Reverse Repo

A reverse repurchase agreement (reverse repo) is the mirror image of a repo. From the cash lender's perspective, they purchase securities — typically government bonds — from a counterparty and simultaneously agree to sell them back at a specified date and price. The difference between the purchase and resale prices is the implicit interest, known as the repo rate. The same transaction is a repo from the seller's viewpoint and a reverse repo from the buyer's.

Reverse repos serve two main functions:

• Money-market liquidity management. Banks, money market funds, and corporate treasurers use reverse repos to park cash safely overnight or for short terms, earning a return while holding high-quality collateral against counterparty default.
• Monetary policy implementation. Central banks use reverse repos to drain reserves from the banking system. By selling securities temporarily to commercial counterparties, the central bank absorbs cash and puts upward pressure on short-term rates.

The U.S. Federal Reserve operates an Overnight Reverse Repo Facility (ON RRP), expanded after 2013, which allows eligible counterparties including money market funds to lend cash to the Fed overnight at an administered rate. The ON RRP rate functions as a soft floor for the federal funds target range. Usage surged dramatically in 2021–2022, at times exceeding $2 trillion daily, as money funds found few comparable safe short-term investments amid abundant reserves.

The European Central Bank, Bank of England, and People's Bank of China likewise conduct reverse repo operations as standard open-market tools, though terminology conventions differ. In China, the PBoC's "reverse repos" inject liquidity (because the Chinese convention defines the operation from the central bank's perspective as cash provider).

Reverse repos are generally considered very low risk because they are collateralized and short-dated, but they carry counterparty risk if collateral values fall sharply, as became evident during the September 2019 U.S. repo market stress episode.