December 17, 2002

Changes to Open Market Operations

The following technical changes have taken place as of December 13, 2002 in the Federal Reserve Bank of New York's conduct of open market operations. First, FRBNY will use Reverse Repurchase Agreements (RRPs), rather than Matched Sale Purchases (MSPs), when it drains reserves from the banking system on a temporary basis.

While the economic impact of RRPs is identical to that of MSPs, the use of RRPs is standard market practice. These changes reflect continued efforts to transact the Desk's operations in accordance with standard market practice, facilitated by the implementation of a new settlement and accounting system at FRBNY. While MSPs are accounted for as separate sales and repurchases on the Bank's balance sheet, RRPs are accounted for as financing transactions. Therefore, in accounting terms, securities pledged to the RRP transaction will remain in the SOMA portfolio and a liability will be recognized until the transaction matures. The amount of securities pledged for the RRP transaction will be explicitly indicated on the H.4.1 statistical release as pledged for that purpose.

There also are some technical changes relating to processing and settlement. These include the fact that dealers will no longer need to include a re-offer rate, as they did for MSP transactions, but instead will submit propositions that include an RRP rate and a money amount to represent the financing they are offering. In addition, in the securities lending program, there will be more precision in the cash rounding of borrowed securities; the new program will round up to the nearest $1,000. As in the switch from RRPs to MSPs, there is no economic impact from the changes related to processing and settlement.