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Fed Drains $100 Million From Banking System With Reverse Repos

The Federal Reserve drained $100 million in reserves from the banking system when it arranged one-day tri-party reverse repurchase agreements.

The Treasury transaction, part of a series of temporary open-market operations that began in 2009, doesn’t represent any change in monetary policy, according to a statement posted on the Federal Reserve Bank of New York’s website yesterday. Settlement is tomorrow.

In a reverse repo, the Fed lends securities for a set period, temporarily draining cash from the banking system. At maturity, the securities are returned to the Fed, and the cash to its counterparties. The central bank added more than $1 trillion in extra cash to its balance sheet as part of its effort to combat the financial crisis.

The repos were the first in the series of “readiness exercises” to utilize eight new banks and two new primary dealers added last year as counterparties. The Fed began adding counterparties in 2010.

In a tri-party arrangement, a third party functions as the agent for the transaction and holds the security as collateral. JPMorgan Chase & Co. and Bank of New York Mellon Corp. are the only banks that serve in a trade-clearing capacity in the tri-party repo market.

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