What Is A Reverse Purchase Agreement?

A reverse repurchase agreement, or “reverse repo”, is the purchase of securities with the agreement to sell them at a higher price at a specific future date.

Repos are classified as a money-market instrument, and they are usually used to raise short-term capital.

What is overnight reverse repurchase agreement?

A reverse repurchase agreement conducted by the Desk, also called a “reverse repo” or “RRP,” is a transaction in which the Desk sells a security to an eligible counterparty with an agreement to repurchase that same security at a specified price at a specific time in the future.

What are US government repurchase agreements?

A repurchase agreement (repo) is a form of short-term borrowing for dealers in government securities. In the case of a repo, a dealer sells government securities to investors, usually on an overnight basis, and buys them back the following day. Repos are typically used to raise short-term capital.

What is the difference between a repurchase agreement and a reverse repurchase agreement?

The reverse repo is the final step in the repurchase agreement closing the contract. In a repurchase agreement, a dealer sells securities to a counterparty with the agreement to buy them back at a higher price at a later date. The dealer is raising short-term funds at a favorable interest rate with little risk of loss.

Why do banks use repurchase agreements?

The Purpose of Repurchase Agreements

For example, the Federal Reserve can buy T-bills or bonds to temporarily increase the amount of money in its reserves. Or it can sell government securities to reduce the amount of money in circulation. Repurchase agreements offer a source of short-term funding.