Friday, September 2, 2016

Central Bank Liabilities: Part I

In this first installment, I'll discuss issues related to Greenwood, Hansen, and Stein's Jackson Hole paper, and leave discussion of the future of currency for installment #2.

An important model for modern central banking was the Bank of England, founded in 1694, which subsequently developed a symbiotic relationship with the British crown. The crown needed to finance spending, particularly on wars, and the Bank was looking to make a profit. The crown granted the Bank an ever-expanding monopoly on the issue of circulating currency, culminating in Peel's Bank Act of 1844, under which the Bank became the sole supplier of circulating currency in the UK (save for some grandfathered Scottish private banks, which are still issuing currency in 2016). Given the Bank's monopoly on currency issue, it could lend to the crown at a low interest rate, and still make a profit. The Bank, through experimentation or accident, discovered crisis intervention. During financial panics the Bank could, through judicious use of information available to it, engage in lending to banks with liquidity problems (banks experience a lot of bank note redemptions). In so doing, the Bank would expand its note issue to fund lending to banks that it deemed illiquid but solvent and, on the flip side of that, give those holding bank notes a safe asset to run to. The Bank did this, driven by its motive to make profits on superior information.

It wasn't like some economist was promoting the idea that a monopoly on currency issue and financial crisis intervention were the natural province of a central bank, or that this central bank should be have some form of public governance. Those ideas came much later. Indeed, the Bank of England remained a private institution until 1946. However, the Federal Reserve System was founded as a public institution, albeit with semi-private governance, in terms of how the regional Federal Reserve Banks are run. The work that led up to the Federal Reserve Act of 1913 included, for example, the National Monetary Commission, created by Congress to study the U.S. financial system, and systems elsewhere in the world, and to come up with recommendations for reform. The Commission produced volumes of useful stuff, which you can find on Fraser. The basic ideas in the Federal Reserve Act are that the role of a central bank in the United States was to: (i) through its monopoly power, provide a safe currency; (ii) make the currency "elastic," i.e. make the supply of currency respond to aggregate economic activity, and to financial panics, by way of discount window lending.

Basically, the framers of the Federal Reserve Act had in mind an institution that would play the same role as the Bank of England, but the motivation was different. A currency monopoly for the central bank was seen as socially beneficial, as experiments with private currency issue in the U.S. had not turned out well. And crisis intervention was seen as a means for preventing the disruption to the aggregate economy that had occurred during the banking panics of the National Banking era (1863-1913).

Fast forward to 2016. In some ways things haven't changed. U.S. Federal Reserve notes are basically the same stuff (with some anti-counterfeiting features added) they were in 1914, and currency is still an important Fed liability. Here's the stock of currency relative to U.S. GDP:
The ratio of currency to GDP has risen to close to 8% from less than 6% before the financial crisis, and is at the same level as in the mid-1950s. Retail payments using currency have fallen, but perhaps not as much as one might think. For example, surveys by the Boston Fed show a declining use of currency, but currency is still important in consumer payments, accounting for 26.3% of payments in 2013, as opposed to 31.1% for debit cards. But, the quantity of Federal Reserve notes per U.S. resident is about $4,500 currently. I don't know about you, but I'm not holding my fair share of that. In this chart you can see that, by value, about 80% of currency outstanding is in $100 notes, and studies indicate that about half of the stock of U.S. currency is held outside U.S. borders. There are some legitimate questions about the role played by currency, and whether its use should be curtailed, but more about that in the next installment.

The key point is that, if we took large-denomination currency - which is likely serving no useful social function - out of the mix, only a small part of the existing Fed portfolio would be funded by what was once thought to be the primary central bank liability. As it is, even with all those $100 bills included, interest-bearing Fed liabilities are greater than the quantity of currency outstanding:
The key Fed liabilities are, in order of magnitude (from small to large):

1. Reverse repurchase agreements, or ON-RRPs, used in "temporary open market operations." This is overnight lending to the Fed, with securities in the Fed's asset portfolio used as collateral. ON-RRPs are roughly reserves by another name - overnight interest-bearing liabilities of the Fed that can be held by a wider array of financial institutions than are permitted to have reserve accounts with the Fed. In particular, money market mutual funds cannot hold reserves, but they are key participants in the ON-RRP market. ON-RRPs play an important role in post-liftoff Fed implementation of monetary policy. The idea is that the ON-RRP rate, currently 0.25%, puts a floor under the fed funds rate, so that fed funds will trade between the interest rate on excess reserves (IOER), currently at 0.5%, and the ON-RRP rate.

