What is the overnight reverse repo facility?

The overnight reverse repurchase agreement facility, or ON RRP, allows eligible counterparties to place cash with the Federal Reserve overnight in exchange for Treasury securities from the Fed’s System Open Market Account. The Fed agrees to repurchase the securities on the next business day. Eligible counterparties include money market mutual funds, banks, primary dealers, and government-sponsored enterprises.

What is the difference between a repo and a reverse repo?

The description depends on which side of the transaction is being discussed. In a repo operation, the Federal Reserve buys securities and agrees to sell them back later, supplying cash and increasing reserve balances in the banking system. In a reverse repo operation, the Federal Reserve sells securities and agrees to buy them back later, taking in cash overnight. Both are collateralized transactions used to support the Fed’s implementation of short-term interest-rate policy.

Why has overnight reverse repo usage fallen so sharply?

ON RRP usage has declined largely because money market funds shifted cash toward Treasury bills and private repo transactions when those investments offered more attractive returns. The change reflects where money funds choose to invest short-term cash. It should not be treated as a simple one-for-one measure of banking-system stress or available bank reserves. By mid-2026, Federal Reserve reporting showed ON RRP usage near zero on most days.

Does a near-zero overnight reverse repo balance mean a liquidity crisis is coming?

No. A near-zero ON RRP balance does not, by itself, signal an imminent liquidity crisis. It means the facility has less cash left to move into other money-market investments as financial conditions change. Investors and advisors should assess the ON RRP balance alongside reserve balances, secured overnight financing rates, repo-market conditions, Treasury bill supply, Treasury General Account changes, credit spreads, and actual signs of funding-market stress. The Federal Reserve’s standing repo facility also remains available to support rate control and money-market functioning when economically appropriate.

Overnight Reverse Repo: What it is and Why Liquidity Is Drying Up

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Overnight Reverse Repo: What it is and Why Liquidity Is Drying Up | Dunham