A reverse repurchase agreement (reverse repo or RRP) is a short-term, collateralized financing arrangement in which a market participant buys securities from another party with an agreement to sell them back later. The transaction transfers cash from the buyer to the seller and uses the securities as collateral, reducing credit exposure for the buyer.
In a reverse repo, the cash provider buys securities from the other party with an agreement to sell them back later. The initial sale of securities to the cash provider drains liquidity from the market, while the securities are held as collateral. The difference between the purchase price and the repurchase price represents the financing cost. RRPs are commonly overnight or short-term, and are widely used in money markets and by central banks to manage liquidity and help guide short‑term rates. The reverse repo is the mirror image of a repo transaction and is often used by central banks to absorb cash from the banking system.
In the United States, central banks and large money-market participants use overnight reverse repurchase agreements as part of open market operations to help set a floor on short-term rates and to manage reserve balances as policy changes or market conditions evolve.
RRPs are secured by high-quality collateral, which lowers credit risk compared with unsecured loans. Market risk can arise if collateral prices move or if counterparties face liquidity constraints; operational risk exists as with any short‑term facility.
A money market fund enters into an overnight reverse repo with a primary dealer, providing cash in exchange for U.S. Treasury securities with a commitment to sell them back the next day.
Repurchase Agreement (Repo) · Monetary Policy Operations · Overnight Reverse Repurchase Agreement (ON RRP) · Open Market Operations · Federal Reserve Balance Sheet · Liquidity Management