2. Reverse repurchase agreeements held by foreign government-related institutions. This is somewhat mysterious, and explained here. Just as there is a foreign demand for Treasury securities, there is a foreign demand for very short-term liabilities of the Fed.

3. Currency. We know what this is about.

4. Reserve balances. As is well-known, this quantity has grown substantially, as this stuff financed the Fed's large-scale asset purchases post-financial crisis.

We're now in a world in which interest-bearing Fed liabilities have become very important. Is this a temporary change, or is it permanent? Should it be permanent? This gets us to Greenwood/Hansen/Stein (GHS). Basically, their answer to the last question is yes. GHS first argue that short-term safe assets are useful in financial markets and that, by looking at market interest rates, we can find evidence of "moneyness" for these assets. If assets are used in facilitating some kind of exchange, or they are in wide use as collateral, they bear a liquidity premium. That is, people are willing to hold these assets at lower rates of return than seem consistent with the actual payoffs on these assets. For example, Gomme, Ravikumar, and Rupert calculate real rates of return on capital in the U.S. since 2007 of from 5%-7% (after tax, for all capital). But here are some short term nominal rates of return:
Before December 17, 2015 (liftoff date), the IOER was 0.25% and the ON-RRP rate was usually 0.05% (with some experimentation). After that date, IOER was set at 0.5% and ON-RRP at 0.25%. In the chart, you can see that, after liftoff, the fed funds rate has typical fallen in the range 0.35%-0.40%, except at month-end and quarter-end (for technical reasons). Also, four-week T-bills trade in the same ballpark as ON-RRP, with some variation.

What can we conclude? (i) Reserves are a less liquid asset than ON-RRP or short-term Treasury debt. Reserves can be traded among a smaller set of financial institutions than these other assets, and you have to pay banks more to take reserves than to take T-bills or ON-RRP. (ii) Short-term Treasury debt and ON-RRP seem to have roughly the same liquidity properties.

So, once the case has been made that short-term safe assets bear liquidity premia, reflecting their usefulness in financial markets, who is going to supply these assets? There are three options: (i) the private sector; (ii) the Treasury; (iii) the Fed. GHS argue that the private sector does not do a very good job of this. Why? First, there are some "externalities" involved, according to GHS. This is somewhat vague, but GHS seem to have in mind that private sector production of short-maturity assets involves intermediating across maturities, which is risky. And maturity transformation makes these private financial intermediaries sensitive to market stresses, according to them. Second, regulatory changes, for example the Supplementary Leverage Ratio requirement, gums up the private sector's ability to produce safe short-maturity assets. GHS also argue that the Treasury does not issue enough short term debt, because it is worried about the risk of auction failure if it has to roll over a lot of short-term debt.

The heart of the argument is that the Fed has advantages over both the private sector and the Treasury in issuing short-term debt. But what kind of short-term debt should the Fed issue? Currently, the choice is between reserves and ON-RRP, though in principle we can think about the possibility the Fed could issue Fed bills - short term circulating debt that looks exactly like Treasury bills. The Swiss National Bank can issue such securities, for example. But, if wer're constrained to considering only reserves and ON-RRP, it seems clear that ON-RRP is much more successful in serving the liquidity needs of financial markets than are reserves. After all, you have to give the institutions that are permitted to hold reserves a 25 basis point inducement to get them to do so.

So, it seems that, in general, ON-RRP is a better instrument for the purpose than reserves. As GHS point out, if the Fed were to expand its ON-RRP program and shrink reserves, this would amount to savings for taxpayers, given the level of short-term market interest rates. This is becasue the Fed could have the same effect on market interest rates, but be paying lower interest on its liabilties, thus handing over larger transfers to the Treasury. What expands the ON-RRP program? One approach would be to set the ON-RRP rate equal to IOER.

