 Everyone and welcome to this panel on the legal, financial and comparative aspects of monetary policy operations with non banks. It has become obvious in the recent years that non banks played an increasing role in the transmission of monetary policy. There is also substantial evidence that non banks take a more prominent role in credit provision in Europe, but also global. Notwithstanding its increasing importance, non banking remains largely unharmonized across the EU. And this may create challenges for all stakeholders, including the regulators. This overall trend, which probably will stay with us for many years, is not only relevant for regulators, for banking supervisors, but also for the monetary policy arms of the central banks. In addition to that growing phenomenon, the recent COVID-19 crisis taught us that non banks also play or can also play a role in financial stability risks, and thereby may also impact the orderly transmission of monetary policy. In such crisis periods, fire sales of assets held by these entities can lead to an impairment of the monetary policy transmission mechanism. Through the approval of the transmission protection instrument, the governing council of the ECB demonstrated the importance of an even transmission of its monetary policy throughout the euro area jurisdiction. The open question remaining here is whether non banks could be a useful channel for the monetary policy transmission in the current swing of monetary policy normalization. One example that immediately comes to mind in this respect is the so-called leaky floor phenomenon. Since non banks have no access to the central bank's deposit storage facility, they receive a less favorable remuneration of their bank deposits than the deposit facility rate, which is offered to credit institutions. In the context of the Fed's experience, Batch and Klee showed that monetary policy normalization can potentially exacerbate this problem. Against this background, non banks are obviously of relevance for monetary policy purposes. This was also underlined in the recent ECB strategy review conducted in 2021. The issue, however, remains that traditionally the euro system central banks interact only with credit institutions and that the euro system counterparty framework has until now been designed almost exclusively for credit institutions. The general documentation sets the relevant eligibility criteria, which are all tailor made for credit institutions and seem very difficult to reconcile with the essence of what non banks are. At this point, you might be right to think than what I was discussing in this panel. Here I feel necessary to recall the recent unexpected shocks that hit European and global economies, which taught us that the monetary policy toolbox of the ECB is extremely vast. Let me just mention a few of these events, the global financial crisis and the ensuing death crisis, the COVID-19 pandemic, the increasing costs generated by global warming and Russia's unjustified aggression towards Ukraine. These events have taught us that we are facing fast evolving world, which requires constant reassessment of the economy and of market conditions, as well as readiness to pull the appropriate tool from our toolbox. Being a lawyer, I would also emphasize at this point that article 18 of the statute of the ECB and ECB explicitly envisages that credit operations may be conducted with credit institutions, as well as other market participants. To conclude, this ultimately leaves us with three questions to answer. Should access of non banks be part of our toolbox? That's the first one. Could access of non banks be part of our toolbox, which is the second? And third, how could access of non banks be part of that toolbox? This is a very exciting discussion that we will be having today, with our panel consisting of three very prominent speakers. Following our discussion, we'll have a Q&A session where you will be able to ask any questions you may have. And for that reason, I would kindly ask you to raise your virtual hand in case you have a question. So, without further ado, let me introduce our first panelist. Imen Russo Ramoni is the Director General of Market Operations at the ECB. She is in charge of implementing the single monetary policy of the euro system. Imen also sits in the BIS's Markets Committee and chairs the ECB's Market Operations Committee. She is the author of a number of articles on financial markets and monetary policy implementation, most recently on the scarcity effect of quantitative easing on repo rates, which she published in the Journal of Financial Economics. Imen will discuss the monetary and financial stability case for granting access to non banks. In other words, she will discuss the truth and also the how. Following that, we will hear Karen Shapersman, who is a prominent lawyer and the Senior Counsel at Trifor Chance, where she has advices on cross-border banking and investment services. Kerstin will tell us whether we actually could provide for such access by describing some of the limitations resulting from the legal requirements. Last but certainly not least, let me introduce Marco Cipriani, the Head of Money and Payment Studies at the Federal Reserve Bank of New York. Marco has a very extensive list of publications which I will not cite completely here. I will only mention that he recently published an article on the money market mutual funds facility in the Fed's Economic Policy Review. Marco will present us how the Fed has set up its overnight reverse repo facility, or ONREP, as Marco will certainly refer to. So, very warm welcome to all three of you and I will now pass the floor to Imen. Thank you very much, George, and thanks to you and to Chiara for the invitation to this very interesting conference. I will now start actually sharing my slides, so hopefully you can already see me and hear me correctly. And now I will go into sharing a couple of slides in order to lead you through the operational and monetary policy considerations into the topic of non-bank financial institutions access. So, you should be seeing in a moment the nice ECB flags, the tower and the first page. Just as a reminder, so the views expressed in this presentation are mine as the author and do not necessarily represent the official views of the ECB. So, I wanted to kind of structure the presentation as follows. I think it's first important to highlight some of the most notable changes to both the ECB balance sheet and the toolkit and also the changes in the financial market landscape. So, that's my first part and how non-banks have played, as you said, George, an increasing role in this landscape. Then second, I'll basically explain what it means that monetary policy is effectively transmitted within the Euro area and I'll see how the non-bank sector fits within this concept of transmission. Then I will dive deeper into the why and how of how we might actually provide non-banks with access to the Euro system balance sheet if this were at some point to be decided and then I will conclude. So, starting with this, you know, shift that we've been experiencing post great financial crisis. It's, you know, very visible in two aspects. One is central bank balance sheet. And so over the last decade, the balance sheets of major central banks have increased significantly in size. That's what you see on the slide. And the reason was to contract the great financial crisis and then the sovereign crisis indicates of the ECB and then more recently the pandemic risks. Yeah. And this has left, you know, more and more footprints in financial market. And then in terms of how the balance sheet has expanded, because as you said, George, it's all about the type of operations we are running. Our previous short term liquidity providing operations have said this, this, you know, the blue part takes that into account have been replaced by fixed rate full allotment operations and also increasingly by these longer term targeted operations that the LG rose. Moreover, the big partner is our large scale asset purchase programs. You see it here in Brown, which have created significant excess liquidity within the Euro area. These tools were necessary. They were necessary. They were effective in enforcing the appropriate stance of monetary policy and support market functioning to safeguard the transmission of our monetary policy. It