Glossary term
Reverse Repurchase Agreement
A reverse repurchase agreement is a transaction in which one party buys securities and agrees to sell them back later.
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What Is a Reverse Repurchase Agreement?
A reverse repurchase agreement, or reverse repo, is a transaction in which one party buys securities and agrees to sell them back later at a specified price. It is the mirror image of a repurchase agreement, viewed from the buyer's side.
In Federal Reserve operations, a reverse repo means the Fed sells a security to an eligible counterparty and agrees to buy it back later. The transaction temporarily absorbs cash from the financial system and provides securities as collateral.
Key Takeaways
- A reverse repo is a collateralized short-term cash investment from the buyer's perspective.
- It is the opposite side of a repo transaction.
- The Fed uses overnight reverse repos as a monetary policy implementation tool.
- Reverse repos can affect reserve balances, short-term rates, and money-market liquidity.
- The meaning depends on whose balance sheet is being described.
How Reverse Repos Work
One party buys a security and agrees to sell it back at a later date. The difference between the purchase price and resale price implies an interest rate. The buyer has temporarily invested cash against collateral. The seller has temporarily borrowed cash against securities.
Because repo and reverse repo describe opposite sides of the same transaction, language can be confusing. What is a repo for one party is a reverse repo for the other.
Repo and Reverse Repo Compared
Perspective | Cash Movement | Securities Movement |
|---|---|---|
Repo seller | Receives cash now | Sells securities now and repurchases later |
Reverse repo buyer | Provides cash now | Buys securities now and resells later |
Federal Reserve ON RRP | Fed receives cash | Fed temporarily provides securities |
Why the Fed Uses Reverse Repos
The Federal Reserve's overnight reverse repurchase agreement facility helps support control of the federal funds rate and other short-term interest rates. It gives eligible counterparties a place to invest cash overnight at a rate set by the Fed, which can help put a floor under money-market rates.
The operation does not permanently change the size of the Fed's securities portfolio. It changes the liability side of the Fed's balance sheet while the trade is outstanding.
Market Context
Reverse repos can grow when money-market funds, government-sponsored enterprises, or other eligible counterparties have cash to place and the Fed's offered rate is attractive relative to other overnight options. High usage can signal abundant short-term cash seeking safe collateralized placement.
The facility is technical, but it matters because it sits near the plumbing of short-term funding markets. It helps connect the Fed's policy-rate setting to actual market rates.
The Bottom Line
A reverse repurchase agreement is a short-term collateralized transaction viewed from the cash provider's side. In central-bank context, reverse repos are also a policy tool for managing short-term rates and liquidity.