But, how large should the Fed's ON-RRP balances be, and what's the optimal size for the Fed's balance sheet? Prior to the financial crisis, the size of the Fed's balance sheet was essentially determined by the demand for currency (in real terms), given the level of market interest rates, as the quantity of reserves was very small, and almost all of the Fed's asset portfolio was financed with currency. If we take the GHS proposal at face value, there should be a similar natural limit for ON-RRP. If the Fed sets an ON-RRP rate, and conducts a fixed-rate full-allotment auction, with IOER equal to the ON-RRP rate, what could happen? (i) the Fed reaches the upper bound on securities that it can use as collateral in ON-RRPs - it gets more bids than it can satisfy. (ii) the Fed does not reach the upper bound on available collateral, and there are some reserve balances outstanding. In case (i) it seems the ON-RRP program is too small, and in case (ii) it's the right size, but the Fed's balance sheet is too large. The bottom line, if we accept GHS's hypothesis that a Fed supply of short-term interest-bearing liquidity is a good thing, is that the market can determine how much of this stuff it needs. I should make it clear that this is my conclusion, not theirs. But I think this is the logical implication of their analysis.


1. How does this relate to quantitative easing (QE)? GHS seem to think this is a different issue - that QE is aimed at some short-run problem, and the role for ON-RRP is long-run. I don't think so. What GHS is putting forward is indeed a theory of how QE works. They are assuming that the Fed has a special role in maturity transformation, and when the Fed does this it matters. And this matters all the time, not just in unusual circumstances, so the implication is that QE should be an ongoing thing. But it seems there is a role for long-maturity debt in financial markets too - presumably the Fed shouldn't be sucking up all the long-maturity assets in existence, and GHS don't seem to be thinking about that.

2. I've got doubts about whether there are limitations on the private sector's ability to intermediate across maturities. Turning long Treasury debt into overnight debt is risky, but there are ways to manage such risk. It's not clear that the Fed and Treasury are any better at bearing such risks than are private financial institutions.

3. If the problem with private sector liquidity transformation is what can happen in crises, why shouldn't the Fed's intervention be confined to crisis times? For example, expand the ON-RRP program in a crisis, and contract it when the crisis is over.

4. A concern of GHS is a possible flight to safety during a panic. The argument is that, during times of financial stress, financial market participants could abandon private sector liquidity for ON-RRPs, and that could be bad. The "cure" for this is caps on the ON-RRP program. I've always found this idea puzzling. In the ON-RRP auction, the Fed can either set the quantity, or the price, but they can't set both. If there's a binding cap on the ON-RRP program, the price is too low, i.e. the ON-RRP rate is set too high. Presumably, in a crisis the correct policy is to lower the ON-RRP rate.

5. GHS's explanation for why the Treasury did not, or could not, issue more short-term debt did not make sense to me. This seemed more like a call for the Treasury to do a better job of auctioning their securities. Further, if a Treasury auction "fails" on a given day, I'm not sure why that's the end of the world. For example, the Treasury has a reserve account with the Fed, and the balance looks like this:
You can see that the balance in this account fluctuates a lot - it's an important buffer for the Treasury in managing cash inflows and outflows. Further, the average size has increased substantially, to around the $300 billion range. If rollover risk is greater with more short debt outstanding, why can't the Treasury have a larger average balance in that account?

In general I found this paper very useful. It's the first coherent story I've seen about a legitimate role for a central bank in what we would typically call "debt management." But much more research and thought needs to go into these questions.


  1. Prof, according to Lewis VS the USA, in 1982, Fed employees are not government employees. The Fed then, is a private institution that is made to look like a public entity. Why can't the Fed just be upfront? The Ninth Circuit was. The treasury and the dollar are public, but the Fed really isn't.

    Also, Prof, do you trust the counterparties when it seems that they are often short of collateral? Isn't that the Achilles Heel of this whole system, and isn't the need for collateral transformation due to a lack of a proper supply of treasuries causing a massive decline in US repo volume?

    And is there bad collateral being offered into the money markets, like the old MBSs leading up to the Great Recession? But even more importantly, is there a shortage of treasuries for the big derivatives markets like oil and interest rate swaps. Is an inferior collateral being used?

    And is the Fed bailing out any of these markets? Just wondering.

    1. The Fed is a unique public institution, set up to have some degree of independence from the political process, but at the same time accountable to the legislative, executive, and judicial branches of the federal government. To say it's purely private is ridiculous.