really economy and thereby to return to our inflation aim of 2% in parallel. And that's the second part. We observed a real change in the money market structure. And in particular, we observed an attrition of money markets due to structural changes imposed by regulatory reform. In terms of enhanced capital requirements, new liquidity provisions, changes to the leverage ratio. And these constrained, you know, bank balance sheets led to a decrease in cross-border money market activity while at the same time the intermediation provided by central banks increased. And so this is something we'll have to consider when we have a look at transmission. Now, in terms of not banks, and you've said it very well in your introduction, they have played an increasing role in financial intermediation. So basically, it's, you know, both a question of a growing size. They're growing size in European capital and financial markets. But it's also a general move towards market-based financing. So this is exemplified by this steady increase in the assets of the non-bank financial sector on your left with total assets of all these different sub-sectors more than doubling from 12 trillion to 30 trillion between 2008 and 2021. In terms of relative size, relative to banks, that's the blue line, you also see that the non-bank sector is now almost at par, 100% almost, with the banking sector. This importance of non-banks is reflected in their expanding role in financing the real economy that's on the right-hand side. And you see that while the bank-based financing is still very important, actually non-financial corporations are also increasingly turning towards credit markets. So that's the blue part, the marketable debt. And the purchasing of such marketable debt by NVFIs increases their role in the financing of the real economy, but also increases really their interconnectedness with financial markets and with the real economy. So now let's have a look at, you know, transmission and how non-banks play into this. So before 2008, yeah, you had in terms of transmission what you have here on the slide, yeah. So we, you had, you know, our traditional monetary policy counterbodies, we call eligible counterbodies, yeah, that had access. And in a way you see on the left-hand side that we, as the euro system, we ultimately, through the transmission mechanism, reach the real economy, but we do not directly interact with the real economy, yeah. I mean, you see that there are many steps in between, yeah. And instead, this kind of, you know, interaction, direct interaction is actually left to both the inter-bank market here, which is our existing bank counterbodies and also to the NVFI sector. So these two sectors interact directly with the real economy, yeah. But we rely on them then on these other sectors to do the job of interacting with the real economy. And that's what we call, you know, transmission, yeah. And so in this way, it's not a question of whether we should interact with NVFIs. We are interacting already directly with NVFIs, but rather how directly we should interact with them, yeah. And so the next topic is about the real meaning of, you know, balance sheet access, yeah. And maybe a better way of thinking about this balance sheet interaction is having the idea that these balance sheet access can be bi-directional to some extent, yeah. So basically having shown the effect of all these tools on, you know, on our balance sheet and here you also see how this has been changing with asset purchases, yeah. And basically when we have added asset purchases, what you see here with this red arrow is that this has added, in a way, and I go back to the previous slide so that you can see the difference. This has added an additional channel by which we are now interacting with the NVFI sector. And so you see where we have represented here that there, you know, even more interaction than before with the NVFI sector, yeah. And of course, because this sector is involved in the bond market and now we are a player in the bond market, all of these interconnectedness and interactions has become even more important. So now let's have a look of, you know, basically the why and how we could provide if this were decided direct central bank access to NVFIs. And I'll start with the asset side, yeah. So the asset side would be about providing NVFIs with liquidity, providing them with funding, yeah. And they are accessing, so the asset side would be basically about whether providing this access, this direct access would help, would help, preserving the transmission mechanism, and mostly at times of market turmoil and crisis. And of course, we had a recent example of that and that was March 2020, March volatility, market volatility linked to the COVID. And during that period, actually, investment funds and money market funds faced a significant liquidity demand shock as investors, you know, asked for redemptions and sought to liquidate their positions. And the result of this stress NVFIs sought to offload their own holdings, yeah, in the market in order to meet this liquidity demands, and this has led to negative selling spirals. The transmission and market conditions improved only through the introduction of our pandemic purchase emergency purchase program, the PEP, yeah, and other non standard monetary policy measures and in particular the TLTRO. And the PEP was really instrumental in reviving a number of market segments and in particular the commercial paper market and alleviating funding stress of corporates caused by fragility in money market funds, yeah. So the necessity to enact PEP is kind of, you know, shown here on the right hand side, yeah, where you can see that in order to counter the widespread financial shock, the PEP really enacted a suite of easing measures, including I mentioned TLTRO but also the collateral easing measures and managed to basically extinguish the fire there, yeah. But the tool that really made a difference was that of asset purchases via the PEP. Again, this was not direct interaction with NVFIs, I mean we purchased securities from the market from our bank counterparties, but of course there is an interaction in the sense that NVFIs themselves interact with banks. So now let me just mention how, you know, a lending operation to a non bank financial institution would work and how it would work as a complement to asset purchases. And in terms of different asset types, what we could consider is either a standing facility that would be used on an ongoing basis and allow NVFIs to meet redemptions, or a backstop facility which would be intended to be used only during crisis periods and when there is liquidity stress within the NVFIs sector, yeah. So this is stylized on the left-hand side. However, and this I wanted to mention that I'm sure it would be taken up in the next presentations from the operational perspective, the granting of this access on the asset side would be quite resource intensive and clearly more resource intensive than the liability side access that it will go into in a moment. Well, first of all, from a risk management perspective, you need to ensure that lending is only provided to financially sound institutions and therefore there you need to basically operationalize the performance of the regular and independent financial soundness checks. And second, from a legal standpoint, certain monetary policy credit operations with no banks seem problematic, in particular from the point of view of the money market fund regulation. So now I go into the liability side, which is probably a bit easier and also has some justifications, as you mentioned, George, in the leaky floor aspect. So that's exactly the leaky floor in a chart. So if you look at the chart on the left-hand side, what you have here is the behavior of money market rates in recent years. And this demonstrates very clearly when you look at what's happening with this yellow line, which is the German repo rate, so collateralized rate. You see actually that while before we had interest rates that were following very closely our corridor and actually before in 2008, so before the financial crisis, they were even trading at the center of our interest rate corridor. Now that we have all this huge amount of excess liquidity, of course, this is driving money market rates to trade at the bottom of the interest rate corridor. So the deposit facility