Evercore ISI has released a new analysis suggesting that a rarely utilized Federal Reserve liquidity facility, the Foreign and International Monetary Authorities Repo Facility (FIMA Repo Facility), could help Japan avoid large-scale sales of US Treasury bonds when intervening in the currency market to support the yen. However, the firm cautions that prolonged reliance on this tool might backfire, prompting markets to test the resolve of both the US and Japan to stabilize their exchange rates.
The FIMA Repo Facility allows foreign central banks and official institutions to use their holdings of US Treasury bonds as collateral to obtain dollar liquidity from the Fed, without needing to sell those bonds directly on the open market. This tool was introduced during the pandemic in 2020 to help overseas official institutions access dollar funding while reducing disruptions to the US Treasury market, and it was made a permanent fixture in July 2021.
Evercore ISI strategists Marco Casiraghi and Gang Lyu point out that there are clear limits on the facility's usage. Under current rules, each counterparty can access a maximum of $60 billion per day, an amount only slightly larger than the funds Japan mobilized in a single day of currency intervention last Thursday. Consequently, the FIMA facility is better suited for providing short-term liquidity support rather than meeting the funding needs of sustained, large-scale exchange rate intervention.
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The strategists stated: "We believe the market may focus on this Fed repo facility, which has a set cap, and this could be counterproductive, prompting markets to test whether the US and Japan are willing to support the yen by selling US Treasuries on a large scale."
Data shows the facility is almost always idle. In the week ending July 29, its average outstanding balance was a mere $6 million. The last significant usage was in early February of this year, when the facility was utilized for about $3 billion.
Japan's Finance Minister Shunichi Suzuki has confirmed that Japan conducted yen-buying intervention last Friday and indicated that it would use the FIMA Repo Facility to provide financial support. US Treasury Secretary Janet Yellen also expressed support for Japan's use of the tool on social media and suggested that its usage limit could be appropriately raised.
Under Fed rules, any adjustment to the size of the FIMA facility can be approved by the Foreign Exchange Subcommittee of the Federal Open Market Committee (FOMC), with the full FOMC being notified of the arrangement.
Evercore ISI further notes that the FIMA facility is fundamentally a short-term liquidity support mechanism, not a long-term funding channel. This means borrowers must continuously roll over the loans upon maturity to maintain their funding source. Additionally, the cost of funding through the facility is relatively high, with a current interest rate of 3.75%, compared to a seven-day funding cost of roughly the one-week Overnight Index Swap (OIS) rate plus 25 basis points.
Where to start
The strategists explained that the Fed intentionally sets the FIMA facility's funding cost higher than that of the private repo market. This reflects its intended role as a liquidity support tool for times of market stress, rather than a vehicle for routine financing or long-term, large-scale currency intervention.
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