The FED would love for hedge funds to INCREASE their cash bond and derivative Arb activity. This would arb away the differential and hedge funds would make a tidy profit in performing this service for the market. The problem is that hedge funds, prop desks, banks, and pretty much everyone DIDN'T step in and arb away the differential. This led to a massive 10%! rate for O/N repo, which is supposed to be a risk free instrument.