rate, which is what we call our floor, and of course very further away from our ceiling, which is the marginal lending facility. However, what we see in recent years is that the demand for liquidity by institutions has diminished, so by banks, and basically the pricing in money markets has been also affected by other sectors, including the differentiated balance sheet access that you mentioned, George, meaning that today while existing counterparties, so the banks can partner funds with us at the deposit facility rate. So at this rate here in blue, actually non-banks need, cannot do that, and therefore they need the service to be fulfilled by the market. And given that banks balance sheets have been somewhat constrained by all these regulatory reforms and also the excess liquidity, we can see that the rates that bank counterparties offer to non-banks are really now below the IFR. I mean this is a little bit the case for the unsecured rates of the EUROSTR, but it's even very clearly the case for the collateralized repo rate, and this is what we call the leaky floor. So such an issue could be problematic from a monetary policy transmission perspective, especially if short-term unsecured money market rates will no longer be steered by the central bank. As such, the provision of liability side access could be seen as a way of placing a firmer floor on rates, so avoiding the leakage below the floor through the removal of differentiated access. That said, and this has been a very recent experience when we had liftoff and increased our key policy rates by 50 basis points in July, we have observed a relatively successful pass-through of this rate increase. And from the chart on the right hand side, you can see that money market have generally reflected in full the 50 basis points hike delivered. The only exception to some extent is what you see in repo markets, and especially in the German repo market, which is here pictured actually here after one month we still don't have complete pass-through. The reaction to possible future rate hikes is uncertain, however, even though there's a high likelihood that the pass-through of policy rate hikes to money markets, we think that this will continue to function well. So now in terms of the contribution to money market activity, non-banks are also very important participants there, and our reference rate, the EuroSDR, is a measurement of the rate at which institutions trade with each other on an unsecured basis. And here it's evident that there has been, on average, a steady increase in the volume of trading captured by EuroSDR in recent years. And throughout this period, however, within the EuroSDR, you had changes in patterns. So the bank-to-bank activity, which would have been historically a very significant part of this market, now constitutes only 10% of activity. Meanwhile, the transactions underlying EuroSDR involving non-bank financial institutions that trade with banks has remained relatively stable at 70% of total. Therefore, accessing the liability side of the central bank balance sheet may benefit transmission of monetary policy at a time of policy normalization, and a time where you want basically to avoid a bit of the sleekly floor and to have all of the market rates that follow the policy rates on an upward trajectory. Now there are a range of options in practice to provide access to the liability side to NBFIs. And here I just wanted to mention the three we have available in the EuroSDR without entering into details, and I'll leave that for questions. If some of you have questions about how this is possibly done. So the first possibility would be an unsecured deposit facility. So very simply that NBFIs leave money at the ECB on an unsecured basis in exactly the same way that banks today have access to a deposit facility. The second instrument would be the issuance of ECB debt certificates. And these debt certificates could actually increase the universe of safe assets available within the financial system that would be an added benefit. And they could be readily available to a broad set of counterparties including NBFIs. And what is interesting with ECB debt certificates is that this option is already specified in our general documentation. And so it would be a matter of using it in practice. And then also specified in our general documentation already is the possibility to conduct reverse repo operations. And this would actually be quite similar to what the Fed does with the overnight RRP that I'm sure will be mentioned in the next presentation. So that would be our third option there. So now concluding and I quickly summarize. First it's clear that non banks are basically playing an increasing role in our financial system and there's nothing to suggest that this trend will not continue and possibly expand. As a consequence, it's likely that the considerations in relation to their potential direct access to the balance sheet will persist for some time. And the main question is, of course, how high is the risk of incomplete transmission of monetary policy if NBFIs continue to grow in importance. Next, when you look at liability side versus asset side, it seems that the case for the liability side access to the transmission of monetary policy avoiding the leaky floor and so on is a bit more compelling today than the case for the asset side access. And that's in particular because asset side access has a lot of complications, as I said, but also that in crisis times we have always been able to actually solve the problem by using instruments that are market based. So for example, asset purchases are market based, but they do not require to interact directly with non banks. And of course, for any potential access, either on the liability side or on the asset side, we would need a proportionality test and further analysis under different scenarios. And finally, to conclude, and this is just a reminder, for all these discussions I think the really basic premise is always the monetary policy case. It's the prerequisite for any of these discussions about potential direct access of NBFIs to the central bank balance sheet. And this case should be assessed in a granular way, meaning by looking at the case of every specific NBFI sector. And I will stop here and I'm very happy to take questions. Thank you very much, Iman. This was a very, very interesting presentation. I will now hand over to Kerstin, who will present some of the legal aspects. Thanks very much, Georgie. Hello everyone. And thanks also for giving me the opportunity to contribute to this great event. Yes, as we have just heard, non bank lenders have been on the rise, not only recently, with a large part of financial assets held by non banks, which can lead to disruptions in the financial markets in times of stress. This in turn raises the question how central banks and the Euro system in particular should position themselves to ensure the effectiveness of monetary policy operations in light of this changing environment. So we have now just now looked at the why and how of direct balance sheet access from a macroeconomic perspective, and I'm going to talk about to what extent an intervention of central banks could be permitted from a legal perspective under existing rules applicable to non banks, or whether, as we think, legislative action might be required to allow central bank interaction with these market participants. So George has already outlined some of the limitations for the Euro system arising from the fact that the general documentation stipulates eligibility criteria which are all tailor made for credit institutions. On my end, I wanted to focus on the legal considerations from the perspective of a particular subgroup of non banks, namely money market funds. And that because MMFs were among the non banks which were particularly affected by events such as the global financial crisis. And more recently the market disruptions resulting from the COVID-19 pandemic, and because MMFs are subject to a set of rules and regulations that poses challenges for a central bank funding. As an alternative to bank deposits and an important source of corporate and government financing, because they offer diversification of investments, instantaneous liquidity and relative stability of value MMFs are closely linked to the banking sector. And as a result, runs on funds in the form of high level redemptions