The Federal Reserve announced that it had drained $180 million in temporary reserves from the banking system when it arranged eight-day tri-party reverse repurchase agreements with JP Morgan Chase & Co (NYSE: JPM) and Bank of New York Mellon Crop (NYSE: BK).
The transaction is one of the many tools that the Federal Reserve is making use of for an eventual withdrawal of the central bank’s unprecedented stimulus of the financial system. Federal Reserve officials announced the tri-party reverse repo operational readiness program November 30th. The Fed also said that the new program doesn’t represent any new change in policy.
The repos will settle on Wednesday. In a reverse repo, the Federal Reserve sell securities for a set period, temporarily lowering the amount of money available in the banking system. At maturity, the securities are returned to the Fed and the cash to the 18 primary dealers that act as counterparties for the central bank’s transactions.
In a tri-party arrangement, a third party serves as an agent for the transaction and holds the security as collateral. Currently JP Morgan Chase & Co and Bank of New York Mellon that are the only two firms that serve in a trade-clearing capacity in the tri-party repo market.
