Reverse Repo

CFA Level II Economics
#1

How are repo/reverse repo and reserves at the federal reserve related? I saw this in a recent Reuters article “Deposits are finding their way into money market funds which invest in reverse repos. Higher reverse repo usage, in turn, effectively cuts reserves.”

My understanding was that banks use cash/reserves to perform reverse repo transactions so they can earn interest on their available funds. I believe I am missing something. Are banks putting their money into money market funds which perform reverse repo transactions therefore funds that could have been reserves at the fed are no longer available?

#2

Reverse repurchase agreements (reverse repos) involve the money market fund lending money to a counterparty in exchange for collateral, such as government securities. As a result, when money market funds invest in reverse repos, they are essentially withdrawing cash from the banking system and transferring it to other parties. This reduces the amount of money that banks have on hand to lend to each other, which can result in a decrease in the available reserves in the banking system.

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