Reverse Repo
A transaction where a party purchases securities and agrees to sell them back at a higher price, effectively lending money secured by securities.
What is Reverse Repo?
A reverse repurchase agreement (reverse repo or RRP) is the mirror image of a standard repo transaction: the party that purchases securities (and agrees to sell them back later) is conducting a reverse repo. From this counterparty's perspective, the transaction is a short-term secured loan—they provide cash, receive securities as collateral, and earn interest on the cash lent. The Federal Reserve uses overnight reverse repos (ON RRP) as a key monetary policy tool: by offering counterparties (money market funds, GSEs, banks) the ability to deposit cash at the Fed overnight and earn the ON RRP rate, the Fed effectively sets a floor under short-term interest rates and absorbs excess reserves from the financial system.
Example
In 2021–2022, U.S. money market funds parked over $2 trillion per day in the Fed's overnight reverse repo facility at rates of 0.05%–0.30%—preferring the safety of the Fed's balance sheet over alternatives that paid even less. This massive demand for reverse repos illustrated how the ON RRP facility functions as a floor for short-term money market rates when excess liquidity is abundant.
Source: Federal Reserve Bank of New York — Overnight Reverse Repo