Fed conducts a repurchase agreement (repo) and reverse repo with a Primary Dealers
Fed conducts a repurchase agreement (repo) and reverse repo with a primary dealers
How Repo and Reverse Repo Operations Work (with Primary Dealers)
When the Fed conducts a repo, it injects cash (liquidity) into the financial system. As a result, reserves and deposits in the banking system increase. In contrast, when the Fed conducts a reverse repo, it absorbs or drains cash from the system. This causes reserves and deposits in the banking system to decrease, as they are temporarily removed for the duration of the transaction.
In these transactions, U.S. Treasury securities are used as collateral. However, the collateral itself does not typically appear on the main accounting statements (balance sheets) of the parties involved. Instead, the exchange and return of collateral are detailed in the transaction records and footnotes, rather than shown as direct changes on the balance sheet. The focus of the accounting entries remains on the movement of cash (reserves and deposits) rather than the collateral itself.
Fed conducts a repurchase agreement (repo) with a primary dealer
The Federal Reserve takes $200 million worth of securities as collateral from the Primary Dealer. In exchange, the Fed creates a $200 million deposit for the Primary Dealer by crediting $200 million reserves to its bank. This increases both the Primary Dealer’s balance at its bank and the banking system’s total reserves.
Fed conducts a reverse repo agreement with a primary dealer
A reverse repo is essentially the opposite of a repo transaction. In a reverse repo, the Federal Reserve (Fed) lends out $50 million worth of securities as collateral to primary dealers in exchange for reserves. These reserves are cleaned temporarily from the balance sheet. This decreases both the Primary Dealer’s balance at its bank and the banking system’s total reserves.
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