the crisis. 13 as part of this approach, the federal reserve acquired a new set of reverse bis central bankers ’ speeches repo counterparties, including money market funds and government - sponsored enterprises, in addition to the primary dealers with which it had traditionally transacted. these new counterparties were major investors of cash in overnight markets and had capacity to facilitate the “ draining ” of substantial reserve balances, if offered attractive term investments with the federal reserve. in addition, the federal reserve developed a term deposit facility to drain banks ’ reserve balances. 14 this playbook of draining reserves back to reserve scarcity to support the transmission of interest on reserves into market rates is standard among central banks. if policymakers had chosen to do so, the federal reserve could have made such a term reserve draining approach work to help control money market rates in the united states. 15 so, why did the federal reserve not follow this approach of large - scale reserve draining? as the balance sheet continued to grow as a result of asset purchase programs, it became apparent that such reserve draining operations would have been very large in comparison to the size of private money markets. as a result, they probably would have had lasting effects on the structure of those markets – for example, by reshaping the structure of term money market activity according to the structure of the federal reserve ’ s operations. these lasting effects could have been especially large if the balance sheet did not run off quickly. for this reason, the federal reserve instead pursued offering an overnight investment opportunity that could, with sufficient capacity, intensify competition in money markets and, without necessarily draining reserves, enhance the transmission of ior into other overnight money market rates. this approach entailed a twist on a traditional federal reserve tool, reverse repos : instead of running quantity - based, term operations aimed at altering reserve levels, the desk would run interest - rate - based overnight operations aimed directly at influencing market rates. a number of operational features were required to implement such an overnight reverse repo, or on rrp, facility : it would need same - day settlement ; 16 the operation would need to be run predictably, every day, and as late in the day as possible, to give lenders time to bargain with other counterparties using the outside option of investing with the federal reserve ; 17 an appropriate spread below ior would be required to ensure that the facility neither induced large changes in the structure of money markets nor lost the ability to support interest rate control

’ ll address later, as well as term money market rates. avoiding unintended effects on the structure of the financial system a second lens for evaluating the operational framework is the extent to which it avoids creating incentives that might result in undesirable changes in the structure of the financial system. this means that the framework shouldn ’ t have lasting unintended effects on how people invest their money or on how financial institutions interact with each other. the federal reserve is operating the on rrp on a temporary basis, primarily because the balance sheet is currently large. the fomc ’ s policy normalization principles and plans make the temporary nature of the on rrp clear by stating that it will be discontinued when it is no longer needed to help control the federal funds rate. 26 this intention was noted again in the bis central bankers ’ speeches minutes to the january fomc meeting. as a result, we expect that firms would not make structural changes in how they operate in response to the on rrp, to avoid the cost of unwinding those changes when it is discontinued. the intention of the fomc to impose an aggregate cap on the on rrp, as described in the january minutes, will mitigate this risk. we closely monitor industry structure and fund flows to detect whether the framework is having any unintended impact. for example, we watch banking data and money fund holdings to see if savings are shifting between the two, because if such a shift had to reverse as we wound down the on rrp, those flows could potentially create costs to the firms concerned and also unnecessary problems for market functioning. we also keep track of prime money funds converting into government - only money funds, because if they do so on the mistaken impression that the federal reserve would provide a risk - free investment opportunity indefinitely and on a very large scale, they might later have to unwind that change when their error became apparent. avoiding financial instability the third lens for evaluating the framework is the extent to which the framework avoids augmenting risks of financial instability. in particular, the framework shouldn ’ t create a risk that, in times of stress, money market lenders will rapidly disintermediate their usual counterparties and come to the federal reserve instead, such as through the on rrp facility. 27 of course, flight - to - quality effects existed in financial markets long before we put the new framework into place – what i ’ m referring to is a situation where the framework facilitates those effects