Fed Repo Operations and Dealer Intermediation

We examine how primary dealers utilized repo operations conducted by the Federal Reserve from September 2019 until May 2020 and how usage affected dealer borrowing and lending. Using daily dealer-level supervisory data, we find that during normal market conditions, dealers primarily used Fed repo to expand their total repo borrowing and on-lent much of this funding to a broad variety of counterparties. However, during market stress in March 2020, dealers used Fed repo as a substitute for funding from other counterparties and focused their on-lending to affiliated counterparties. Moreover, dealers with more headroom under the Supplementary Leverage Ratio requirement used more of their Fed repo borrowing to provide intermediation in funding markets. Our results underscore the critical role that the Fed's repo operations played, especially in March 2020, by reducing dealer funding stress and enabling dealers to pass on liquidity.