Overnight Reverse Repurchase Agreement Facility
When the Federal Reserve conducts an overnight RRP, it sells a security to an eligible counterparty and simultaneously agrees to buy the security back the next day. This transaction does not affect the size of the System Open Market Account (SOMA) portfolio, but there is a reduction in reserve balances on the liability side of the Federal Reserve's balance sheet and a corresponding increase in reverse repo obligations while the trade is outstanding. The FOMC sets the ON RRP offering rate, which is the maximum interest rate the Federal Reserve is willing to pay in an ON RRP operation; the actual interest rate that a counterparty receives is determined through an auction process.
The Federal Reserve conducted technical exercises using ON RRPs beginning in September 2013 in order to gain operational experience and garner information about how such operations might be used during the policy normalization process.
The ON RRP offering rate (the maximum interest rate that the Federal Reserve is willing to pay on ON RRP operations) plays a role for ON RRP counterparties that is similar to the role played by the interest rate on excess reserves for depository institutions. That is, in general, any counterparty that can use the ON RRP facility should be unwilling to invest funds overnight with another counterparty at a rate below the ON RRP rate, just as any depository institution eligible to earn interest on reserves should be unwilling to invest funds overnight with another counterparty at a rate below the interest rate on excess reserves. The Federal Reserve currently conducts ON RRP operations with many counterparties, covering a wide range of entities (the list of ON RRP counterparties is available here).