I think it's called a Reverse Repo?
I'm pretty sure thats how they get rid of excess liquidity.
I might be way off though, I really dont have too much knowledge on this.
Does anyone else really? lol
Here, read all this and call me in the morning, haha from FED website
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
There are two main types of settlement methods for repos: triparty and “delivery vs payment” or DVP. Fed repos are done via triparty settlement,
which means that the Fed and the primary dealers use a triparty agent to manage the collateral. In a triparty repo, both parties to the repo must have
cash and collateral accounts at the same triparty agent, which is by definition also a clearing bank. The triparty agent will ensure that collateral
pledged is sufficient and meets eligibility requirements, and all parties agree to use collateral prices supplied by the triparty agent.
The Desk selects winning propositions on a competitive basis. Each dealer is requested to present the rates they are willing to pay for the agreements
versus various types of collateral. The three types of general collateral, or GC, the Fed accepts are marketable U.S. Treasury securities (including
STRIPS and TIPS), certain direct U.S. agency obligations, and certain agency “pass-throughs” (or Mortgage Backed Securities, often called MBS).
The significance of the “GC” designation on the collateral is that GC collateral is fungible. That is, the Fed is not looking for specific
securities; rather it is looking for any of the eligible securities that do not have scarcity value. As such there are a number of securities that
would satisfy the requirements, and neither the dealer nor the Fed needs to know which specific security or securities are going to ultimately be
pledged to a winning proposition. The Desk establishes relative values across the three collateral types, and then uses these values to select the
best bids presented.
The New York Fed makes payment for the securities by crediting the reserve account of the dealer's triparty agent, a commercial bank. This act of
crediting the bank's account actually creates reserve balances. When the repo matures, the dealer returns the loan plus interest, and the Fed returns
the collateral. The return of funds to the Fed extinguishes the reserves that were originally created by the repo.
The collateral pledged by dealers towards the repo has a “haircut” applied, which means they are valued at slightly less than market value. This
haircut reflects the underlying risk of the collateral and protects the Fed against a change in its value. Haircuts are therefore specific to classes
of collateral. For example, a U.S. Treasury bill might have one haircut rate, while an agency coupon might have a different haircut.
Fed reverse repos are settled DVP, where securities are moved against simultaneous payment. In this case, the Fed sends collateral to the dealers’
clearing bank, which triggers a simultaneous movement of money against the security. At this point, reserve balances are extinguished. When the deal
matures, the dealer sends the collateral back to the Fed DVP, which triggers the simultaneous return of the dealer’s funds. This act re-creates the
reserve balances that were extinguished on the front leg of the transaction.
Market participants frequently use repurchase agreements and RRP transactions to acquire funds or put funds to use for short periods. However,
transactions not involving the central bank do not affect total reserves in the banking system.
[edit on 9-2-2010 by GreenBicMan]
[edit on 9-2-2010 by GreenBicMan]