    2. I agree that there is oversight by the public government. I didn't mean to imply there was no oversight. But I think the Fed could push for changes in the laws any time it wants and could have saved the Commercial Paper market if it had wanted to much sooner. It liquidated the economy by not buying paper until after the subprime people and people depending on HELOCs were denied credit. By not buying the paper, all the CP loans migrated back onto the TBTF banks' balance sheets. That could have been avoided. Did the Fed liquidate the economy because of bad subprime in 4 states just to push wages down and get the houses back for Wall Street. It looks like that is exactly what happened, Prof. I am interested on your take. Bernanke was like Mellon, saving the financial system AFTER liquidating the economy. Some things, from my view, never change with banking. Procyclical behavior never changes. I just don't quite understand why.

    3. The trick is this: "While the Federal Reserve Board of Governors in Washington, D.C., is covered by FOIA, the 12 regional banks of the Federal Reserve are not considered government agencies and FOIA does not apply to them. Records held by the regional banks — like many of those recently sought in connection with the government’s private-sector financial bailout packages — are not subject to FOIA unless also filed with Washington’s Federal Reserve Board."

  2. Further to your point 2 above, there is a flaw in their logic:

    1. "the problem is intermediaries take on excessive maturity transformation risk"
    2. "the Fed should take it on instead as this will reduce risk of a financial crises"
    3. "because the fiscal risk is high, in the process, the Fed shouldn't take on much maturity transformation risk"

    Of course, the Fed cannot absorb the private sector's duration risk and also avoid it.

    1. Yes, the Fed cannot make duration risk go away. Possibly it can put it in a different place. Possibly it can have no influence at all on the economy's capacity for bearing such risk.

    2. We expect you to single-handedly keep your macroeconomist peers honest when it comes to magical 'free lunch' thinking about the Fed's balance sheet. Thanks for taking on that responsibility.

    3. Well, you should certainly be skeptical of economists claiming the existence of free lunches. On rare occasions we get one though.

  3. you are the only honest economist blogging anywhere.

    1. Well, I would like to call myself honest, but there are plenty of honest economist bloggers out there, I think.

  4. I would suggest exactly the opposite.
    In a crisis, the private sector wants to reduce its duration and increase its liquidity. In the last crisis the Fed accommodated this by dramatically increasing its balance sheet, increasing the duration of its assets and increasing the size of its short term (and highly leveraged quid) reserves. . The Treasury also increased its Issuance of tbills.
    In better times, the private sector wants to increase its duration and will accept illiquidity. So the Fed can wind down its balance sheet.

    So the Fed acts as a liability smoother. It moves its liabilities and assets in the opposite way from that of the private sector. Or at least it should.
    Actually in better times the fed barely needs to do anything. It just needs to stop banks expanding too fast and keep credit standards high.

    Less is s more for the Fed I would suggest.

    1. "I would suggest exactly the opposite."

      Opposite of what?

  5. I read where the Fed was short on bonds in the Great Recession, and therefore, it allowed the subprime market to crater as a way to offset the injection of excess reserves into the system. Rather than selling bonds to sterilize the process, it simply pinched off the subprime market entirely as a sterilization effort. I am just wondering Prof Williamson's take on that. Clearly all the subprime was not bad or misunderwritten. But it all died. Then HELOCs died a year later in mid 2008 and the nation was plunged into recession.

    People lost their lives, houses, pets, and I saw much of it as I live in Nevada.

  6. Steve, great stuff.

    You said: " looking at market interest rates, we can find evidence of "moneyness" for these assets. If assets are used in facilitating some kind of exchange, or they are in wide use as collateral, they bear a liquidity premium."

    You point out that ON RPP and 4-week t-bills are trading below IOR, which is evidence of a liquidity premium in ON RPP and t-bills.

    Question for you. I agree that t-bills are currently bearing a liquidity premium. They can be passed off as collateral to someone else who can in turn hypothecate the same t-bill themselves. You get a chain of collateral.

    But are the balances created by the ON RRP and owned by the likes of money maket mutual funds capable of being passed along? i.e. are they transferable? Unlike reserves, which are perpetual, a balance created by ON RRP exists for no more than 24 hours. How liquid are they? I'm not sure, but if they aren't alienable then ON RRP balances wouldn't bear a true liquidity premium. Instead, the observed premium might be due to something else, some sort of friction perhaps.

    1. "But are the balances created by the ON RRP and owned by the likes of money maket mutual funds capable of being passed along?"