by investors and MMFs when combined with a lack of liquidity in private money markets in a financial crisis can have consequences not only on the functioning of the money markets but also in the worst case on the real economy. So in the EU, MMFs are subject to restrictions in their operations since the enactment of the money market funds regulation in 2018, rules that were introduced as a consequence of lessons learned from the global financial crisis to make MMFs more stable and less vulnerable to runs. So before turning to specific provisions of the MMF regulation that are relevant in the context of their ability to be a counterparty to central bank monetary policy operations, for some background I wanted to just very briefly describe the main features of MMFs and their regulatory framework. So an MMF must be authorized as such under the MMF regulation and must be a collective investment undertaking that fulfilled three requirements. One, it is a use its fund or an alternative investment fund under the AFMD. Two, it invests in short term assets with residual maturities of less than two years and three, it has distinct or cumulative objectives offering returns in line with money market rage or preserving the value of the investment. And MMF may be set up as one of three types, depending on its investment. So whether those are public debt or other assets, and whether the funds net asset value stable or variable. Its legal form ultimately depends on the applicable national law, but under the regulation the fund can for example be a fund constituted in accordance with contract law. So a common fund managed by a management company. It can also be set up in accordance with trust law, or in accordance with statute as an investment company. And if an MMF comprises more than one investment compartment, each compartment is regarded as a separate MMF for the purposes of the activities that I'm taking a closer look at in this panel. The MMF regulation sets out rules for the operation of MMFs. This applies in particular on the composition of the portfolio. MMFs may only invest in predefined legible assets, which will become relevant later on. Those assets comprise money market instruments, ABCP, deposits with credit institutions, repos and reverse repos and some other assets. All of those investments are subject to strict diversification requirements and concentration limits. Like other financial counterparties, MMFs are subject to AML requirements and must have approved and documented internal credit quality assessment procedure, as well as sound and prudent or your customer procedures to help understand their investor base and anticipate large redemptions. MMFs are also subject to maturity limitations in the form of a maximum allowable weighted average maturity and weighted average life. And they must hold a minimum amount of liquid assets that mature daily or weekly on an ongoing basis to strengthen their ability to face redemptions and prevent their assets from being liquidated at heavily discounted prices. MMFs must also conduct stress testing at regular intervals as part of prudent risk management and competent authorities have supervisory and investigatory powers to verify compliance with the MMF regulation. Now, to the interesting part, how can restrictions that apply to MMFs under the MMF regulation be reconciled with the ECB's monetary toolbox? Again, the general framework, Georgie mentioned that until now has been designed for banks and although the statute of the ECB and the ECB and the ECB expressly permit the conduct of credit operations not only with credit institutions but also other market participants and MMFs as just shown are subject to a set of regulatory rules. These are distinct from those applicable to credit institutions and the current framework would obviously require changes in order to be workable for them if justified from a policy perspective. In any event, fitting non-banks in the form of MMFs under the monetary policy framework is only one side of the coin, the other side is whether the rules of the MMF regulation themselves would allow the participation of MMFs in monetary policy operations. To try and answer this question, I am going to look at three specific aspects of the money market funds regulation. The first one that I wanted to look at is a general principle that would be relevant independent of the specific monetary policy tool that is used and is enshrined in article 35 of the regulation, namely a general prohibition of external support for MMFs. So what does external support mean in this context? The MMF regulation defines this as any direct or indirect support offered to an MMF by a third party including a sponsor of the MMF that is intended for or in effect would result in guaranteeing the liquidity of the MMF or stabilizing the NAV per unit or share of the MMF. So the reason for such prohibition being that providing support for an MMF with a view to maintaining liquidity or stability or de facto having such effects increases the contagion risks between the MMF sector and the rest of the financial sector. The question is then how the reference to third party is to be understood. Looking at the wording in the first place as lawyers tend to do, this could refer to any person and as a result also include the Euro system. But if one takes into account the historical context and looks at the MMF regulation proposals and impact assessments, it must be noted that external support from third parties was discussed under the term sponsor support. The MMF regulation does not offer an expressed definition of that term, but the legislative materials identify two types of sponsors, an asset manager of the MMF and the financial institution which offers or originates the MMF. So if the Euro system was to undertake monetary policy operations with MMFs, its intention would certainly be to maintain liquidity and stability of MMFs, so one could say that this corresponds with the definition of external support. But this support would I think not necessarily be given on an individual basis as would be the case for a sponsor who is an affiliate or entity involved in the setting up of the fund and has a very distinct economic or reputational reason to provide support. This in my view would be different for the Euro system which is guided by monetary policy and systemic stability considerations and under its framework treats all eligible participants equally once their eligibility has been determined. Also, if we look at the list in the MMF regulation as to what constitutes external support, examples are cash injections from a third party or the purchase by a third party of assets of the MMF at an inflated price. These examples imply that support entails a certain non-market element and I would also note the following in the context of the difficulties faced by certain MMFs during the COVID crisis in March 2020 when measures of central banks such as the purchase of CP, intermediated by credit institutions indirectly also benefited MMFs. Esma issued a statement aimed at clarifying the potential interaction between such intermediation and the requirements of article 35 of the MMF regulation. And in this statement Esma specifies certain conditions under which intermediation does not constitute external support. One of the clarifications made was that transactions with third parties are considered not to be carried out at an inflated price where they are executed at arm's length conditions which kind of seems obvious. The other clarification relates to the circumstances in which an action by a third party has the direct or indirect objective to maintain the liquidity profile in the NFE per unit or share of the MMF, where Esma points out that such indication is given where third parties execute transactions solely with the MMFs to which they are affiliated. In the context of the ongoing consultation of the MMF regulation it has now been proposed that these clarifications be made in the level one text. So on that basis I believe that the argument can be made that monetary policy operations by the Euro system with MMFs on standard tender procedures at conditions which are available to all eligible counterparties participating in the operation should not qualify as support within the meaning of the MMF regulation. The second specific aspect that is worth looking at in the context