FEDERAL RESERVE BANK OF WEW YORK Circular No. 96-74 April 25, 1984 REPURCHASE AGREEMENTS ON BANKERS’ ACCEPTANCES To All Depository Institutions, Securities Dealers, and Others Concerned, in the Second Federal Reserve District: Following is the text of a statement issued by the Board of Governors of the Federal Reserve System announcing the decision by the Federal Open Market Committee to discontinue the use of repurchase agreements on bankers’ acceptances in open market operations: The Federal Open Market Committee has announced that as of July 2, 1984, it will discontinue use of repurchase agreements on bankers’ acceptances in open market operations to manage reserves. The Federal Reserve Bank of New York will continue to serve as agent in buying and selling acceptances for the accounts of foreign central banks. In taking the action, the Committee noted that the use of repurchase agreements on acceptances for reserve management has declined in relative importance in recent years. In 1983, about 7 percent of System repurchase agreements was arranged against bankers’ acceptances compared with an average of about 16 percent in the previous three years. The Committee’s action also recognizes that the market for bankers’ acceptances has reached a scale of activity that does not require or justify continuing Federal Reserve support. It continues the disengagement from the market begun in 1977, when the Federal Reserve ceased buying these private instruments on an outright basis. Since then, the System’s involvement has been limited to the use of repurchase agreements on acceptances for managing bank reserves as a modest supplement to operations in Treasury and Federal agency securities. Repurchase agreements are used by the Federal Reserve to meet short-term reserve needs. In these transactions, the System purchases Government securities, Federal agency issues, or bankers’ acceptances from dealers under an agreement that requires the dealer to buy back the securities after a fixed period, usually one to seven days.. Interest rates in these transactions are determined by competitive bidding. The market for bankers’ acceptances has continued to grow since 1977. The outstanding volume of acceptances at the end of 1983 was $78 billion compared to $23 billion at the end of 1976 and $642 million at the end of 1955 when the Federal Reserve resumed operations in acceptances after a lapse of more than 20 years. Bankers’ acceptances are negotiable instruments generally drawn to finance the export, import, shipment or storage of goods. They are termed “accepted” when a bank agrees to pay the draft at maturity. Questions regarding this matter may be directed to the Securities Department of this Bank (Tel. No. 212-791-5479). Anthony M. Solomon, President. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

9674. Repurchase Agreements on Bankers' Acceptances...volume of acceptances at the end of 1983 was $78 billion compared to $23 billion at the end of 1976 and $642 million at the end

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Page 1: 9674. Repurchase Agreements on Bankers' Acceptances...volume of acceptances at the end of 1983 was $78 billion compared to $23 billion at the end of 1976 and $642 million at the end

FEDERAL RESERVE BANKOF WEW YORK

C ir c u la r N o . 9 6 -7 4 A p r il 2 5 , 1984

REPURCHASE A G R EEM EN TS ON B AN KER S’ ACCEPTANCES

To All Depository Institutions, Securities Dealers, and Others Concerned, in the Second Federal Reserve District:

Following is the text of a statement issued by the Board of Governors of the Federal Reserve System announcing the decision by the Federal Open Market Committee to discontinue the use of repurchase agreements on bankers’ acceptances in open market operations:

The F ed e ra l Open M ark e t C om m ittee has announced th a t as of Ju ly 2, 1984, it will d iscontinue use of rep u rch ase ag reem en ts on b an k e rs’ acceptances in open m a rk e t operations to m anage reserves. The F ed era l R eserve B ank of New Y ork will continue to serve as ag en t in buying and selling acceptances for the accounts of foreign cen tra l banks.

In ta k in g the action, the C om m ittee noted th a t the use of re p u rch a se ag reem en ts on acceptances for reserve m anag em en t has declined in re la tiv e im po rtan ce in recen t years. In 1983, about 7 p ercen t of System rep u rch ase ag reem en ts w as a r ra n g e d ag a in s t b an k e rs ’ acceptances com pared w ith an average of about 16 p ercen t in the previous th ree years.

The C om m ittee’s action also recognizes th a t the m a rk e t for b an k e rs ’ acceptances has reached a scale of ac tiv ity th a t does not re q u ire or ju stify con tinu ing F ed e ra l R eserve support. I t continues the d isengagem en t from the m ark e t begun in 1977, w hen the F ed era l R eserve ceased buying these p riv a te in s tru m en ts on an o u tr ig h t basis. Since then, the S ystem ’s involvem ent has been lim ited to the use of rep u rch ase ag reem en ts on acceptances for m an ag in g bank reserves as a m odest supp lem en t to operations in T reasu ry and F ed era l agency securities.

R epurchase ag reem en ts are used by the F ed era l R eserve to m eet sh o rt-te rm reserve needs. In these transactions, the System purchases G overnm ent securities, F ed e ra l agency issues, or b an k e rs’ accep tances from d ea le rs u n d e r an ag reem en t th a t re q u ire s the d ea le r to buy back the securities a f te r a fixed period, usually one to seven days.. In te res t ra te s in these tran sac tio n s a re d e term ined by com petitive bidding.

The m a rk e t for b an k e rs’ acceptances has continued to grow since 1977. The o u ts tan d in g volum e of acceptances a t the end of 1983 was $78 billion com pared to $23 billion a t the end of 1976 and $642 m illion a t the end of 1955 w hen the F ed era l R eserve resum ed operations in acceptances a f te r a lapse of m ore th an 20 years.

B an k ers’ acceptances a re negotiable in stru m en ts g enera lly d raw n to finance the export, im port, sh ip m en t or s to rage of goods. They a re te rm ed “accep ted” w hen a b ank agrees to pay the d ra f t a t m atu rity .

Questions regarding this matter may be directed to the Securities Department of this Bank (Tel. No. 212-791-5479).

Anthony M. Solomon,P re s id e n t.

Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis