What Is a Matched Sale-Purchase Agreement?
In a Matched Sale-Purchase Agreement (MSPA), the Federal Reserve sells government securities (U.S. Treasuries) to an institutional dealer or the central bank of another country with the contractual agreement to purchase the security back within a short period of time, usually less than two weeks. The security is bought back at the same price at which it was sold and decreases banking reserves during the term of the matched sale-purchase agreement.
This is also known as a "system MSP."
Understanding Matched Sale-Purchase Agreement (MSPA)
This is a rarely-used method of temporarily decreasing reserves and securities holdings, and is done to slightly prohibit market liquidity for the term of the MSP. This financial arrangement is different than the standard open-market operations (such as selling Treasuries to investors), where actions by the Federal Reserve make permanent changes to banking reserves and securities levels.
Open Market Operations
Open market operations (OMO) refer to the buying and selling of government securities in the open market in order to expand or contract the amount of money in the banking system. Securities' purchases inject money into the banking system and stimulate growth, while sales of securities do the opposite and contract the economy. The Federal Reserve facilitates this process and uses this technique to adjust and manipulate the federal funds rate, which is the rate at which banks borrow reserves from one another.