They don’t, however, reduce the size of the participating bank’s balance sheet, as they substitute reserve balances with a less liquid instrument. Reverse repos are a type of open market operation in which eligible counterparties place cash at the Federal Reserve in return for securities from the Fed’s portfolio. Technically structured as a sale and repurchase agreement, a reverse repo is economically equivalent to a collateralized investment with the Fed (with the opposite flow of cash from a repo, the traditional liquidity-adding open market operation described earlier). These transactions are arranged as auctions between the New York Fed and the Desk’s traditional primary dealer counterparties, as well as with an expanded set of counterparty types, including money market funds and GSEs, that typically provide large amounts of short-term funding to the financial markets.13 Reverse repos were initially envisioned to be used as a term, fixedquantity tool. However, with the necessary operational infrastructure to support reverse repo  11  Permanent operations such as asset sales would also remain in the Desk’s toolkit and would result in a reduction in the size of the Fed’s securities portfolio and balance sheet. 12  Operational exercises for both mortgage-backed security purchase and sale operations using the Desk’s proprietary trading system, FedTrade, were started on November 21, 2013. 13  The expanded set of counterparties is intended to enhance the capacity of the Desk’s reverse repo operations beyond that provided solely by the primary dealers.
This should reduce downward pressure on money market rates. Meanwhile, the availability of risk-free assets to a broader pool of counterparties could help to satisfy demand when the appetite for safe assets by those counterparties increases, but only indirectly. The Fed’s counterparty may hold a risk-free asset on its balance sheet – a reverse repo with the Fed collateralized by risk-free securities. However, the securities sold to the counterparty are in the tri-party system, making them unavailable for the counterparty to satisfy margin requirements. That said, to the extent that the counterparty switches its investments from other high-quality  14  A separate, overnight reverse repo facility has long existed as an investment vehicle for foreign central banks and international accounts that hold dollars in their accounts at the New York Fed. Investments in this program are pooled and are arranged in mutually agreed-upon amounts. Reverse repos with foreign official and international accounts are reported as a separate line item in the Board of Governors’ weekly H.4.1 statistical release on factors affecting reserve balances. 15  In practice, the size of the operation would be limited by the lesser of the level of excess reserves or the amount of securities held in the SOMA portfolio. BIS central bankers’ speeches  7  assets to reverse repos with the Federal Reserve, the distribution of safe assets within the system could become more efficient. This type of facility represents an efficient tool from an operational and market-functioning standpoint as well.