of monetary operations with MMFs are deposits, namely whether MMFs could benefit from a deposit facility which can be used by eligible participants to make overnight deposits with the Euro system for the absorption of excess liquidity. A deposit that is eligible for investment by MMFs must fulfil three requirements, namely one it is repayable on demand or is able to be withdrawn at any time, two it matures in no more than 12 months and three it is with a credit institution in a member state or in a third country where institutions are subject to equivalent prudential rules. While the first two requirements seem achievable by designing the terms of the instruments accordingly, the more interesting question is whether the Euro system could be considered as a credit institution as that term is used in the MMF regulation. The regulation refers back to the CRR which defines as we know a credit institution as an undertaking, the business of which is to take deposits or other repayable funds from the public and to grant credit for its own account. Now on the one hand under the statute of the ECB, the ECB and the NCB's open accounts for credit institutions, public entities and other market participants and accept assets as collateral under search could be seen to be taking funds from the public. As an EBA opinion of 2020 has shown it's not a term that is conclusively defined in European law and can be construed to refer to any person other than the credit institution itself. But on the other hand one might say that the ECB and NCBs do not undertake a business with a commercial purpose as is commonly understood to be the case for credit institutions as they are traditionally understood. But it must also be noted that the capital requirements directive contains an express exemption declaring the provisions of that directive inapplicable to central banks as did actually already the first banking directive in 1977 which in the recital says that exceptions must be provided for in the case of certain institutions to which this directive cannot apply. So it could be concluded that the CRR definition of credit institution does not in itself exclude central banks. So as a result it is at least doubtful if the wording is such prohibits a deposit by an MMF under the deposit facility as a monetary policy instrument. But it should also not be disregarded that one of the goals of the review of the MMF regulation that I mentioned earlier is to make MMFs more resilient to stress market conditions without the need of central bank support. So ultimately a legislative clarification might be appropriate if it is determined that a participation in monetary operations in the form of a deposit facility would be desirable from a policy perspective. The third and last aspect that I quickly wanted to address today is a potential participation by MMFs in open market operations in the form of reverse repurchase transactions under which the Euro system receives securities and provides liquidity to market participants. So from the perspective of an MMF its participation would be in the form of a repurchase agreement which as mentioned is in principle part of the eligible transactions that an MMF is allowed to undertake if it falls to specific conditions. Those are that it must be on a temporary basis for no more than seven working days only for liquidity management purposes and not for investment purposes a requirement that could be managed through the conditions specified for the relevant policy instrument. The next requirement is that the counterparty receiving assets transferred by the MMF as collateral under the repurchase agreement must be prohibited from selling investing pledging or otherwise transferring those assets without the MMS prior approval. That is obviously not something that the current framework provides but it also does not appear to preclude that such a requirement could be implemented so this seems manageable. A further condition is that the cash received by the MMF as part of the repurchase agreement must not exceed 10% of its assets. Again that's a requirement to be observed by the MMF manager more of an internal aspect. And finally the MMF must have the right to terminate the agreement at any time upon giving prior notice of no more than two working days. Again the current framework doesn't specify any such right to terminate the agreement at any time but conversely also does not per se prohibit such termination rights. So it would be a question of whether implementing the implementing documentation can accommodate this. So on those points in summary it appears possible in principle to design open market operations in the form of MROs to meet the requirement for repurchase agreements under the MMF regulation. So by way of conclusion while it doesn't seem that central banks support for non banks in the form of MMF would have to be ruled out completely from a purely legal perspective. There are some challenges and uncertainties in the interpretation of existing provisions. Also a boring and lending of MMFs against con natural is prohibited at the moment under the MMF regulation. And in a number of areas I think on that basis legislative intervention would be preferable to enhance legal certainty and to make potential measures less vulnerable to challenge. Again taking into account that post COVID crisis assessments including in the context of the consultation on the MMF regulation has focused on enhancing MMF resilience and ensuring that they can operate without impacting financial stability. Regardless of the market conditions and also to avoid intervention of central banks. So even if we could put the legal piece of the puzzle in the right place it's only part of the whole picture. And so with that I'll hand over back to you. Thank you. Thank you very much Gersin this was very very interesting. We are slightly running behind of time. So without further ado I will pass the mic to Marco Marco the floor is yours. I have to be given authority to share my screen which I don't have now. Okay so thank you very much for having me here. This presentation is about the overnight reverse ripoff facility which is a facility set in place by the Federal Reserve to support monetary policy. It's work that myself and a colleague of mine Gabriela Spada currently conducting whatever I'm presenting does not of course reflect the opinion of the Federal Reserve Bank of New York. Or of the Federal Reserve system in general the building in the slide I hope you see is the Federal Reserve Bank of New York. It's a copy of a very famous building in Florence. So I hope that sets the discussion in a in a in a good way. So I will I will start by giving an outline of the presentation I will talk about how the Federal Reserve implemented monetary policy before 2008. How the implementation of monetary policy changed after 2008. What is the role of the overnight reverse ripoff facility in the monetary policy implementation framework. And then I will conclude with some other policy considerations. First of all how does the Federal Reserve communicate the stance of monetary policy. It does so by setting a target for the federal funds rate. It used to be a numeric target. Now it's a target range but not doesn't matter so much. And what is the federal fund rate is the rate that prevails in the federal funds market and the federal funds market is the market where federal funds are traded. Federal funds are uncollateralized loans by institutions that have an account with the Federal Reserve. Now it's very important that there are two types of such institutions that have an account at the Federal Reserve two main types and there are several others. One is depository institutions that is banks be them domestic or foreign. And then there are government sponsored enterprises which are quasi-governmental organizations that have been set up by US government suit to support the flow of credit to set a segment of the new US economy. Of particular importance because they have been particularly active as of recent in the federal funds market is federal home loan banks. Now before 2008 the Federal Reserve implemented monetary policy through a so-called corridor system. What does that mean? There was reserve scarcity that is reserve where at the level which was just enough for banks to satisfy their liquidity needs and the reserve requirements that we used