The FIMA Repo Facility is a tool introduced by the U.S. Federal Reserve to support global financial stability in response to the COVID-19 pandemic.
FIMA Repo Facility provides an alternative temporary source of U.S. dollars for approved FIMA account holders of Treasury securities other than sales of the securities in the open market.
FIMA account holders consist of central banks and other foreign monetary authorities with accounts at the Federal Reserve Bank of New York (FRBNY.
What is the FIMA Repo Facility?
The FIMA Repo Facility was established by the Federal Reserve in March 2020.
It is a temporary program that was created in response to the COVID-19 pandemic, which caused a sharp sell-off in U.S. Treasury securities and a tightening of global dollar funding markets.
The facility was designed to help foreign central banks meet their dollar liquidity needs and to support the smooth functioning of global financial markets.
It allows foreign central banks and other international monetary authorities to temporarily exchange their U.S. Treasury holdings for U.S. dollars, providing them with short-term liquidity during times of financial stress or market disruptions.
The facility aims to alleviate strains on global U.S. dollar funding markets and support the smooth functioning of the financial system.
How the FIMA Repo Facility Works
The FIMA Repo Facility operates through repurchase agreements or repos, a financial transaction in which one party sells an asset, typically U.S. Treasury securities, to another party with an agreement to repurchase it later at a predetermined price.
In the context of the FIMA Repo Facility, foreign central banks and international monetary authorities can enter into repo transactions with the Federal Reserve, temporarily exchanging their U.S. Treasury holdings for U.S. dollars.
These transactions are typically short-term, lasting overnight or for a few days. The interest rate charged on the repo transaction is determined by the Federal Reserve, which is generally based on the prevailing market interest rates.
Why is the FIMA Repo Facility important?
The FIMA Repo Facility plays a crucial role in promoting global financial stability:
- Providing short-term liquidity: The facility offers foreign central banks and international monetary authorities access to short-term U.S. dollar liquidity, helping them manage their domestic financial institutions’ needs and address any potential liquidity shortages.
- Alleviating pressure on U.S. dollar funding markets: By allowing foreign central banks to access U.S. dollar funding directly from the Federal Reserve, the FIMA Repo Facility helps alleviate pressure on global U.S. dollar funding markets, reducing the need for foreign central banks to sell their U.S. Treasury holdings in the open market.
- Supporting the global financial system: As the U.S. dollar is the world’s primary reserve currency, maintaining its stability and smooth functioning is essential for global financial stability. The FIMA Repo Facility plays a crucial role in ensuring that the global financial system continues to function efficiently, particularly during times of crisis or uncertainty
As the world continues to navigate economic uncertainties, instruments like the FIMA Repo Facility highlight the importance of central bank cooperation and new policy tools in maintaining financial stability.