Reader question: The Federal Reserve pays interest on bank reserves, but many large cash investors such as money market funds cannot hold reserve balances directly. How can the Fed still create an administered overnight investment rate that limits downward pressure on money-market rates?
The answer is the Overnight Reverse Repurchase Agreement (ON RRP) operation. Each business day, eligible counterparties can submit propositions to the New York Fed. The Desk temporarily sells U.S. Treasury securities from the System Open Market Account (SOMA) and agrees to repurchase them the next day or after the applicable overnight/weekend term. The difference between sale and repurchase price produces the FOMC-set ON RRP interest rate.
As of August 30, 2026, the current operating parameters are:
- offering rate: 3.50%;
- per-counterparty limit: $160 billion per day;
- minimum proposition: $1 million;
- increment: $1 million;
- eligible collateral: U.S. Treasury securities;
- schedule: every business day, normally 12:45 p.m. to 1:15 p.m. ET.
Those are time-sensitive policy parameters and should always be versioned against the current FOMC implementation note and New York Fed FAQ.
What this page owns — and what it does not
This page owns:
eligible counterparty + proposition amount/rate + available SOMA Treasuries → ON RRP award → triparty settlement → overnight interest and maturity cash flow.
It does not replace private repo pricing, money-market-fund constraints, or the Federal Reserve’s standing repo facility. ON RRP is a specific monetary-policy implementation mechanism.
This is public central-bank operations mathematics, not a recommendation to place funds in any instrument.
Why the Fed needs a reverse repo facility
Banks can earn interest on reserve balances, but money market funds and some government-sponsored enterprises cannot simply transform their cash into reserve balances.
If those investors have abundant cash and few alternatives, overnight market rates can fall below the Federal Reserve’s intended policy range.
ON RRP gives a broad set of eligible cash investors access to a risk-free overnight investment directly with the Federal Reserve Bank of New York.
The New York Fed states that the facility helps limit downward pressure on overnight rates and supports a floor under money-market rates.
The transaction direction is easy to invert
From the New York Fed’s perspective:
- today: it sells a Treasury security and receives cash;
- maturity: it repurchases the same security and returns cash plus interest.
From the counterparty’s perspective, it is economically an overnight collateralized investment.
This direction is the reverse of a Fed repo operation, where the Fed lends cash and receives securities.
Interest mathematics
For principal P, annual ON RRP rate r and term of d calendar days, a stylised simple-interest calculation is:
Interest = P × r × d / 360.
The exact repurchase-price convention follows the New York Fed operation terms.
For a $1 billion one-day operation at 3.50%:
Interest ≈ 1,000,000,000 × 0.035 × 1/360 = $97,222.22.
A Friday-to-Monday overnight operation spans multiple calendar days even though it is one overnight market term.
Step 1: counterparty eligibility
Eligible ON RRP counterparties include:
- primary dealers;
- eligible banks and savings associations;
- government-sponsored enterprises;
- eligible SEC-registered Rule 2a-7 money market funds.
The New York Fed maintains current eligibility criteria and counterparty lists.
As of 2026, for example, a Rule 2a-7 fund generally must satisfy current size/activity requirements and must not be structured simply as a single-beneficial-owner vehicle designed to gain direct access to the facility.
Eligibility does not force participation
Being on the counterparty list means the institution may participate if it chooses and has completed legal/operational setup.
It does not mean the counterparty must submit a proposition every day.
ON RRP usage therefore reflects both eligibility and relative-value economics.
Step 2: submit one proposition
For ON RRP, each counterparty is permitted one proposition per operation.
Current New York Fed parameters require:
- minimum amount: $1 million;
- $1 million increments;
- maximum amount: $160 billion;
- submitted rate no greater than the announced offering rate.
A proposition therefore has at least:
(Counterparty, Amount, Submitted Rate).
Why a counterparty might submit below the offering rate
When the operation is comfortably below the amount of securities available, all accepted ON RRP propositions receive the specified offering rate.
Submitting below that rate usually makes little difference in an undersubscribed operation.
But submitted rates matter in the extremely unlikely oversubscription case because the allocation algorithm sorts propositions by rate.
Step 3: calculate available Treasury collateral
The aggregate operation is limited by U.S. Treasury securities held outright in SOMA that are available for ON RRP.
Not every Treasury security in SOMA is necessarily available. The New York Fed excludes securities needed for:
- foreign official and international account reverse repos;
- SOMA securities lending;
- near-maturity operational needs;
- outstanding term RRP collateral where applicable.
So:
AvailableONRRPCollateral = Eligible SOMA Treasury Holdings − Reserved/Unavailable Treasury Amounts.
Normal case: propositions fit within available securities
If:
Total Propositions ≤ Available Securities,
the New York Fed FAQ states that awards are made at the specified offering rate to all counterparties submitting valid propositions.