to impose. Reserves did not pay any interest. Therefore banks did not have an incentive to hold reserves in excess of what they needed. Therefore they traded reserves in the federal funds market and the prevailing rate was the rate that the Federal Reserve would target. And the Federal Reserve would adjust the supply of reserves so that the prevailing rate would be close to its own target. Now this changed after 2008. The level of reserves in the system ballooned because the Federal Reserve as many other central banks in Europe conducted large scale asset purchases. And therefore it became difficult to conduct monetary policy and to achieve a target for the federal fund rate through reserve scarcity. However in 2008 the Fed had received the authority from Congress to pay interest on reserve balances held by domestic or foreign banks. And of course this interest rate which changed the aim throughout the years but I will call the interest on reserve balances or IORB would set the floor below any bank who would be unwilling to lend. The reason for a bank to lend below IORB if it can get the same amount of interest by simply keeping the money as reserves. And therefore the Federal Reserve used and uses the IORB to keep the federal funds rate within its target. So if this chart kind of characterized the change in monetary policy implementation. On the X axis you have the amount of reserves on the Y axis you have the interest rate. The blue line represents the demand of reserves that can come from liquidity needs of bank they need to satisfy regulatory ratio they need to keep a reserve requirement you name it. Now when there is a little amount of reserves when reserves are scarce in the chart that line will be downward sloping. That is by adjusting the amount of reserves in the system the Federal Reserve can keep the rate in the federal fund market on target. However if you have so many reserves that that line become flat because banks have more reserves than they need. The only way the Federal Reserve can keep the interest rate the federal fund rate close to the target is through setting the interest rate that banks are paid on reserve IORB. And that was the has been the way in which the Federal Reserve has implemented monetary policy since 2008. And overall it has worked reasonably well. The gray area in this chart represents the target range the red line represents the interest that we set the interest on reserve balance is an administrative rate set by the Federal Reserve. And the blue line represents the effective federal fund rate which is the measure of the rate at which transaction happen in the federal fund market. And as you can see they track each other both when rates are low and when rates go up and when rates go down they track each other. However you can see that almost always the blue line is below the red line which is a little bit the leaky floor that was mentioned below. And why is the blue line below the red line that is why doesn't it hover around the red line or wasn't it is actually always on top of the red line since the red line is the interest rate that the Fed pays. On reserve balances. The reason is that there are as I mentioned before institution that trade Fed funds contract which are not depository institution. The most important of this institution nowadays are federal home loan banks because these institutions don't have access to the IORB. They may trade at rates which is below the IORB rate. So a way of solving this problem this problem of a leaky floor would be just to allow this institution to earn an interest rate at the Federal Reserve. And this is exactly what the on an RRP the overnight reverse repo facility does. It allows eligible institution to place money that is to invest if you want overnight with the Federal Reserve at the fixed rate. The on RRP offering rate which is determined by the Federal Reserve itself. Who are the eligible counterparties there are depository institutions but there are also non bank financial institution like money market funds. FHLBs which are the institution that trade in the federal funds market and other government sponsored enterprise that is other entities sponsored by the US government that have access to a Fed account. The investment take the form of a reverse repo transaction collateralized by US treasuries. Now by allowing non bank institution to invest in the Federal Reserve at the fixed rate the on an RRP provides a soft floor if you want for the federal funds rate and for short term rates in general. And that floor it works really well as I will see in a second. Now what is the legal authority for us to do that there is a section of the Federal Reserve act that allows each Federal Reserve bank to buy and sell basically US treasuries. This is a long way of saying that in accordance to the rule and regulation prescribed by the border governor of the Federal Reserve system. Because a repo transaction is the agreement to buy a security with the agreement to resell the security it falls within the scope of this act. Some characteristics about the on an RRP it's run daily at 1245 for half an hour. There is an aggregate limit and we will discuss a little bit rational for that at the end which is all the treasuries held out tried by the New York Fed. There is also a counterparty limit which is 160 billion. It has been raised over time throughout the life of this facility and settlement is not bilateral. It happens on the triparty repo platform. The overnight reverse repo facility was proposed by a Federal Reserve staff in July 2013. There was a period in which we texted it was a very fascinating time. We texted it in a way in which scientists test a facility. We just change the rate of the facility, a very small rate to see the impact it had on the activity in the federal fund market. And in 2014 the Federal Reserve issued a statement saying that it would intend to use the overnight reverse repo facility in addition to the RRP to help control the federal funds rate. And this is the monetary policy implementation framework that we have now. Let me show it with a chart. This is very similar to the chart we had before. On the horizontal line you have the quantity of reserves. On the vertical line you have the rates. On the top is the discount window rate, which is the rate at which bank can borrow from us. On the bottom you have the RRP rate, which is the rate that we pay to banks. And below that you have the RRP rate, which is the rate that the RRP pays to RRP counterparties. As you see the FFR lies usually below these two rates independently of the supply of reserves because the supply of reserve is large enough that we hit the demand of reserve curves in its horizontal segment. How did it work? It worked reasonably well. This is the same slide as before. You can see the red line as before is the interest we pay on reserves to bank. The gray area is our target range. The red line is the overnight reverse repo facility rate. And the blue line is the effective federal funds rate, which is a measure of federal funds rate activity in the market. You see that the yellow line acts as a very good floor for the RRP rate. This is the take up of the facility. We'll discuss this a little bit at the end. Take up was that is how much institution invested in the facility was relatively large at the beginning of the facility. Then as the Fed started contracting its balance sheet as part of the normalization process between the end of 2017 and 2019, the use of the facility went basically to zero. And then it balloon again during the COVID 2020 pandemic because the federal reserve again expanded its balance sheet to meet the issue caused by COVID. Now, the RRP is not the only instance in which the Federal Reserve interacts with money market funds. For instance, in March 2020, the Federal Reserve established a money market funds liquidity facility to help redemption during the March 2020 run. Through this facility, the Federal Reserve made loans available to banks so that they could purchase MMF assets. So this is exactly the opposite kind of facility. With the RRP funds place cash with us. With the MLF, we helped funds meet their redemptions. That is the purpose of the MLF was not monetary policy implementation was to support the flow of credit to household and business by supporting money market funds. If you want, it's a credit