What is the difference between Overnight Repo Operations and Term Operations When talking About the Repurchase (Repo) Market?
According to the NY Fed website:
In accordance with the most recent Federal Open Market Committee
(FOMC) directive, the Open Market Trading Desk (the Desk) at the
Federal Reserve Bank of New York will conduct a series of overnight
and term repurchase agreement (repo) operations to help maintain the
federal funds rate within the target range.
Effective the week of October 7, the Desk will offer term repos
through the end of October as indicated in the schedule below. The
Desk will continue to offer daily overnight repos for an aggregate
amount of at least billion each through Monday, November 4, 2019.
Securities eligible as collateral include Treasury, agency debt, and
agency mortgage-backed securities. Awarded amounts may be less than
the amount offered, depending on the total quantity of eligible
propositions submitted. Additional details about the operations will
be released each afternoon for the following day’s operation(s) on the
Repurchase Agreement Operational Details webpage. The operation
schedule and parameters are subject to change if market conditions
warrant or should the FOMC alter its guidance to the Desk.
What is the difference between overnight and term operations? Also, how are these operations are done exactly?
This is coming from the point of view where the media is chattering that the Feds are "injecting" money to the repo market. So I am trying to warp my thoughts around it.
www.newyorkfed.org/markets/opolicy/operating_policy_191004
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As Charles Fox answered:
Overnight repo is a transaction meant to be resolved within the 24hrs of the agreement. The main and most common use for overnight repo (not as amount of transactions but as amount of capital transaction) can be seen between Financial institutions (from minor ones to banks) in order to ensure to gain some interest rate from excess liquidity. A common example is when a institution receives a 100k deposit, the law says it should save 20% of its deposits (20k), and this institution could only loan 50k that day. Therefore it has an excess liquidity of 30k (without considering VaR and other possible variables to make it a simple example). This 30k would go to waste if nothing is done with them, so an overnight repo is a safe to gain some little interest with this excess liquidity while making sure to not overcommit to a term and be at liquidity risk.
A term repo works similar to a fixed term deposit, but with a bigger risk of the asset/bond being traded varying in price causing a higher risk over and of course less liquidity
Overnight repo: I sell this bond to you today and agree to buy it back from you tomorrow.
Term repo: I sell this bond to you today and agree to buy it back from you [next week, next month, ...].
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