than required by Regulation Q, the FF and
OBFR rates will always trade below IOER: as discussed above, IOER is an integral
part of banks’ HQLA curve and banks will always price o/n funding in a way that
makes the funding of an o/n HQLA (“base HQLA”) a positive carry trade. The
quantity of reserves in the system does not matter much in determining the spread
between FF and IOER for as long as there are substantially more reserves in the
system than what banks are required to hold for reserve requirements (about $100
billion) and major banks are subject to the Liquidity Coverage Ratio.

2 All repo rates mentioned on this page refer to o/n tenors and Treasury collateral.

Global Money Notes #6 8

 10 June 2016

9. The steepness of the unsecured bank funding curve beyond the 30-day point is
structural and reflects the price of “freedom”: three- and six-month funding have no
HQLA requirements and with term funding banks can do anything they please.
10. The Fed’s foreign repo pool is most definitely a policy tool. The Fed’s repos with
foreign central banks and multilateral organizations pre-date the tri-party repo system
and are executed on a bilateral basis. They return cash early, at 8:30 AM, in an era
when repo trades that settle through the tri-party platform – including o/n RRPs with
the Fed – return cash at 3:30 PM. Investors find out the rate they will earn overnight
at around 4:00 PM – so late because the Fed needs time to finish its daily survey of
where dealers got funded during the day. The rate paid by the foreign repo pool is
very close to the o/n GCF repo rate but it is not the same. Our instinct says that it
matches the volume weighted average rate of o/n GCF repo trades done both
bilaterally and on a tri-party basis and which the Fed derives from the above dealer
survey. And so the Fed pays a market rate. But the fact that the rate on the foreign
repo pool matches a market rate and hence does not influence interdealer repo
rates does not mean that it does not impact things elsewhere. Since late 2014, the
rate paid by the foreign repo pool has been “surfing” the structural widening
between o/n GCF and tri-party repo rates and has been consistently yielding more
than Treasury bills. Over this period, the foreign repo pool morphed into a superior
alternative to bills – nothing beats o/n trades with the Fed with an 8:30 cash return
yielding more than term bills. As foreign central banks traded out bills and into the
foreign repo pool – greased by an apparently secret removal of “the constraints
imposed on customers’ ability to vary the size of their investments” – the effective
supply of Treasury bills increased by $250 billion. And since o/n tri-party Treasury
repos, Treasury bills and o/n RRPs with the Fed are substitutes (see point 4 above),
$250 billion in extra bills meant $250 billion worth of bids not hitting primary dealer’s
shrinking balance sheets begging for o/n tri-party trades they cannot make, and that
much in bids not hitting the Fed’s o/n RRP facility. If the o/n RRPs facility and
Treasury bills are substitutes and the foreign repo pool and Treasury bills are
substitutes as well, then the o/n RRP facility and the foreign repo pool are
substitutes too. Both facilities are full allotment but one at an administered price and
one at a market price, and both facilities are in the business of providing safe, short-
term assets in an era where quantities matter more than prices.3 So to reiterate, the
foreign repo pool is a policy tool. And just like the use of metaphors from physics to
describe how FF trades, saying that the foreign repo pool is not a policy tool when in
fact it is confuses, rather than illuminates at a time of change. In Exhibit 4 (see Page
7 above) the foreign repo pool is marked by a black dot – an allegory for the foreign
repo pool as the system’s wandering black hole…
And with all that dig in, and enjoy Money Markets after QE and Basel III…

3 The foreign repo pool is in a league of its own. Central bank facilities are either fixed price, full allotment (where the central bank
sets the price and the market determines the quantity) or fixed size, variable price (where the central bank sets the size and the
market determines the price). Oddly, the foreign repo pool is neither: its size is full allotment and its rate varies with the market
(in fact its rate is the interdealer market rate). It is a gift wrapped in gold: giving an interdealer rate for a segment of cash pools in
violation of the hierarchical nature of money markets, where only dealers should earn the interdealer rate and only those private
cash pools that are big enough to extract a pound of flesh from primary dealers. The foreign repo pool flattens the hierarchy…

Global Money Notes #6 9

 10 June 2016

Figure 5: A Target Range for the o/n Secured Rates Complex

%
0.75

Soft ceiling and outside spread

↓
0.50

← inside spread →
Banks as opportunistic lenders
↓

0.25
↑
Hard floor and outside spread

0.00
15 16
o/n RRP (cash pools/MFs to Fed) o/n TRP (cash pools/MFs to dealers) OBFR (cash pools/MFs to bank)
EFFR (FHLBs to banks) o/n GCF (inter-dealer) IOER (banks to Fed)

