# Report on the September 2019 U.S. Repo Market Disruption

Date: February 14, 2026

Subject: Analysis of the September 2019 Liquidity Episode in Secured Funding Markets

1. Executive Summary

In mid-September 2019, the U.S. repurchase agreement (repo) market experienced a significant dislocation characterized by a severe imbalance between the supply of and demand for reserve balances. On September 17, 2019, the Secured Overnight Financing Rate (SOFR) spiked to over 5%, with intraday trading in some segments reaching as high as 10%, well above the Federal Reserve’s target range for the federal funds rate.

This report analyzes the episode as a convergence of idiosyncratic liquidity drains (proximate triggers) occurring within a system characterized by an unforeseen scarcity of aggregate reserves (structural vulnerability). The disruption necessitated immediate open market operations by the Federal Reserve Bank of New York to restore interest rate control and market functioning.

2. Market Context and Structural Vulnerabilities (The “Fuel”)

Prior to September 2019, the U.S. financial system was operating under a regime of “normalization” following years of quantitative easing. The stability of the repo market—a critical venue for short-term secured funding and monetary policy transmission—relied on the assumption that the prevailing level of reserve balances was sufficient to meet banks’ liquidity needs.

2.1. Decline in Aggregate Reserves (Quantitative Tightening)

From late 2017 through 2019, the Federal Reserve reduced its balance sheet assets, a process known as quantitative tightening (QT). This mechanically reduced the liability side of the Fed’s balance sheet, specifically reserve balances held by depository institutions. By September 2019, aggregate reserves had declined from a peak of $2.8 trillion to approximately $1.4 trillion, a multi-year low.

2.2. Regulatory Liquidity Constraints

Post-2008 liquidity regulations, specifically the Liquidity Coverage Ratio (LCR) and resolution planning requirements, fundamentally altered bank behavior. Large banking institutions, particularly Global Systemically Important Banks (G-SIBs), were required to hold High-Quality Liquid Assets (HQLA) to survive a 30-day stress scenario.

Crucially, while U.S. Treasuries count as HQLA, reserves (cash) are the most fungible form of liquidity. As reserves dwindled toward the $1.4 trillion level, banks became increasingly reluctant to lend excess cash into the repo market, even as rates rose, effectively hoarding liquidity to ensure regulatory compliance and intraday payment settlement.

3. Proximate Triggers of the Disruption (The “Spark”)

The latent fragility of the reserve environment was exposed by two scheduled market events on September 16, 2019, which simultaneously drained liquidity from the banking system.

3.1. Corporate Tax Payments

September 16 marked a quarterly corporate tax payment deadline. Corporations withdrew cash from money market funds (MMFs) and bank deposit accounts to pay the U.S. Treasury. This resulted in a transfer of approximately $35 billion from the commercial banking system to the Treasury’s General Account (TGA) at the Federal Reserve.

3.2. Treasury Auction Settlements

Coinciding with the tax deadline, settlement occurred for previously auctioned U.S. Treasury securities. Private sector participants (primary dealers and investors) were required to remit cash to the Treasury to settle these purchases. This settlement drained approximately $54 billion in reserves from the banking system.

3.3. Aggregate Liquidity Drain

The combined effect of these two autonomous factors was a net reduction in reserve balances of approximately $90 billion over two business days. This rapid outflow pushed aggregate reserves below the critical threshold required to maintain liquid trading conditions, precipitating the rate spike. The liquidity stress was further exacerbated by segmentation across repo market structures (tri-party, bilateral, and GCF segments), which limited the efficient reallocation of available cash across market participants.

4. Policy Response and Correction

The Federal Reserve responded with both immediate operational interventions and longer-term structural adjustments to the implementation of monetary policy.

4.1. Immediate Intervention (September 2019)

On the morning of September 17, the Federal Reserve Bank of New York intervened to alleviate funding pressures. The Desk conducted an overnight repurchase agreement operation offering up to $75 billion in liquidity; $53 billion was taken up by market participants. These ad hoc open market operations continued daily to ensure sufficient liquidity. Additionally, on September 19, the Federal Reserve lowered the Interest on Excess Reserves (IOER) rate by 30 basis points to 1.80% to further support rate control and market functioning.

4.2. Medium-Term Adjustment (October 2019)

Recognizing that the “lowest comfortable level of reserves” had been underestimated, the Federal Reserve announced on October 11, 2019, that it would purchase Treasury bills at a pace of approximately $60 billion per month. This action was designed to permanently increase the supply of reserves over time, effectively reversing the final phase of quantitative tightening.

4.3. Long-Term Structural Reform (July 2021)

To prevent recurrence and provide a permanent backstop for money markets, the Federal Reserve established the Standing Repo Facility (SRF) in July 2021. Unlike the discretionary operations of 2019, the SRF serves as a standing facility that allows primary dealers and eligible banks to borrow reserves against Treasury and Agency collateral at a commercially adverse rate. This facility effectively places a ceiling on repo rates, ensuring liquidity is available during stress events without requiring emergency intervention.

5. Conclusion

The September 2019 episode demonstrated that the demand for reserve balances is dynamic and nonlinear, particularly in a regulatory environment that incentivizes liquidity hoarding. The crisis revealed that the aggregate level of reserves—previously thought to be “ample” at $1.4 trillion—was insufficient to absorb standard volatility in autonomous factors. The subsequent establishment of the Standing Repo Facility and the shift to a regime of higher structural reserves represent the enduring policy corrections resulting from this event.