This is why ON RRP is commonly described as fixed-rate, full-allotment subject to the aggregate securities constraint and counterparty limit.
A simple normal-case example
Suppose:
- available Treasuries = $2 trillion;
- Fund A submits $10bn;
- Fund B submits $25bn;
- Bank C submits $5bn.
Total = $40bn, well below available collateral.
All valid propositions are accepted at the current offering rate.
Oversubscription fallback: stop-out logic
The New York Fed also publishes a fallback for the unlikely case:
Total Propositions > Available Securities.
In that state, propositions are evaluated in ascending order of submitted rate.
Why ascending?
From the Fed’s perspective, a lower submitted RRP rate is less costly than a higher rate. So lower-rate propositions are economically preferable when the aggregate securities constraint binds.
Stop-out rate
The stop-out rate is the rate at which the available-security limit is reached.
Then:
- propositions below the stop-out are awarded in full;
- propositions at the stop-out are prorated if needed;
- propositions above the stop-out are rejected.
The stop-out can be below the announced offering rate and, under the published rules, can even be negative.
Oversubscription example
The New York Fed FAQ gives an illustrative structure where $3 trillion of propositions compete for $2 trillion of securities.
If lower-rate propositions consume most of the capacity, the marginal rate receives partial allocation and higher submitted rates receive nothing.
This is the mirror image of many borrowing auctions: here the Fed is paying interest, so the cheaper funding propositions rank first.
Proration at the marginal rate
If remaining capacity is C and total amount submitted at the stop-out rate is M:
Pro Rata Fraction = C / M.
Each marginal proposition is allocated according to the published $1 million increment rules.
Rounding must preserve total accepted amount at or below available collateral.
Step 4: triparty settlement
The New York Fed states that ON RRP transactions settle on the triparty repo platform with Bank of New York Mellon acting as triparty agent.
The triparty agent:
- holds/custodies the Treasury collateral;
- values securities;
- moves cash and collateral on the books of the clearing bank;
- supports maturity reversal.
Counterparties are expected to deliver funds by the published settlement deadline.
Collateral is not an investment choice by the counterparty
The counterparty is entering an ON RRP with the Federal Reserve, not choosing a specific Treasury issue for directional investment exposure.
The Treasury securities collateralize the transaction.
The economic return is the ON RRP rate, not the market yield of the particular security allocated in triparty settlement.
Balance-sheet effect
When ON RRP settles, cash moves to the Federal Reserve.
The New York Fed explains that this reduces reserve liabilities in the banking system and increases the Federal Reserve’s reverse-repo liabilities by an equal amount.
Conceptually:
Bank Reserves ↓; ON RRP Liabilities ↑.
SOMA asset size is unchanged because the securities sale is temporary under the repo accounting treatment.
Why money funds use ON RRP
A money market fund compares ON RRP with alternatives such as:
- Treasury bills;
- private repo;
- agency discount notes;
- other eligible short-term instruments.
If alternative safe overnight returns rise above ON RRP, facility usage can decline sharply.
That is exactly what has happened from the 2021–2022 peak usage period into the much lower usage environment of 2026.
Current usage is low relative to historical peaks
On August 28, 2026, the New York Fed reported only about $0.175 billion accepted in ON RRP from one counterparty at the 3.50% offering rate.
This is a time-sensitive snapshot, not a permanent usage level.
It illustrates that a standing operational facility can remain important for rate control even when actual daily usage is small.
Floor mechanism through outside options
Suppose a qualifying money fund can earn 3.50% at ON RRP with the Federal Reserve.
Why lend overnight privately at 3.00% with more counterparty or operational risk, unless there are other benefits?
The existence of the 3.50% outside option tends to reduce the willingness of eligible investors to accept much lower rates elsewhere.
This is the economic floor channel.
ON RRP rate is not the federal funds rate
The effective federal funds rate is a market rate on unsecured overnight federal-funds transactions.
The ON RRP rate is an administered offering rate set by the FOMC for this specific facility.
The two rates influence each other through money-market substitution but are not the same object.
ON RRP is not the standing repo facility
Direction matters:
- ON RRP: Federal Reserve absorbs cash and provides Treasury collateral;
- Standing Repo Facility: Federal Reserve provides cash against eligible collateral.
Current July 2026 implementation settings illustrate the distinction: ON RRP at 3.50%, standing overnight repo at 3.75%.
Counterexample: “full allotment” is not literally unlimited
Each counterparty is capped at $160 billion, and aggregate awards are limited by available SOMA Treasury collateral.
So “full allotment” describes the normal allocation method when valid propositions fit within those constraints.
Counterexample: eligible counterparty may submit zero
Eligibility does not imply usage. If Treasury bills or private repo offer a more attractive risk-adjusted return, the counterparty can simply not participate.