Source: Federal Reserve, DTCC, The Bank of New York, Credit Suisse

Figure 6: A Soft Floor for o/n GCF Repo Rates

%
0.75

0.50

↑
Soft floor to the o/n GCF repo rate

0.25

0.00
15 16
o/n RRP (cash pools/MFs to Fed) o/n TRP (cash pools/MFs to dealers) OBFR (cash pools/MFs to bank)
EFFR (FHLBs to banks) o/n GCF (inter-dealer) IOER (banks to Fed)

Source: Federal Reserve, DTCC, Credit Suisse

Global Money Notes #6 10

 GLOBAL FIXED INCOME AND ECONOMIC RESEARCH
Ric Deverell
Global Head of Fixed Income and Economic Research
+1 212 538 8964
[email protected]

GLOBAL ECONOMICS AND STRATEGY

James Sweeney, Chief Economist Neville Hill
Co-Head of Global Economics and Strategy Co-Head of Global Economics and Strategy
+1 212 538 4648 +44 20 7888 1334
[email protected] [email protected]
GLOBAL STRATEGY AND ECONOMICS
Axel Lang Jeremy Schwartz Sarah Smith Wenzhe Zhao
+1 212 538 4530 +1 212 538 6419 +1 212 325-1022 +1 212 325 1798
[email protected] [email protected] [email protected] [email protected]

US ECONOMICS
James Sweeney
Head of US Economics Xiao Cui Zoltan Pozsar
+1 212 538 4648 +1 212 538 2511 +1 212 538 3779
[email protected] [email protected] [email protected]

LATIN AMERICA (LATAM) ECONOMICS

Alonso Cervera
Head of Latam Economics Casey Reckman Daniel Chodos Juan Lorenzo Maldonado Alberto J. Rojas
+52 55 5283 3845 +1 212 325 5570 +1 212 325 7708 +1 212 325 4245 +52 55 5283 8975
[email protected] [email protected] [email protected] [email protected] [email protected]
Mexico, Chile Argentina, Venezuela Latam Strategy Colombia, Ecuador, Peru

BRAZIL ECONOMICS
Nilson Teixeira
Head of Brazil Economics Iana Ferrao Leonardo Fonseca Paulo Coutinho Lucas Vilela
+55 11 3701 6288 +55 11 3701 6345 +55 11 3701 6348 +55 11 3701-6353 +55 11 3701-6352
[email protected] [email protected] [email protected] [email protected] lucas.vilela @credit-suisse.com

EUROPEAN ECONOMICS
Neville Hill
Head of European Economics Giovanni Zanni Sonali Punhani Peter Foley Anais Boussie
+44 20 7888 1334 +44 20 7888 6827 +44 20 7883 4297 +44 20 7883 4349 +44 20 7883 9639
[email protected] [email protected] [email protected] [email protected] [email protected]

EASTERN EUROPE, MIDDLE EAST AND AFRICA (EEMEA) ECONOMICS

Berna Bayazitoglu
Head of EEMEA Economics Nimrod Mevorach Alexey Pogorelov Carlos Teixeira Chernay Johnson
+44 20 7883 3431 +44 20 7888 1257 +44 20 7883 0396 +27 11 012 8054 +27 11 012 8068
[email protected] [email protected] [email protected] [email protected] chernay.johnson @credit-suisse.com
Turkey EEMEA Strategy, Israel Russia, Ukraine, Kazakhstan South Africa, Sub-Saharan Africa Nigeria, Sub-Saharan Africa

JAPAN ECONOMICS NON-JAPAN ASIA (NJA) ECONOMICS

Hiromichi Shirakawa Dong Tao
Head of Japan Economics Head of NJA Economics Dr. Santitarn Sathirathai Christiaan Tuntono
+81 3 4550 7117 +852 2101 7469 +65 6212 5675 +852 2101 7409
[email protected] [email protected] [email protected] [email protected]
China Regional, India, Indonesia, Thailand Hong Kong, Korea, Taiwan
Takashi Shiono
+81 3 4550 7189 Deepali Bhargava Michael Wan Weishen Deng
[email protected] +65 6212 5699 +65 6212 3418 +852 2101 7162
[email protected] [email protected] [email protected]
India, Vietnam Singapore, Malaysia, Philippines China
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