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NY Fed readies reverse repurchase transactions

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Officials at the Federal Reserve Bank of New York plan to conduct another set of small-scale reverse repurchase transactions starting Wednesday to test efficiency of this investment tool. The NY Fed, which handles market operations for the Federal Reserve, wants to ensure the "operational aspects" of tri-party reverse repurchase agreements are in good working order for when and if the Federal Open Market Committee decides to use it. The New York Fed said its action is simply "a matter of prudent advance planning." "These operations do not represent a change in the stance of monetary policy, and no inference should be drawn about the timing of any change in the stance of monetary policy in the future," the Fed bank said Tuesday. Repurchases are the most common form of temporary market operations and are used to temporarily add balances as a result of securities purchased and held in the Fed's system open market account portfolio, according to the NY Fed. In a tri-party repo, both parties must have cash and collateral accounts at the same tri-party agent, which is also a clearing bank and ensures the collateral pledged is sufficient and eligible. All three parties agree to use collateral prices supplied by the tri-party agent, according to the Fed bank. The third party serves as a clearing house that sits in the middle of the repo to take out the counterparty risk. The FOMC is set to convene again in early November. In August, the committee announced plans to reinvest maturing agency bonds and mortgage-backed securities into Treasury securities to stave off contraction of the national balance sheet. But FOMC members hold divergent views on what should be done with the maturing MBS. Write to Jason Philyaw.

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