Cantor Fitzgerald

George Goncalves Comments: Fed Said To Consider Clearing Banks - Bloomberg Markets

Bloomberg Markets, October 9, 2009

The Federal Reserve is considering accessing money market funds through clearing banks or creating a facility to drain the record amount of cash added to the financial system, according to people familiar with the plans.

Those methods may help conserve the capital of the 18 primary dealers that act as counterparties for open market transactions as the Fed removes some of the more than $1 trillion the central bank pumped the economy, said the people, who declined to be identified because no decision has been made.

Dealers would face constraints on capital if they were the sole counterparties on all the so-called reverse repurchase transactions while they're still repairing balance sheets after booking losses and writedowns in the aftermath of the worst financial crisis since the Great Depression. In a reverse repo, the Fed sells securities for a set period, temporarily decreasing the amount of money available in the banking system.

“One of the goals could be that the Fed is trying to distribute paper without encumbering dealers' balance sheets while utilizing existing distribution channels” to expand the transactions to money markets, said George Goncalves, chief fixed-income rates strategist in New York at primary dealer Cantor Fitzgerald LP.

Discussions on how to access a broader array of counterparties other than primary dealers are still developing, said one of the people with knowledge of the situation. Deborah Kilroe, a spokeswoman for the New York Fed, declined to comment.