An open repo agreement (also known as on-demand repo) works in the same way as a term deposit, except that the trader and the counterparty agree on the trade without setting the maturity date. On the contrary, the negotiation may be terminated by either party by notifying the other party before an agreed daily deadline. If an open deposit is not terminated, it is automatically renewed every day. Interest is paid monthly and the interest rate is regularly reassessed by mutual agreement. The interest rate on an open deposit is usually close to the federal funds rate. An open deposit is used to invest money or fund assets when the parties don`t know how long it will take them to do so. But almost all open agreements are concluded within a year or two. But the Fed didn`t know exactly how many minimum reserves were “plentiful,” and polls last year suggested that reserves wouldn`t run out until they fell to less than $1.2 trillion. The Fed has apparently miscalculated, in part based on banks` responses to Fed surveys.
It turned out that banks wanted to hold (or felt obligated) more reserves than the Fed expected, and were unwilling to lend those reserves in the repo market, where many people with government bonds wanted to use them as collateral for money. As demand has outsed supply, the realpo rate has risen sharply. A repo agreement, also known as a repo, PR or sale and repo agreement, is a form of short-term borrowing, mainly in government bonds. The trader sells the underlying security to investors and buys it back shortly after, usually the next day, at a slightly higher price after consultation between the two parties. The repo market is an important source of funding for large financial institutions in the non-custodian sector, which can compete in size with the traditional custodian sector. In addition, the marginal buyer of the increased supply of Treasury bills has changed. Until recent years, the Fed was buying government bonds as part of its quarterly easing monetary policy. .