On any business day, between 12:45 and 1:15 p.m. Eastern, the Open Market Trading Desk at the Federal Reserve Bank of New York runs an auction. It sells Treasury securities from the System Open Market Account and agrees to buy them back the next morning. The difference between the sale price and the repurchase price is an interest rate the Federal Reserve pays. The facility is called the Overnight Reverse Repurchase Agreement facility, or ON RRP. Its stated purpose is to keep the federal funds rate from falling below the target range the Federal Open Market Committee sets. Its observed use, by the Fed’s own research, is something else: a place where money market funds park enormous sums at a risk-free rate, and a facility whose eligibility rules had to be tightened in 2023 because some funds were being organized specifically to access it.
This is not a story about a secret slush fund. It is a story about a technical tool with a distributional footprint that its designers did not fully anticipate, and about what happens when a central bank creates a deposit-like account for institutions that are not banks.
What a reverse repo actually is
A repurchase agreement, or repo, is a short-term secured loan. One party sells a security and agrees to buy it back later at a slightly higher price. The difference is interest. A reverse repo is the same transaction seen from the other side: the party buying the security and reselling it is lending cash. When the New York Fed conducts a reverse repo, it is borrowing cash from a counterparty and posting Treasury securities as collateral. The New York Fed’s own FAQ states that the difference between the sale price and the repurchase price, together with the time between them, “implies a rate of interest paid by the Federal Reserve on the transaction.”
That sentence matters. The Fed is not spending money in the way Congress appropriates it. It is paying interest on a liability. When an ON RRP transaction settles, the New York Fed’s triparty agent moves cash from the counterparty to the Fed. According to the FAQ, this “reduces bank reserve liabilities on the Federal Reserve’s balance sheet and increases RRP liabilities by an equal offsetting amount.” The Fed’s balance sheet does not shrink. Its liabilities change composition: bank reserves go down, reverse repos go up.
The mechanics, precisely
The ON RRP is a standing facility. The FOMC sets the offering rate. The Desk conducts the operation every business day. The per-counterparty limit is $160 billion. Eligible counterparties include primary dealers, banks, government-sponsored enterprises, and 2a-7 money market funds. The minimum proposition is $1 million, in $1 million increments. If total propositions are less than the available securities, everyone who bids gets the offering rate. If propositions exceed the limit, awards go to the lowest rates first, and the stop-out rate can be any value at or below the offering rate, including a negative rate.
The offering rate moves with policy. In the July 26, 2023 FOMC implementation note, the Committee directed the Desk to conduct standing overnight reverse repurchase agreement operations at an offering rate of 5.3 percent with a per-counterparty limit of $160 billion per day. The current New York Fed FAQ lists a 3.75 percent offering rate, reflecting subsequent policy easing. The rate is not a market outcome. It is an administered price.
Who actually uses it
The Fed’s own research is unusually direct on this point. A December 2023 FEDS Note by Samuel J. Hempel, Calvin Isley, R. Jay Kahn, and Patrick E. McCabe reports that money market funds “provided 91% of the facility’s average daily volume in 2022.” The same note documents the scale: ON RRP volumes rose from $10 billion at year-end 2020 to $2.5 trillion at year-end 2022.
That is not a rounding error. It is a transformation of the Fed’s liability structure. In 2020, the facility was a minor tool. By the end of 2022, it was absorbing trillions of dollars of overnight cash from a narrow set of institutions, overwhelmingly money market funds.
The New York Fed publishes the list of reverse repo counterparties. It is a public, dated record. It includes money market funds managed by BlackRock, Fidelity, Vanguard, JPMorgan, Goldman Sachs, Morgan Stanley, Federated Hermes, and many others. The list also includes banks and government-sponsored enterprises such as the Federal Home Loan Banks, Fannie Mae, and Freddie Mac. But the Fed’s own data leave no doubt about which category dominates the volume.
The puzzle the Fed’s researchers found
If the ON RRP were simply a subsidy for parking cash, money market funds would use it and nothing else. The FEDS Note found something more complicated. Between January 2021 and June 2022, money market funds’ investments in the ON RRP rose by $2 trillion, while their private repo lending fell by almost $500 billion. But the note also found that “despite MMFs’ increased ON RRP usage, they continued to lend in private repo markets at rates below the ON RRP rate.” And aggregate private repo volumes held steady, because dealers turned to affiliates to replace the funding they lost from money funds.
