In fall of 2009, the Federal Reserve began conducting small-scale tests of trades called reverse repos, or reverse repurchase agreements, on Wall Street that would enable it to drain cash from the financial system once it decides to roll back its monetary policy.
In a reverse repo the Fed sells assets such as Treasury securities to dealers for cash with an agreement to buy them back at a slightly higher price at a later date. In the process, bank reserves are drained from the financial system.
The Fed is expected to do about $500 billion in total in reverse repos during 2010. The Fed likely has to drain a total of around $1 trillion from the market. Typically, individual reverse repos amount to about $25 billion in size.
- NY Fed Testing Reverse Repos. WSJ.com.
- Fed Begins Testing Reverse Repo Trades. FT.com.
- UPDATE: Fed Has Run Tests For Reverse Repos -Source. WSJ.com.