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Topic: Discuss the differences between fed Funds and repurchase agreements as a liability management tool. Introduction Liability management is a method used by financial institutions to maintain working capital and savings capital. Most financial institutions, such as banks or trust institutions, absorb a large amount of funds that belong to others in whole or in part, even if they may not have full ownership, these institutions can invest and use the funds as they see fit. Indebtedness management allows these institutions to spend money and have enough funds on hand to pay people when they ask for money back. Liability management can use many different tools, this article mainly discusses two of them: federal funds and repurchase agreements. Federal funds refer to the reserves deposited by commercial banks in the Federal Reserve Bank of the United States, including statutory reserves and funds that exceed the reserve requirements. The federal funds can be rent and to the other market participants that have insufficient cash to meet their reserve needs and lending. During the time of meeting liability on time, the federal government uses excess reserves which are held by financial institutions which are fed funds and it is above the mandate reserved central bank requirements[footnoteRef:1]. Therefore, it is evident that fed funds can be convenient in liquidating the excess fund and attain the emergency need like the on-time obligation of liability. The achievement can be met through banks by deciding on options like borrowing or lending their surplus funds to each other on an overnight basis since some banks are on many reserves[footnoteRef:2]. [1: Gray, S. (2011). Central bank balances and reserve requirements.] [2: Dutkowsky, D. H., & VanHoose, D. D. (2020). Equal treatment under the Fed: Interest on reserves, the federal funds rate, and the ‘Third Regime’of bank behavior. Journal of Economics and Business, 107, 105860.] A repurchase agreement is a transaction agreement that sells a security and agrees to repurchase the security at an agreed price at a certain time in the future. Repurchase agreements are one of the advantageous tools for banks to implement liability reserve management. In particular, large banks prefer to use repurchase agreements to adjust their reserve positions. The term of the repurchase agreement is generally very short, the most common is overnight lending, but there are also long term. In addition, there is a form of "continuous contract". This form of repurchase agreement has no fixed period. Only when neither party expresses the intention to terminate, the contract is automatically extended every day until one party proposes to terminate it. In general, the federal funds market is a broker market while repo marekt is mainly a dealer market. When constructing a transaction in federal funds market, the participant should involve a buyer and a seller for the trade to happen. A dealer market, on the other hand, is a transparent financial market mechanism that multiple dealers post prices at which they will buy or sell a specific security.Why is it repo market is a dealer market and the fed funds market is a broker market? One reason is that people commonly know the security dealers, which are prime dealers or big banks. Having them one the other side of the transaction means that participants don’t have to worry about who’s on the other side of the transaction because the dealers’ reputation can guarantee the transaction . In a way, dealers are making a heterogeneous object. People can repo anything, including corporate bonds, mortgage bank security, all kinds of stuff. But the dealer is on the other side of everything, and that’s what make it homogeneous. Naturally, the dealer is borrowing in a lower rate than it’s lending, and earning the interest rate spreads between them. It’s making the market. The repurchase agreement market is open to all institutions and people. As long as they hold treasury bonds, whether they are a bank or a member of the federal reserve system, they can conduct repurchase transactions. In addition, because federal funds need to perform the function of meeting savings requirements, the federal funds market has stricter restrictions on participants than the repurchase agreement market. Specifically, it is limited to banks, government-sponsored enterprises and other selected entities. This has the important implication that while all financial institutions are theoretically able to participate in the repo market, the federal market is limited only to selected institution types, which could restrict possible opportunities for arbitrage across markets. Although the federal funds market is more important for the implementation of monetary policy, its size is far smaller than the repurchase agreement market. The repo market is important for both fixed income securities and equity trading1. Repurchase agreements allow for arbitrage in the Treasury agency, mortgage and backed securities markets, thereby increasing price discovery and market liquidity. Repurchase agreements, such as commercial banks, use them as a source of funding when they are involved in a funding requirement for a certain period of time. The banks will sell their own government bonds such as Treasury bonds to corporations, accompanied by a temporary overfunding, and then those bonds are later bought back. The government bonds are used as collateral for the corporations in the repo bonds, providing the banks with funds. There are restrictions on the use of bonds by federal funds as opposed to repurchase agreements, for example, only standardised and homogenised government bonds can be used. Conclusion Aside from above differences, the federal funds market and repurchase agreement market both provide a platform for deflect agents and surplus agents to to clear and push their liabilities and assets off to another day[footnoteRef:3]. The federal funds market and repurchase agreement market both have special connections with Federal Reserve monetary policy implementation[footnoteRef:4]. Typically, the Federal Reserve buys securities from dealers in the RP market, and give them cash that can deposit into their accounts. Later the banks can proceed to sell the funds in federal funds market. Policy actions significantly effect the federal funds and RP market, which major commercial banks now use as sources of funds more extensive than before. Therefore, any slight changes in the availability of funds today can have mroe direct impact than before. Though such mechanism, Federal Reserve monetary policy implement more directly and quickly by a boarder range of the financial institutions, including the one with major portion of the total credit available in the US economy. [3: Bech, M., Klee, E., Stebunovs, V., BIS, & FRB. (2011). Arbitrage, Liquidity and exit: The repo and federal funds market before, during, and after the financial crisis (Rep.). ] [4: FRBNY Quarterly Review. (1977). Federal Funds and Repurchase Agreements (Rep.). (n.d.). ]