Overnight Reverse Repurchase Agreement Facility (ON RRP) Definition

The Overnight Reverse Repo (ON RRP) facility is a monetary policy tool employed by the Federal Reserve to help control short-term interest rates and manage market liquidity.

It involves transactions between the Federal Reserve and eligible financial institutions, such as banks, money market funds, and other institutional investors.

What is the Overnight Reverse Repo (ON RRP) facility?

In an overnight reverse repo transaction, the Federal Reserve sells Treasury securities to eligible financial institutions with an agreement to repurchase them the next day at a predetermined price.

In effect, the Fed is borrowing cash from these institutions on an overnight basis in exchange for collateral in the form of Treasury securities.

The interest rate paid by the Fed on these transactions is called the offering rate and is determined by the Federal Open Market Committee (FOMC). This rate serves as a floor for short-term interest rates, influencing the overall market rates.

How does the ON RRP affect market liquidity?

The ON RRP plays an important role in shaping market liquidity and maintaining stability in the money markets. Its effects on market liquidity include:

Drains Excess Reserves

By allowing financial institutions to lend their excess reserves to the Federal Reserve, the ON RRP helps remove excess liquidity from the banking system, reducing the overall supply of reserves available for lending in the money markets.

Establishes a Floor on Short-Term Interest Rates

The ON RRP offered rate acts as a floor for short-term interest rates, ensuring that financial institutions do not lend in the market at rates lower than what they can earn through the ON RRP.

Stabilizes Money Market Rates

During periods of market stress or volatility, the ON RRP can help stabilize money market rates by providing a risk-free investment option for financial institutions, reducing the potential for disruptions in money market rates.

Complements Other Monetary Policy Tools

The ON RRP works in conjunction with other monetary policy tools, such as the interest rate on reserve balances (IORB rate, to maintain control over short-term interest rates and manage liquidity conditions in the financial system.

Related Terms

Reverse Repo (RRP)

A reverse repurchase agreement (RRP), or “reverse repo“, involves the purchase of securities with the promise to sell them at a higher price at a future date. For the party selling the security (and agreeing to repurchase it in the future), it is a repurchase agreement (RP) or repo; for the party on the other […]

Scarce Reserves Regime

The scarce reserves regime refers to a monetary policy framework in which reserve balances held by banks are relatively low,.

Repo (RP)

A repo is a short-term secured loan: one party sells securities to another and agrees to repurchase those securities later at a higher price.

Ample Reserves Regime

The ample reserves regime refers to a framework in which the central bank ensures that there is a large amount of excess reserves in the banking system.

Federal Reserve

The Federal Reserve is the central bank of the United States. The Federal Reserve often referred to as the Fed, is an independent entity that was established by Congress on December 23, 1913. Prior...

Babypips

Overnight Reverse Repurchase Agreement Facility (ON RRP)