Overnight Reverse Repurchase Agreements

Prior to the 2008 financial crisis, repurchase operations were used to optimize the supply of reserves to the banking system and to maintain the key rate around the FOMC target for funds. Currently, the desk conducts overnight and long-term repurchase operations to support effective policy implementation and the smooth operation of short-term U.S. dollar financing markets. Resp transactions are carried out with primary broker counterparties for a pre-announced amount, a minimum bid rate and a maximum individual proposal limit, all available on the “Operational Details” page. How much of the portfolio of free cash securities is available for use in RRP operations? The FOMC instructed the Desk to conduct, overnight, RRP (ON RRP) transactions in amounts limited only by the value of the cash securities held at the soma, which are available for such transactions. To determine this value, the desk takes into account several factors, as not all cash securities held in the SOMA are available for such transactions. First, some of the treasury bills held in the SOMA are required to carry out reverse retirement transactions with foreign official and international accounts. Second, some treasury bills are required to support the desk`s securities lending operations. If the desk were to perform RRPs, cash securities as collateral for unpaid RRP maturities would not be available as collateral for ON RRP operations. A pension contract (repo) is a short-term guaranteed credit: one party sells securities to another and agrees to buy them back at a higher price at a later price. The securities serve as collateral. The difference between the initial price of the securities and their redemption price is that of the interest paid on the loan called the pension rate. As part of its post-crisis monetary policy implementation, the Federal Reserve (Fed) sets an interest rate range that is supported by two administered interest rates: interest on reserves (IOR) earned by banks and the supply rate on reverse repurchase operations (ONRP) overnight, which are earned by a wider group of financial institutions.

IOR was the primary monetary policy instrument used to move the federal funds rate within the target range, while the ON-RRP offer rate was used to improve interest rate control.