Why would a fund lend at a rate below what the Fed offers? The note gives two reasons. First, funds want to maintain relationships with dealers. Second, the ON RRP window is only open from 12:45 to 1:15 p.m., and funds continue to receive investor flows after that window. Private repo offers late-day flexibility that the Fed facility does not. The note reports that on average over all of 2022, roughly 40 percent of MMF private repo lending was at rates below the ON RRP rate.
This finding cuts against a simple narrative. The facility did not simply vacuum up all money fund cash. It set a floor, and some funds chose to lend below that floor for operational reasons. The transfer is real, but it is not the whole story of what money funds do with their cash.
The drafting record: a facility that drifted
The most revealing document in this record is not the FAQ or the FOMC directive. It is the April 25, 2023 announcement by the New York Fed changing eligibility for the RRP. A legal update by the law firm Mayer Brown describes the change: “Due to concerns about the use of RRP by some money market mutual funds in a way contrary to FOMC’s intent, the FRBNY announced new changes to the program. The changes are intended to restrict the program to only money market funds that seek to deposit excess cash in connection with the fund’s normal investment operations.”
The same update states that the changes “seek to prevent the use of the RRP as a means for a person to obtain a de facto Fed account.” Under the new rules, a money market fund must represent whether it is organized for the purpose, in whole or in part, of accessing the RRP. A fund organized for a single beneficial owner, or one that exhibits similarities to such a fund, generally will be deemed ineligible.
Read that carefully. The New York Fed is saying that some money market funds were being set up not as ordinary cash management vehicles but as conduits to the Fed’s balance sheet. The facility was designed to provide a floor for a broad set of institutions that cannot earn interest on reserve balances. Insured depository institutions can hold reserves at the Fed. Money market funds cannot. The ON RRP gave them a deposit-like account at the central bank. The 2023 change was an admission that the line between “broad access for monetary policy purposes” and “a de facto Fed account for a single wealthy owner” had been crossed.
What the record does not show
It is tempting to put a dollar figure on the interest paid to money funds through the ON RRP. The retrieved sources do not provide one. The FEDS Note gives volumes and rates. The FOMC directive gives the offering rate. The FAQ gives the mechanics. But no primary source in this record states cumulative interest paid to ON RRP counterparties over a defined period. Any aggregate dollar claim would require data the record does not contain.
What the record does show is the structure. A facility built to set a rate floor became, by the Fed’s own measurement, a dominant destination for money market fund cash. Its eligibility rules had to be tightened because some funds were organized to access it. The beneficiaries are the shareholders of the money market funds that used the facility, and the asset managers who earn fees on those funds’ assets. The question the record leaves open is how much the drift cost, and who should have been counting.
That is the distributional forensics of the ON RRP. It is not a scandal. It is a design that treated a central bank liability as a neutral technical tool, and in doing so created a risk-free deposit account for a set of institutions that were never meant to have one. The 2023 eligibility change is the Fed’s own acknowledgment that the tool had drifted from its stated purpose.
Frequently asked questions
Is the ON RRP the same as quantitative easing? No. QE involves the Fed buying assets, which expands reserves. The ON RRP is a liability swap: it moves cash from bank reserves to reverse repos. The SOMA portfolio stays the same size. The FAQ states that securities sold temporarily under repurchase agreements continue to be shown as assets held by the SOMA.
Does the Fed lose money on the ON RRP? The Fed pays interest on the reverse repo. That interest is an expense. The retrieved record does not document how that expense flows through to the Fed’s remittances to the Treasury, so no dollar figure can be assigned here.
Why not just let money funds earn interest on reserves? Only depository institutions can hold reserve balances at the Fed. Money market funds are not depository institutions. The ON RRP was created to give them a comparable option, which is precisely why the 2023 eligibility change focused on funds organized to exploit that option.
How large is the facility now? The New York Fed publishes daily operation results. The current FAQ lists a 3.75 percent offering rate and a $160 billion per-counterparty limit. Volumes have declined from the 2022 peak as the Fed has reduced its balance sheet and money fund assets have shifted.
Where can I find the counterparty list? The New York Fed publishes the list of reverse repo counterparties, along with additions and removals, on its website. The list is a public record of which institutions can access the facility.