Reverse Repo¶
A reverse repurchase agreement (reverse repo) is a short-term transaction in which one party buys a security — typically a Treasury — and agrees to sell it back the next day at a slightly higher price, earning the difference as interest. From the cash lender's perspective it is a collateralized overnight loan. The Federal Reserve's Overnight Reverse Repurchase Agreement Facility (ON RRP) is the dominant institutional form, setting the effective floor under all U.S. money market rates.
HOW IT WORKS¶
The cash lender buys securities from a counterparty and receives them back the following day at a pre-agreed higher price. The price difference represents one day of interest:
Interest = Principal × Rate × (Days / 360)
The Fed's ON RRP facility lets eligible counterparties — primarily money market funds — park cash directly at the Fed overnight at the administratively set ON RRP rate, which sits at the bottom of the FOMC's target range. Because that rate is risk-free, no rational lender accepts less in the open market, making it the system-wide rate floor. Daily take-up volume, reported by the New York Fed, is a direct read on excess cash in the system. When ON RRP balances drain, quantitative tightening begins absorbing bank reserves rather than the RRP buffer — shifting the underlying liquidity regime.
IN TAPEBOARD¶
Tapeboard surfaces ON RRP balance data as a core liquidity indicator. Traders monitor daily take-up to gauge whether QT is consuming the RRP buffer or biting directly into reserves. The spread between prevailing repo rates and the ON RRP rate flags whether collateral or cash is the scarce resource. A sudden spike in RRP balances is treated as a risk-off signal; a sustained drain toward zero prompts closer watch on reserve adequacy and funding market stress.