      I had the same question. The person I asked told me, if I remember it right, that MMMFs can't rehypothecate the collateral posted for ON-RRPs, as this would violate some regulatory rule. But other ON-RRP counterparties could do it, in principle. In practice, apparently they don't, but I don't know why.

      "a balance created by ON RRP exists for no more than 24 hours."

      But, the auction is done every day, so in principle a financial institution could just roll these things over, and have an ON-RRP balance for a long time. On the other hand, I can easily get rid of reserve balances - they're overnight assets, just like ON-RRP. The key difference, which I didn't mention is that reserves are held by a subset of financial institutions, which are all regulated. There are "balance sheet costs," i.e. deposit insurance premia and and capital requirements, which potentially explain the rate of return differential. That's not exactly a "liquidity premium" but has the same implications I think.

    2. "I had the same question. The person I asked told me, if I remember it right, that MMMFs can't rehypothecate the collateral posted for ON-RRPs, as this would violate some regulatory rule. But other ON-RRP counterparties could do it, in principle. In practice, apparently they don't, but I don't know why."

      Ah. So private counterparties lend to the Fed by holding ON RRP balances, and then the Fed provides the counterparties with collateral, say a t-bill. Which means that it might be more advantageous to hold ON RRP balances than to hold regular reserves. With the former, you (ie. the private counterparty) also get a highly liquid t-bill that you can maybe rehypothecate onward. And a broad segment of the financial sector might accept that t-bill as money. With a reserve, only a small segment of the financial sector will accept it. So maybe you'd be willing to lend to the Fed at a better rate than IOR to take advantage of those liquidity services, which is one reason why the ON RRP is below IOR?

    3. Suppose I'm a MMMF, and I'm lending to the Fed overnight by way of ON-RRP. This will be done as a tri-party repo, so the Fed as parked some of its securities with a financial intermediary, and those securities are going to serve as collateral for the ON-RRP transaction. In principle, we might imagine that the MMMF could then use those securities as collateral to borrow from someone else. But in fact they can't, apparently, due to some regulation. But suppose I'm some other counterparty, e.g. one of those listed here:

      The Royal Bank of Canada, say. Then in principle I can rehypothecate. So I get something that I don't get if, for example, I'm the Royal Bank of Canada and I'm holding reserve balances with the Fed. But, apparently I don't actual do that in practice, and I'm not sure why.

  7. Sorry not to be clear. I meant the opposite of keeping the fed balance sheet large instead of letting it contract. It seems to me that the enlargement in bad times and contraction in better times are fundamental to th purpose of the central bank.

    1. "enlargement in bad times and contraction in better times are fundamental to the purpose of the central bank"

      That's roughly what the authors of the Federal Reserve Act seemed to have in mind. But the way they thought of it, bank depositors would be running to safety - Federal Reserve notes - in bad times, and the Fed would be lending to the banks against illiquid collateral, and thus supplying the currency. What you would see would be an expansion in the Fed's balance sheet in bad times.


      (i) the actual large scale asset purchases (QE) that happened in the US certainly weren't about crisis management. The crisis was long gone when most of this happened. So this seems far from conventional central banking.

      (ii) GHS is not about crisis management either. They're arguing for a long-run role for the Fed in intermediating assets, much like the old-fashioned rationale for the central bank is a natural monopolist in terms of currency issue.

  8. Jeremy P. Snider has said on Talkmarkets that there are a lot of repo fails because most repos are backed by UST's and MBSes as collateral. So, are these new private RRP's actually another means of creating collateral, Prof? If they are sound it could be a good idea. If they turn out like the old MBSes, maybe not such a good idea. And how bad can the repo fails Snider uncovers get? If you want I will post the article or you can just google his name on Talkmarkets as a contributor.

  9. "So, it seems that, in general, ON-RRP is a better instrument for the purpose than reserves. As GHS point out, if the Fed were to expand its ON-RRP program and shrink reserves, this would amount to savings for taxpayers, given the level of short-term market interest rates."

    It seems that you have to make some implausible assumptions to get here. The "savings" come because the rate on reserves is higher than the rate paid on ON-RRP, the same effect could be had by cutting ior to a lower rate. To do so and maintain liquidity (not even expand, just maintain) the holders of reserves have to not respond at all to a lower interest rate. Then to expand liquidity you have to open up ON-RRP lending to a broader audience, which would decrease remittences to the Treasury.

