August 18, 2010 / 2:31 PM / 9 years ago

UPDATE 2-Big U.S. funds named for Fed's reverse repos

* 26 U.S. money market funds named for Fed’s reverse repos

* Combined assets of funds equivalent to 1/3 of industry

* Funds see reverse repos as another investment choice

(Recasts lead, adds quote, byline, Crane data,)

By Richard Leong

NEW YORK, Aug 18 (Reuters) - Most of the biggest U.S. money market mutual funds were named on Wednesday as eligible parties to do business with the New York Federal Reserve to help the central bank implement its new monetary policy operations.

These money market funds, which investors use to park their cash, are among the biggest in a $2.8 trillion industry, each with at least $20 billion in assets.

The New York Federal Reserve will turn to 26 money market funds as eligible partners for reverse purchase agreements which aim to drain excess reserves from the banking system.

The combined assets of these funds were approximately $900 billion at the end of July, according to Crane Data LLC.

Some of the biggest investment firms including Blackrock, Fidelity, J.P. Morgan and Wells Fargo oversee some of these funds.

The banking system has some $1 trillion in excess reserves as a result of the emergency government measures to help the economy and to combat the global financial crisis of 2007-2009.

Reverse repos are one of the tools that the Fed can use to remove excess reserves in a bid to avert a resurgence in inflation. In these operations, the Fed exchanges Treasury and other securities it holds for cash for a short period.

Money fund operators welcome another asset choice, as they have been hurting from rock-bottom yields and a tight supply of investments.

“We always are seeking investment opportunities for our money market mutual funds that are consistent with our goals of protecting the $1.00 stable net asset value, providing liquidity and seeking a market return,” said Fidelity spokesman Vincent Loporchio in an email statement.

Fidelity runs four money market funds eligible for the Fed’s reverse repos. Its cash reserve fund is the biggest taxable U.S. money market fund with almost $123 billion in assets at the end of July, according to Crane Data.

The announcement by the New York Fed, which conducts open market operations for the central bank, comes after it said in early March that it planned to expand the counterparties for reverse repos.

Given the tremendous amount of excess reserves, analysts have said the New York Fed needed to look beyond the primary dealers to conduct reverse repos.

The New York Fed held small scale reverse repos earlier this month to ensure they go smoothly. FEDOPS

For the list of the eligible money market funds for reverse repos, click on: here

Reporting by Richard Leong

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