Federal funds purchases and security repurchase agreements are a type of short-term borrowing. In the flow of funds accounts, this category excludes transactions carried out entirely among U.S.-chartered depository institutions, which are classified as net interbank claims (shown on tables F.203 and L.203). Also, for some sectors that both lend and borrow in this market, only a net federal funds and security repurchase agreement position is shown.
Federal funds are overnight borrowings by a depository institution to maintain its required reserve balance at the Federal Reserve. The interest rate at which such borrowings are done is called the federal funds rate.
A security repurchase agreement, also called a repo, is the sale of securities together with an agreement for the seller to buy back the securities at a later date. Repurchase agreements are viewed as collateralized loans, with the difference between the sale price and the repurchase price of the security constituting the interest payment. Repurchase agreements (and reverse repurchase agreements) are often carried out by the Federal Reserve System in order to temporarily inject reserves into (or remove reserves from) the banking system and withdraw them when they are no longer needed (or replace them when the need returns). Government securities dealers use repurchase agreements to finance their inventories.
Because some sectors do not report federal funds purchases or sales separately from security repurchase agreements, it is not possible to show net purchases and sales of the two items individually. Due to the differences in the timing of recording sales and purchases and the short-term nature of many repos, the discrepancy for this instrument is often large.