    1. This is important: "given the level of short-term market interest rates."

      That is, for the same effect on other market interest rates, there will be interest savings from moving to ON-RRP from reserves.

    2. "That is, for the same effect on other market interest rates, there will be interest savings from moving to ON-RRP from reserves."

      I don't see how (in a relevant way). To shift money from reserves to ON-RRP the Fed will have to cut IOR (or reduce the quantity of reserves it pays on), which should net out to lower liquidity. What is the difference between decreasing IOR and shifting reserves to ON-RRP?

    3. holding the ON-RRP interest rate constant, say at 0.25%, and lowering IOER to 0.25% from 0.50% should cause a migration from reserves to ON-RRP. Banks are free to hold ON-RRP rather than reserves, if they want, but the likely outcome is that more Fed liabilities will now be held outside the commercial banking sector. For financial markets as a whole, this should actually increase liquidity. For example, part of the reason that IOER is greater than the ON-RRP rate currently has to do with "balance sheet costs" such as capital requirements - the regulations in part make reserves poor liquidity, and ON-RRP better liquidity. So if you get more of the latter and less of the former, liquidity goes up.

    4. Wouldn't any reserves that were transferred be, by definition excess? Which should be the most liquid assets?

    5. again, that's in excess of reserve requirements. banks are holding reserves because they want to - the asset is doing something for them.

    6. "...the asset is doing something for them." Clearly. If the IOER is 0.5% vs 0.25% offered on ON-RRP, and there is no quantity limit imposed on ER held with the Federal Reserve Banks, then a bank's treasurer would have to have a very good reason to participate in ON-RRP.

      Why is the IOER greater than the rate on ON-RRP? Immunization. By offering a higher rate on excess reserves cf. to ON-RRP, the Fed maintains control over the supply of money and thereby over the rate of inflation.

      The relative size of the Fed's liabilities in excess reserves vs its liabilities in the reverse-repo program suggest to me that shifting the former into the latter would pose some logistical problems that the Fed might be unable or unwilling to take on. The size of the daily auction would be one order of magnitude greater than it currently is. Would this make sense from the Fed's point of view? What would the effect be on the management of the money supply? Immunization? The price level and inflation expectations?

    7. " shifting the former into the latter would pose some logistical problems"

      No, I don't think so. Conducting the auction is not big deal, and it would involve no complications for monetary control. There's only an upside I think.

    8. Interesting. If that is so, then the IOER is too high. Perhaps the rate on IOER should be reduced to zero percent, and the ON-RRP rate increased (administrative) or allowed to float according to demand (market). Would we see the inflation rate rise or fall or remain unchanged?--I suppose the answer viz. the effect on rate of inflation is, "It depends."

    9. What would make sense is IOER equal to ON-RRP rate. Inflation control is the same, basically. Right now, the ON-RRP rate is the relevant safe short-term nominal rate of return for most of the financial market.

  10. Steve, thank you for another highly enlightening post. Fascinating stuff; since I started reading your blog I kinda almost regret not going into monetary economics, lol.

    But I have a question regarding the rehypothecation of ON-RRPs. If these auctions are daily, why would a financial intermediary buy ON-RRP from another intermediary instead of simply participating in the Fed's auction? Unless access to the auction is limited to certain classes of intermediaries and buying an ON-RRP is a way for intermediaries that do not have access to the auction to lend to the Fed, just like ON-RRPs allow intermediaries that are not allowed to have reserve accounts at the Fed to circumvent that restriction. In which case, why not simply change the regulatory framework?

    1. The repo market is huge, and the Fed is only one participant in it. For the Fed, the overnight repo facility consists of an auction conducted from 12:45 pm to 1:15 pm. In principle, there could be constraints on how much is auctioned, but since this has been in operation for real (since December 17) it has essentially been fixed rate, full allotment - the Fed fixes the overnight rate and then accepts all offers at that rate. But not everyone can lend to the Fed through the ON-RRP facility - there is a set of approved counterparties. In general, in the repo market there is some ability to rehypothecate. That is, if I lend to another financial institution, I'm temporarily in possession of some collateral, which I can proceed to use again as collateral to back my lending from someone else. But apparently, when counterparties lend to the Fed through the ON-RRP facility, they don't rephypothecate the collateral the Fed posts to secure the loan, either because they can't or have no good reason to do it. But I don't think that the restricted set of counterparties is a big deal - arbitrage should look after that.