The New York Federal Reserve is conducting a trial run of small-scale reverse repo transactions with primary dealers, using mortgage-backed securities (MBS) as collateral for the first time.
In November 2009, the New York Fed tested a series of reverse repo agreements using U.S. Treasury and direct agency securities as collateral, conducting $990 million worth of reverse-repos over five transactions. Typical reverse repo transactions fall around the $30 billion mark.
The MBS holdings are currently held by J.P. Morgan.
The repos are aimed to test operational efficiency at the Federal Reserve, the triparty repo clearing banks and the primary dealers. A reverse repo is also one method the Federal Reserve may use to begin monetary policy tightening. A reverse repo will allow the Fed to lend securities in exchange for cash, with an agreement to repurchase them at a higher price at a later date similar to a collateralized loan. This will help decrease outstanding balances and reduce liquidity.