The Federal Reserve drained $260 million in temporary reserves from the banking system by arranging five-day tri-party reverse repurchase agreements with money-market funds for the first time.
Settlement is tomorrow. In a reverse repo, the central bank sells 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 the counterparties in the transactions.
The central bank is putting the infrastructure in place to remove or neutralize the more than $1 trillion in extra cash from the Fed’s balance sheet even as policymakers contemplate buying additional securities to ensure that the economic recovery takes hold. The operation, part of a series that began last year, doesn’t represent any change in monetary policy.
The number of counterparties used for reverse repurchase agreements was expanded in August to add money-market funds managed by 14 firms, including Fidelity Investments and Goldman Sachs Group Inc. The new firms aren’t eligible to participate in other transactions. Today’s transaction included the 18 primary dealers that serve as counterparties to open market operations.
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.
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