• The Fed uses repurchase agreements, also called "RPs" or "repos", to make collateralized loans to primary dealers. In a reverse repo or “RRP”, the Fed borrows money from primary dealers. The typical term of these operations is overnight, but the Fed can conduct these operations with terms out to 65 business days.

• The Fed uses these two types of transactions to offset temporary swings in bank reserves; a repo temporarily adds reserve balances to the banking system, while reverse repos temporarily drains balances from the system.

• Repos and reverse repos are conducted with primary dealers via auction. In a repo, dealers bid on borrowing money versus various types of general collateral. In a reverse repo, dealers offer interest rates at which they would lend money to the Fed versus the Fed’s Treasury general collateral, typically Treasury bills.

Among the tools used by the Federal Reserve System to achieve its monetary policy objectives is the temporary addition or subtraction of reserve balances via repurchase and reverse repurchase agreements in the open market. These operations have a short-term, self-reversing effect on bank reserves.

Repurchase agreements are made at the initiative of the trading desk at the New York Fed (“the Desk”). The Desk implements monetary policy for the Federal Reserve System at the behest of the Federal Open Market Committee (FOMC).

Repos are the most common form of temporary open market operation, and are used to temporarily add balances to those already in the system as a result of securities purchased and held in the SOMA portfolio. The SOMA portfolio is grown via securities purchases, also called permanent open market operations.

RPs and reverse repurchase transactions are particularly useful in offsetting temporary swings in the level of bank reserves caused by such volatile factors as float, currency held by the public and Treasury deposits at Federal Reserve Banks.

While the mechanics of a repo involve buying and then reselling securities at a set price and a set time, at its financial essence, a repo is a collateralized loan. Fed repos can be conducted for terms anywhere from one to 65 business days. They are usually overnight, though rarely longer than 14 days.