facility. And there is also a difference in the way in which this facility were set up. Whereas with the RRP, the Federal Reserve transacts with money market funds with MLF, the Federal Reserve made loans to bank to purchase assets from a method from from money market funds. That is the interaction with money from market funds was much more indirect. That I will also established by through very different segment of the Federal Reserve Act. So we like to finish the presentation the last remaining slides by going through some policy consideration related to the setting up of the on RRP. The first is what is the its impact on reserves. So when a money market fund, let's use the money market fund as an example, because they are the largest user of the facility invest in the RRP. It basically places money with the Federal Reserve. How does it do the so by reducing the money it holds with its custodian bank. Therefore that bank will hold lower reserve balances at the Federal Reserve. Let's make an example. Let's say money market funds invest a hundred dollars in the on RRP. The impact on the Federal Reserve balance sheet will be the following reserves will go down by a hundred dollars and on RRP in our balance sheet will go up by a hundred dollars. That is one of the impact of the on RRP one of the effect of an RRP is that it allows for Federal Reserve liability to be held by a more varied set of institutions, not only the positive institutions, but also for instance money market funds. This is particularly important in times of stress when the Federal Reserve, as it was the COVID-19 pandemic, may want to stimulate the economy by expanding its balance sheet. If the on RRP did not exist, the only way to do that would be to increase in reserves by the positive institution, which would make good pressures on banks to balance sheet themselves. As bank have lots of reasons why they may not want to hold too large an amount of reserves. The on RRP allows the Federal Reserve to expand its balance sheet through a wider set of institutions. So let's make an example. Let's say the Federal Reserve wants to increase its balance sheet by a hundred dollars by buying a hundred dollars worth of treasuries. On our asset side of our balance sheet, treasury will go up by a hundred dollars. Normally we would conduct an operation, we will sell a treasury, we will buy a treasury from a bank and reserves would go up by a hundred dollars. But through the on RRP, we can spread, if you want, the effect of this increase in a hundred dollars worth of asset by having the reserve go up only by a portion of that and part of the take up being done by money market funds. And of course the on RRP rate will be a rate that will determine ultimately the ratio between the amount of our balance sheet, which is held by depository institutions and the amount of our balance sheet, which is held by money market funds and other institutions. I will finish with two slides. One has to do with financial intermediation and the other one with financial stability. One concern when the on RRP was initially set up was that it could crowd out private financing. Why money market fund instead of investing directly with investing with private institution. Now have the option of investing directly with the Federal Reserve and they just may avail themselves of that option and get a headache less for them. Like it's much easier to invest with us than to invest with the private sector. In these, if you see in this chart, this chart shows from 2013 to 2021 the repo investment by US money market funds. The red line is private repo and the blue area is on on RRP repos by money market funds. You see what happens with the COVID pandemic in 2020. They take up by money market fund of the NRP went up dramatically. But at the same time, they reduce their take up of private repos. This is exactly the concern that people had in mind. However, one has to bear in mind that the on RRP does not change the size of the Fed balance sheet. So much of this increase in take up may simply represent a reduction in MMMF lending to bank, which in turns hold less reserves. So its impact for the real economy, maybe less, as this picture seems to suggest. Another concern is impact on financial stability. And here the impact can go on both ways. On the one hand, the on RRP is a liability by the Federal Reserve that is money like has a feature like repos of a money asset. As such, it may displace private money creation by non bank financial institutions and we generally think this is a good thing as non bank financial institutions are inherently run a runnable. So there is a there may be a financial stability benefit in having this facility set up. On the other hand, people were concerned that the availability of a safe option for money market fund could increase the likelihood of a bank run. That is, the money market funds could withdraw in mass from a bank and precipitated a run on the bank on which the money market fund is investing. And this is the reason why the Federal Reserve established all those caps I mentioned at the beginning. I want to just mention that this concern has not materialized during the pandemic. Let me finish up the on RRP overnight diversity of facility together with the interest on reserve balance allows the Federal Reserve to maintain control over short-term money market rates in an environment in which reserves are no longer scarce as they were before. It also increases, and this is an important feature of the facility, the set of institutions that can hold Federal Reserve liabilities diminishing depression on banks when the Federal Reserve exposes balance sheet. Thank you so much. Thank you very much, Marco. So, we will now have a Q&A session. As I said during my introduction, please raise your hand and please also indicate to whom your question is directed at. In the meantime, I would already have a few questions for our panelists and maybe first to Iman and Marco. I saw in Iman's presentation that the recent rate hike in the Eurozone was quite closely translated into money market rates. I mean, this is just an example and it's a recent example, so I think we need some background to be able to properly assess this phenomenon. But would you say that there is a difference in between the US and Europe in that respect, or is it too early to judge? That's one question I have to both of you. And then I have two questions to Kerstin. The first one is about the definition of credit institutions. And you mentioned this EBA report, which I also read, and there it seems that the number of member states have clarified that deposit taking from other financial institutions. Including credit institutions do not or does not constitute deposit taking from the public. So this would not fly under the definition of credit institutions. That's the first one. The second one is when you mentioned this arms length basis that we would contract with money market funds. And there I think I have a more general question on equal treatment. So when you look at what we have currently as requirements for our counterparties to meet, one of them is to be subject to minimum reserves. And as you know, the statute of the ECB and ESCB only allows the ECB to subject credit institutions to minimum reserves. So by definition, we would need to lift that requirement. The same applies to supervision because most of these institutions are not prudentially supervised. The same applies actually also to financial summits because these institutions do not have to meet on funds requirements. So when you speak about arms length transactions, I was a bit surprised because we would have to set up a brand new framework with very derogatory conditions if we wanted to allow these institutions to come into our system. So these are my two questions to you and I will stop here. Thank you. So do you want me to go ahead? Yes, please. Yes, thank you. So, I mean, I think the past through the past through in the in the Euro system, I think it's not, I mean, the question of past through is not very different in the Euro area in the US. I mean, the difference clearly is that in the US there is the overnight, you know, RRP facility in place, as Marco explained very well. Yeah. And we don't have that. Yeah. So on in our case, what happens is that in the repo market in particular, you do see an incomplete past through. Yeah. Because