Given the nature of their business, primary dealers are more likely to seek financing for their inventories of securities rather than look to invest cash in reverse repos with the Federal Reserve. 6  BIS central bankers’ speeches  operations through tri-party arrangements and an expanded set of counterparties now in place, we’re focusing on additional ways to tap the capabilities. Specifically, reverse repos with expanded counterparties could also be used in an overnight, fixed-rate, full-allotment facility with same-day settlement that directly targets overnight interest rates. Such a facility – which is essentially an extension of IOER to a broader set of counterparties – might help strengthen the floor and tighten control over short-term interest rates by increasing competition in the market and diverting deposits from banks, potentially improving the integration among the various market segments. Reverse repos with non-banks would remove reserves from the banking system. The TDF and term reverse repos are somewhat parallel tools, in that they were initially envisioned to auction a fixed quantity of term investments (deposits or reverse repos) to bank and non-bank counterparties, respectively, in order to drain reserves. Their capabilities have been tested periodically over the past several years through small-value exercises in order to ensure that they’ll be ready to deploy in size if and when needed. Nevertheless, for reasons discussed earlier, achieving an interest rate target through the management of the supply of reserves alone may not offer the best framework for implementing monetary policy in a system with an elevated level of reserve balances.

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.