What Is Overnight Reverse Repurchase Agreement
In the context of a repo transaction, the office acquires treasury securities, agency debt securities or mortgage securities (MBS) from a counterparty subject to an agreement to resell the securities at a later date. It is economically similar to a loan secured by securities of a higher value than the loan to protect the office from market and credit risks. The reversal of the amount of reserve deposits in the banking system temporarily increases. Prior to the 2008 financial crisis, repo operations were used to refine the supply of reserves in the banking system and to keep the federal funds rate around the FOMC`s federal funds target. Currently, the office conducts day-to-day and term repo operations to support the effective implementation of policies and the proper functioning of short-term U.S. dollar funding markets. Repo transactions are conducted with the principal broker counterparties at an advertised offer amount, a minimum offer rate and a maximum individual offer limit, all of which are available on the Operational Details page. If a positive interest is assumed, it can be assumed that the PF buyback price is higher than the initial PN selling price. What should the FOMC do in the future? The secular decline in interbank lending suggests that the days of alignment with the federal funds rate are numbered. In our view, the Fed should be prepared to target an interest rate that results from the short-term guaranteed market, where most financing operations currently take place. Focusing on the overnight guaranteed rate (SOFR) would also help accelerate the ongoing transition of LIBOR. .