those institutions that have a preference to basically transact on a collateralized basis, yeah, to leave deposits collateralized. Yeah. Basically, their only option is to go to the banks and because the there's a kind of double phenomenon whereby the banks are awash with liquidity because of all this excess liquidity we created and therefore especially at period ends but also outside of quarter ends and year end. They are not very happy to accept this liquidity. Okay. And in our in our system contrary to the Fed, the banks are the only ones who can hold this excess liquidity because we don't have this overnight RRP. So first of all, they're not very happy to accept it. So basically they propose rates that are not very favorable. Yeah. And the second thing is that we also experience in our market collateral scarcity in particular on German French securities. So those securities that are the most liquid and credit worthy. And the reason for this is we, you know, we do have this this diff. Well, first of all, the QE has, you know, taken a lot of securities out of the market. I think this is common with all the major central banks. Yeah. So we hold a significant portion of the debt now. And we do have a securities lending facility that allows to put the securities back into the market, but somehow it is underused. Yeah. I mean, we're still looking at why but but clearly it's it doesn't it doesn't completely mitigate the scarcity that we have on on on the core markets. And the other reason is that indeed we have this, you know, segmentation of bond markets in the area across jurisdictions and therefore some jurisdictions feel the pressure on scarcity more than others. Yeah. So long story short, what happens is this repo market is is a bit under pressure in the system we have today. And therefore we see rates that are sometimes especially appeared and significantly below, you know, the deposit facility rate. I mean, I'd be interested if Marco, if there's something similar in the US, but my, my, my guess is that the overnight RRP actually mitigates a lot of this. Yeah. Then the phenomenon that may be a bit common is maybe the pass through to the Treasury bill market. So this I haven't mentioned because it's, you know, it's it's kind of not not the main part of what we look at when we talk of pass through. But we also are seeing a lot of demand for this Treasury bills and therefore the rates are also somehow below the deposit facility rate. Yeah. And I think this is also a manifestation of scarcity, the same collateral scarcity, but for short term government securities. And I think this in the US, there's the same. Also, because, you know, in a way, the demand does not always the trend in demand does not always meet the trend in supply. Yeah. Because governments may choose that they want to issue less T bills exactly at the moment where investors would like to buy more T bills. Yeah. Do you want me to continue? So I think a man exactly explained the case of the United States in the correct way in the sense that the purpose of the RRP was to make sure that we would be able to implement monetary policy by which we mean keeping the effective funds rate on target. Okay. However, the counterparty at the RRP are not only those institutions that are active in the federal funds market. They are not only banks and GSEs, there are other institutions that have a much bigger imprint in the economy. And there are active in other markets, like exactly as the man said in the repo market. So by allowing institutions which do not trade in fed funds access to the RRP, the facility supported money market rate in general. For instance, money market funds are very active in the euro dollar market, which has been supported by the facility, or by the repo market, which a man mentioned before. Now, if we go a step forward, however, the level of the past through is very heterogeneous across institutions. For instance, the past through of rate increases by in CDs is very different from that in money market share yields. They are very, very different. Additionally, at some work that Gabriella and I have done it, there is a difference even between the past through to retail investors within the money market fund industry and institutional investors within the money market fund industry. So when we move one step away from the institution, then directly interact with the Federal Reserve and with European Central Bank, then we see much more heterogeneous impacts through according to the institution and the type of contract we are looking at. Thank you. Thank you to both. And then I'll leave the floor to Kerstin. Thanks. Maybe first, so to your first question on the definition of credit institutions. I mean, obviously, this question is probably bigger than just looking at the money market fund regulation then has a lot of other impacts. I mean, with and I agree with you with a sort of with my but with my my German sort of law glasses on credit institutions taking funds from other credit institutions would not fall within the definition but credit institutions taking funds from other market participants including funds would still be seen to be taking at least from a German perspective and licensing perspective funds from the public. And I mean, as I said, I think the the relying just on that interpretation is probably a bit bold in the circumstances and a clarification that money market funds could actually use a deposit facility would would certainly be appropriate on on the second point. I mean the way that I think arm's length business was to be understood is very much in contrast to sort of transactions with affiliates and hence at conditions which one might not be willing to give to unrelated parties. I mean, I also realize that if the your system wanted to include mms in the money market, sorry, in the in the monetary policy operations, you would need to come up with a whole different set of entrance criteria, because mirroring what is available for credit institutions would would probably be difficult. Thank you. We have one minute left. Maybe we still have time for a very last question. So, I see that Lamprini Zyaka wants to ask a question. I understand the the whole process takes a bit of of time. While she's allowed to speak. But but bear with us for a second and she she already appeared on screen so you'll be with us in the moment. And you hear me now. Yes, you can hear right. First of all, many thanks to everyone. It was very interesting. There were all the presentations very interesting. I would have a question to Kirsten. And I would like to know you felt in your in your presentation to the fact that the MFMS can take different legal forms depending on national law. And I was wondering whether you can specify or elaborate elaborate a bit further about this. For instance, if in case we have, let's say, an MF that that does not have a legal personality, whether this would, for instance, be overcome or whether you see issues with in this context. Thank you. I realize my camera was not on. Thanks. Yeah, I mean, I think in terms of the different forms that MMS can take is I think that comes from from the way funds are typically set up as in, for example, German funds as a contractual fund with separate compartments of assets. I mean, for the purposes of in transacting in the normal course, each sort of compartment called compartmentalized fund would enter would be seen as a separate, not a separate legal entity obviously but transactions would be sort of allocated to the different compartments. And I think that is one of the challenges when thinking about sort of entrance criteria for funds how one would overcome the fact that you're not looking in all cases at a at a separate legal entity. The fantastic solution at hand right now, but to me that is a question to be addressed in the in the entrance criteria. Many, many thanks. Yes, indeed. It sounds legally also challenging from a lot of different perspectives, but yeah, here we have. Here we are. Exactly. Exactly. Okay. So thank you. Thank you very much to the to the panelists also thank you to the to the audience. This panel is now closed. The next, the next panel will start at four. And the title is towards legal interoperability of retail central bank digital currencies, the comparative law perspective. Thank you to all. Thank you. Thank you everyone. Bye bye.