The reverse repo is a guarantee for the lender of funds to protect itself with a short-term level of investment, thus creating a door to borrow the security to cover certain short positions. It generally aims to control the money supply throughout the economy. They are also considered safer, as they are primarily treasury securities. The Desk has been performing daily auto-repo operations overnight since 2013. The ON-RSO is used as a means of preventing the effective policy rate from falling below the target range set by the FOMC. The overnight-reverse-repo (ON RRP) program is used to complement the Federal Reserve`s primary monetary policy instrument, excess reserve interest (IÖR) for custodian banks, to control short-term interest rates. ON-RSO operations support interest rate control by setting a floor for short-term wholesale rates, below which financial institutions with access to these facilities should not be willing to lend funds. ON-RSO transactions are carried out at a known-in-advance offer interest rate against guarantees on treasury securities and are open to a large number of financial firms, including some that are not entitled to earn interest on federal reserve assets. Repo operations are taken at the initiative of the trading desks of the New York Fed (The Desk). The Desk implements the monetary policy of the Federal Reserve System at the request of the Federal Open Market Committee (FOMC). There are a number of differences between the two structures. A repo is technically a one-time transaction, while a sell/buy is a pair of transactions (a sale and a buy).
The sale/redemption does not require specific legal documents, whereas a repo usually requires a framework contract between the buyer and the seller (usually the Global Master Repo Agreement (GMRA) ordered by SIFMA/ICMA). For this reason, an increase in risk compared to repo is associated. In the event of default by the counterparty, the absence of an agreement may reduce the legal position on the recovery of collateral. Any coupon payment on the underlying security during the term of the sale/redemption is normally returned to the purchaser of the security by adjusting the cash paid at the end of the sale/redemption. .