The encyclopedia · Finance & Accounting · Financial decision · 2020–2021
The Fed's FIMA repo lets foreign central banks borrow dollars without dumping Treasuries
In March 2020 the Fed opened a repo window for foreign central banks, giving them dollars against their Treasuries so they never had to sell.
Federal Reserve System
the move
In March 2020, the pandemic froze global dollar funding. Foreign central banks and sovereign funds that needed dollars faced one costly route: selling their US Treasury holdings into a distressed market, which would push Treasury prices down and spread the stress back to American markets.
The Federal Reserve's answer was the FIMA Repo Facility, announced March 31, 2020 and opened April 6. Foreign central banks with accounts at the New York Fed could temporarily repo their Treasury securities for dollars at a backstop rate, then use the cash in their own jurisdictions.
The trick was giving a borrowing alternative to selling. Foreign officials got liquidity without dumping Treasuries, the US Treasury market was spared a wave of forced supply, and the facility complemented the dollar swap lines the Fed had already reactivated with other major central banks.
why it works
- A repo is cheaper and less disruptive than a sale: the collateral comes back when the loan matures.
- The Fed already held these Treasuries in custody, so the facility needed no new infrastructure.
- Backstop pricing means the window is only attractive in stress, so it does not distort normal markets.
- It extended the Fed's lender-of-last-resort logic to the foreign official holders of US debt.
what transfers
When the holders of your asset are under funding pressure, give them a borrowing window before they sell; a backstop prevents the fire sale the panic would otherwise force.
what came after
The facility was extended through 2021 and made a permanent standing facility on July 28, 2021, alongside the domestic standing repo facility. It remains part of the Fed's toolkit for supporting the smooth functioning of the Treasury and global dollar funding markets.
references
- Foreign and International Monetary Authorities (FIMA) Repo Facility
- Federal Reserve announces establishment of a temporary FIMA Repo Facility
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