Counterexample: a 3.50% facility does not force all overnight rates to equal 3.50%
Not every cash investor has ON RRP access. Market instruments differ in credit, collateral, liquidity and convenience.
The facility supports a floor; it does not mechanically fix every overnight price at one number.
Counterexample: an oversubscribed award need not occur at the offering rate
If available securities became binding, the published stop-out algorithm could award marginal propositions at a lower rate.
This is why submitted rate remains a real field in the operation even though normal usage is fixed-rate.
Inputs and outputs
An ON RRP engine can require:
- FOMC effective-date parameters;
- current offering rate;
- counterparty eligibility and status;
- proposition amount and submitted rate;
- per-counterparty cap;
- available SOMA Treasury collateral;
- operation dates/times;
- triparty settlement details;
- 360-day interest convention;
- maturity calendar.
Outputs can include:
- valid/rejected proposition;
- accepted amount;
- award rate;
- stop-out rate if applicable;
- pro-rata allocation;
- collateral settlement amount;
- repurchase price/interest;
- published aggregate operation result.
Evidence polarity: what supports confidence?
Evidence for a correct implementation includes current FOMC parameters matching the New York Fed FAQ, propositions respecting $1m increments and $160bn caps, accepted amounts matching published results, normal operations awarding valid propositions at the offering rate, and oversubscription tests reproducing the published ascending-rate stop-out logic.
Evidence against confidence includes outdated offering rates, a proposition above the counterparty cap, Treasury collateral counted while reserved for another operation, rate sorting in the wrong direction during oversubscription, or interest calculations that ignore multi-calendar-day weekends.
Weak links in implementation
stale FOMC rate. Old administered rate remains active after a policy change.
cap error. $160bn current limit replaced by an older historical limit.
collateral double-use. Treasuries reserved for securities lending or other RRPs are counted twice.
sort-direction error. highest submitted rates are accepted first during oversubscription.
full-allotment overstatement. aggregate collateral constraint is ignored.
weekend-day error. Friday-to-Monday interest uses one day instead of the correct calendar span.
repo/RRP sign error. cash and securities directions are reversed.
counterparty-state drift. inactive or ineligible institutions remain enabled.
Diagnostics: how to test the engine
- current-parameter test: effective July 30, 2026: ON RRP 3.50%, $160bn cap.
- minimum/increment test: reject amounts below $1m or off $1m increments.
- normal-allotment test: propositions below collateral availability all receive the offering rate.
- oversubscription test: sort submitted rates ascending and identify stop-out.
- proration test: marginal-rate accepted amount exactly fills remaining capacity.
- collateral-availability test: remove Treasuries reserved for securities lending and foreign-account operations.
- Friday-weekend test: reproduce multi-day interest.
- triparty-reconciliation test: cash and Treasury collateral movements match the operation award.
- published-result test: reproduce total submitted/accepted and award rate from participant records.
- policy-effective-date test: a new FOMC rate applies only from its specified effective date.
What would falsify confidence?
Confidence should be withdrawn if operation results cannot be reproduced from valid propositions and collateral availability; if administered rates/caps are stale; if oversubscription sorting is reversed; if triparty cash movements disagree with awards; or if the Federal Reserve’s published daily result cannot be reconciled.
Alternatives and limits
Private triparty repo provides secured investment with private counterparties. Treasury bills provide outright securities ownership. Bank reserves are available only to eligible depository institutions. ON RRP is a monetary-policy implementation facility with its own access and operating rules.
The current 3.50% rate, $160bn cap and low usage are not timeless. They are explicit update triggers.
How this connects to the surrounding knowledge estate
Repo pricing explains private secured funding. Rule 2a-7 constraints explain why money funds value short, liquid instruments. ON RRP supplies a distinct administered overnight outside option.
Verification and update triggers
Preserve FOMC implementation-note effective date, New York Fed FAQ version, counterparty list, offering rate, per-counterparty cap, available-collateral calculation, proposition file, triparty settlement record and maturity cash flow. Revalidate after every FOMC decision, counterparty-policy update or unexpected allocation/settlement incident.
Primary and high-quality references
- Federal Reserve Bank of New York, FAQs: Reverse Repurchase Agreement Operations, updated March 23, 2026.
- Federal Reserve Board, July 28–29, 2026 FOMC implementation direction.
- Federal Reserve Bank of New York, Repo and Reverse Repo Agreements.
- Federal Reserve Bank of New York, Reverse Repo Counterparties: List & Eligibility Requirements.
- Federal Reserve Bank of New York, Markets Data Dashboard, for current operation results.
Educational boundary: This article explains public Federal Reserve operation mechanics. It does not advise participation in ON RRP, repo or any money-market transaction and does not provide personalized financial advice.