Reverse Repos Showing Possible Evidence of Forced Liquidations
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| Author       | Source       | 
| :-------------: |:-------------:|
|  [u/AcedVector](https://www.reddit.com/user/AcedVector/) | [Reddit](https://www.reddit.com/r/Superstonk/comments/nlxom6/reverse_repos_showing_possible_evidence_of_forced/) | 

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[DD 👨‍🔬](https://www.reddit.com/r/Superstonk/search?q=flair_name%3A%22DD%20%F0%9F%91%A8%E2%80%8D%F0%9F%94%AC%22&restrict_sr=1)

Pre-DD Message:

Hello you beautiful apes! Before I get into this DD I just wanted to say that I am so proud of everyone for holding against these wall street crooks. We're finally starting to see some change happen and more and more people are starting to catch on to how fucked of a position the hedgies are really in right now, and it genuinely makes me happy that we've come from just some stupid retail investors looking for a quick buck to an educated mastermind of apes who scour the sub for DD and knowledge. With all that said, let's get into the DD!

The Good Stuff:

As I myself was scouring this sub for info I had come across an interesting [post](https://www.reddit.com/r/Superstonk/comments/nlu3wb/coincidental_link_in_decreasing_parties_for/?utm_source=share&utm_medium=web2x&context=3) by [u/qwert4the1](https://www.reddit.com/user/qwert4the1/) (show them some love!) who had found a connection between the price surges in GME and the amount of counterparties within the reverse repo agreements. Specifically, they had mentioned that on days when there was a significant price increase compared to the norm (today, May 26th, would be a good example), the amount of counterparties who were accepted in the reverse repo agreements the day of or the day after had *decreased*. Now, why is this incredibly important if this connection holds true and how can it point to some interesting conclusions? To understand that, we have to understand the main prerequisite to these repo reverse agreements, which is according to the Fed FAQ page:

[An 80 billion max per counterparty, hm?](https://preview.redd.it/pv3jripp9k171.png?width=465&format=png&auto=webp&s=9f6e860076f899e8ad04354d7b02514dad450106)

We also have to understand that in these overnight reverse repo agreements, the Desk (The Open Market Trading Desk the Fed uses for these transactions) sells treasury securities that it holds in the System Open Market Account (SOMA) to these eligible counterparties. What that means is that the aggregate counterparty amount of treasury securities that can be lended overnight is limited by the amount that is held in SOMA. As of May 19th, here are these amounts:

[Take note of the 4 TRILLION that it has in Treasury Notes and Bonds.](https://preview.redd.it/1lp15o74dk171.png?width=962&format=png&auto=webp&s=6fce3b40c66599b746de3b854f70768facf85ea3)

So in other words, there are 2 limitations to take note of for overnight RRP agreements:

1.  80 billion max per counterparty

2.  4 trillion held in SOMA

Why are these limitations important to take note of? Well, because the logical conclusion to draw is that the Fed uses these limitations to some extent in order determine whether they should accept or reject a counterparty in the agreement. This leads into why I feel the connection between the counterparties and the price surges in GME are important, because in my mind there's only a couple of explanations as to why the amount of counterparties in the ON RRP agreement would *decrease* as the price in GME *surges*:

1.  The aggregate amount treasury securities lent to the counterparties in these agreements are reaching an uncomfortable amount so they are choosing their counterparties more carefully.

2.  Marge is calling some of the counterparties that could potentially have the treasury bonds be used as collateral for short positions in some certain stocks ( perhaps GME? ;) )and are forcefully liquidating them, thus they don't need to be part of the agreement. Side note: (If some of the counterparties are banks, then the hedge funds that banks are potentially lending these treasury bonds/notes to for collateral could be margin called and forcefully liquidated, thus the bank having no reason to ask for the bonds does not take part in the agreement.)

3.  A mix of the two

Conclusion:

Here's why I think we might be seeing both *forced liquidations* as well as *more selectivity from the Desk* in lending treasury securities, given that the connection between the counterparties and price surges in GME is correct:

-   The 1st point alone wouldn't be enough of a reason to necessarily be more selective in choosing counterparties, as the current amount being lent (450 billion as of today) is about less than a quarter of the amount of the treasury notes/bonds in SOMA, and there are more than FOURTY counterparties as of the latest agreement.

-   If there are forceful liquidations happening among the counterparties(which are most likely banks), it serves as a threefold hit:

1.  Less counterparties would be needed in these agreements, lowering the counterparty amount but raising the average amount of treasury bonds/notes lent per counterparty.

2.  With the average amount lent per existing counterparty increasing, the Fed has to take more into account what the counterparties are using these treasury bonds/notes for.

3.  If most of the existing counterparties are banks, who lend these treasury bonds/notes to hedge funds for collateral in a short position, and they learn the banks they have lent to beforehand but not anymore (from hedgies being forcefully liquidated) are being connected to margin calls and forced liquidations, the Fed would be less inclined to lend these bonds/notes to the banks currently in the agreement as time goes on as it would become more risky to do so.

-   These three points working in tandem with each other would lead to the Fed having a strong enough reason to be more selective to counterparties in future agreements, while also serving as a explanation for liquidations being a partial cause to the decrease in the amount of counterparties as as result of a GME price surge.

Sources:

[FAQs: Overnight Reverse Repurchase Agreement Operational Exercise - FEDERAL RESERVE BANK of NEW YORK (newyorkfed.org)](https://www.newyorkfed.org/markets/rrp_faq)

[Repo and Reverse Repo Agreements - FEDERAL RESERVE BANK of NEW YORK (newyorkfed.org)](https://www.newyorkfed.org/markets/domestic-market-operations/monetary-policy-implementation/repo-reverse-repo-agreements)

[Repo and Reverse Repo Operations - Federal Reserve Bank of New York (newyorkfed.org)](https://apps.newyorkfed.org/markets/autorates/tomo-results-display?SHOWMORE=TRUE&startDate=01/01/2000&enddate=01/01/2000)

[System Open Market Account Holdings of Domestic Securities - FEDERAL RESERVE BANK of NEW YORK (newyorkfed.org)](https://www.newyorkfed.org/markets/soma-holdings)

As always, thank you for reading my DDs you guys. I will try to hang in the comments for edits as well if anything. :)

Edit: 1.8k likes!! Holy mackerel thank you guys I appreciate your support very much. 🤠🙏

Edit 2: WOW you guys are blowing this post out of the water! Thanks for 7k likes everybody! :)

Edit 3: I would like to point out some amazing counterpoints to this DD in the comments, as I feel it is always important to address both sides of the argument. No DD is perfect(mine certainly isn't) so I would like to thank you guys for bringing these points up:

1.  Why use bonds/notes as collateral when they can just use cash when it comes to short positions in stocks?

2.  If the Fed has been more selective in ON RRP agreements, wouldn't it be showing in their acceptance rate (which has always been 100%)

3.  Correlation does not equal causation, the GME price surge doesn't necessarily have to 100% be connected to a decrease in the counterparties.

I'll admit, I don't have much of a rebuttal to these as they are solid points, and I appreciate you guys bringing it up because it helps me keep more things in mind to create stronger, more effective DD in the future.

Edit 4: A fellow ape in the comments gave a link to the list of eligible counterparties for RRP agreements:

<https://www.newyorkfed.org/markets/rrp_counterparties>

Most if not all of these counterparties are banks, so it lends credence to the idea that banks would be lending these treasury bonds to hedgefunds, as well as the banks themselves needing bonds as well (since there is a lot of cash but not collateral in the bonds market at the moment)
