The perceived costs associated with new regulatory requirements on capital and liquidity ratios may further incentivize such behavior, particularly by foreign institutions. Borrowers’ responses appear to contribute to the period-end dynamics I described earlier, including declines in money market volumes, increased volatility in money market rates, and elevated participation in the RRP operations as cash investors face temporarily reduced investment options from private counterparties. Importantly, the increase in RRP take-up can be understood as a consequence, rather than a cause, of private market balance sheet reductions on quarterend dates. There have also been changes to the business models of many money market participants. Following the financial crisis, many financial institutions have sought to adjust their balance sheets to enhance their liquidity positions and reduce reliance on short-term wholesale funding. Cash lender business models have also adapted, with changes to some lenders’ willingness to take credit risk. For example, Fannie Mae and Freddie Mac have not been active lenders in the fed funds market since 2011. 21  Although the currently elevated level of reserves creates unique temporary dynamics, the introduction of IOER, (which would have been implemented regardless of monetary policy responses to the financial crisis) represents a permanent change in the Federal Reserve’s operating framework. 22  Drawing on public filings of market participants, we estimate that this figure captures approximately 80 percent of all overnight fed funds transactions. 23  For foreign banks—the predominant borrowers of fed funds—the Basel III leverage ratios are largely calculated on a period-end basis.

These adjustments have allowed us to learn how ON RRPs might be used to support the monetary policy objectives of the FOMC. Our testing has demonstrated that ON RRP operations can set a soft floor on short-term interest rates. That is, while some trades may occur below the ON RRP offering rate, the volume-weighted averages of most money market rates have been above the ON RRP rate on nearly all days (Figure 2). Data across a range of money markets provide evidence that changes in the ON RRP rate affected pricing for both unsecured and secured instruments and that the operations successfully set a floor on short-term interest rates. While market participants are aware of the success in producing a floor from such volume-weighted rates as the fed funds effective rate and GCF Repo Index®, the Desk has been also examining detailed transaction-level data for evidence that the ON RRP sets a floor on nearly all overnight money market transactions. 12  The payment of interest on reserves has been in place since October 2008, although the Federal Reserve Board recently requested public comment on proposed technical changes to the methodology for calculating IOER. The proposal intends to enhance the effectiveness of changes in the IOER rate in moving the federal funds rate into the target range when changes in those rates do not coincide with the beginning of a reserve maintenance period. Further information is available at http://www.federalreserve.gov/newsevents/press/ bcreg/20150413a.htm.