Matched Sale-Purchase Agreement (MSPA): Definition and Mechanism Explained

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What Exactly Is a Matched Sale-Purchase Agreement (MSPA)?

A Matched Sale-Purchase Agreement (MSPA) is a financial transaction where the Federal Reserve sells government securities, such as U.S. Treasury bonds, to an institutional dealer or a foreign central bank. This sale includes a contractual promise that the Fed will buy back the same securities at the original price within a brief timeframe, usually under two weeks. This process temporarily reduces banking reserves for the duration of the agreement.

This strategic arrangement is also referred to as a "system MSP."

Key Insights

• In an MSPA, the Federal Reserve transfers government securities to institutional dealers or foreign central banks.
• The agreement stipulates that the Federal Reserve will repurchase the securities at the same price within a short period, effectively lowering banking reserves temporarily.
• MSPAs are infrequently utilized but serve as a tool to momentarily restrict market liquidity.
• These agreements tighten economic activity, contrasting with repurchase agreements that increase liquidity by injecting reserves into the economy.
• Unlike standard open market operations that permanently alter banking reserves and securities, MSPAs effect temporary changes.

Deep Dive into Matched Sale-Purchase Agreements (MSPAs)

MSPAs are a seldom-used mechanism designed to temporarily reduce reserves and securities holdings, typically employed when governments have limited alternatives. The primary goal is to slightly limit market liquidity during the agreement's term.

Because MSPAs span short durations, they function as short-term stabilization tools for financial markets. This approach differs from regular open market operations, where the Federal Reserve’s actions cause lasting adjustments to banking reserves and securities portfolios.

MSPAs contract economic activity and are the inverse of repurchase agreements, which boost financial supply by adding money reserves to the economy. For instance, the Bank of Canada utilizes a similar method called Purchase and Resale Agreements (PRAs) to influence liquidity and interest rates within money markets.

MSPAs Compared to Open Market Operations

Open market operations (OMOs) involve the buying and selling of government securities in public markets to regulate the money supply within the banking system. When securities are purchased, money is infused into banks, promoting economic growth; conversely, selling securities withdraws money, contracting economic activity. The Federal Reserve orchestrates these transactions to manage the federal funds rate—the interest rate at which banks lend reserves to each other.

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