Overnight Reverse Repurchase

Understanding Overnight Reverse Repurchase Agreements

An overnight reverse repurchase agreement is a financial transaction in which the Federal Reserve sells Treasury securities on a temporary basis to financial institutions, such as banks and money market funds. In exchange for the securities, these institutions provide the Federal Reserve with cash.

This type of transaction is called a "reverse" repurchase agreement because it involves the Federal Reserve selling securities rather than buying them. The "overnight" aspect of the transaction means that it is only for one night, with the securities being repurchased by the Federal Reserve the following business day.

The purpose of overnight reverse repurchase agreements is to manage the level of reserves in the banking system. By temporarily taking cash out of the system in exchange for Treasury securities, the Federal Reserve can reduce the supply of reserves, which can help to maintain the federal funds rate within its target range.