Repurchase agreements (also known as repos) are conducted only with primary dealers; reverse repurchase agreements (also known as reverse repos) are conducted with both primary dealers and with an expanded set of reverse repo counterparties that includes banks, government-sponsored enterprises, and money market funds.
In a repo transaction, the Desk purchases Treasury, agency debt, or agency mortgage-backed securities (MBS) from a counterparty subject to an agreement to resell the securities at a later date. It is economically similar to a loan collateralized by securities having a value higher than the loan to protect the Desk against market and credit risk. Repo transactions temporarily increase the quantity of reserve balances in the banking system.
In a reverse repo transaction, the opposite occurs: the Desk sells securities to a counterparty subject to an agreement to repurchase the securities at a later date at a higher repurchase price. Reverse repo transactions temporarily reduce the quantity of reserve balances in the banking system.
Prior to the 2008 financial crisis, repo operations were used to fine-tune the supply of reserves in the banking system and keep the federal funds rate around the fed funds target established by the FOMC. Currently, the Desk conducts overnight and term repo operations to support effective policy implementation and the smooth functioning of short-term U.S. dollar funding markets. Repo operations are conducted with Primary Dealer counterparties at a pre-announced offered amount, minimum bid rate, and maximum individual proposition limit, all of which are available on the Operational Details page.
The Desk has conducted overnight reverse repo operations daily since 2013. The ON RRP is used as a means to help keep the effective federal funds rate from falling below the target range set by the FOMC. The overnight reverse repo program (ON RRP) is used to supplement the Federal Reserve's primary monetary policy tool, interest on excess reserves (IOER) for depository institutions, to help control short-term interest rates. ON RRP operations support interest rate control by setting a floor on wholesale short-term interest rates, beneath which financial institutions with access to these facilities should be unwilling to lend funds. ON RRP operations are conducted at a pre-announced offering rate, against Treasury securities collateral, and are open to a wide range of financial firms, including some that are not eligible to earn interest on balances at the Federal Reserve.