Fed Begins Tri-Party Reverse Repos to Drain Banking Reserves

The Federal Reserve said it’s conducting tri-party reverse repurchase agreements as policy makers prepare for the eventual withdrawal of monetary stimulus.

The “small-value” transactions, part of a series of open-market operations that began in 2009, don’t represent any change in monetary policy, according to a statement on the Federal Reserve Bank of New York’s website yesterday. All eligible securities will be used as collateral.

The Fed uses repos and reverse repos to help maintain the level of money in the banking system to keep overnight interest rates close to the central bank’s target. The Fed has held its target rate for overnight loans between banks in a range of zero to 0.25 percent since December 2008. The central bank’s large-scale asset purchases have swelled its balance sheet to $2.87 trillion, close to a record, as policy makers have sought to reduce borrowing costs.

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.

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.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE