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

In a matched sale-purchase agreement (MSPA), the Federal Reserve sells government securities such as U.S. Treasury bonds 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 calculated agreement is also known as a "system MSP."

Key Takeaways

  • In a matched sale-purchase agreement (MSPA), the Federal Reserve sells government securities such as U.S. Treasury bonds to an institutional dealer or the central bank of another country.
  • Under the MSPA, the contractual agreement then outlines that the Federal Reserve would purchase the security back within a short period of time for the same price at which it was sold to temporarily decrease banking reserves.
  • A matched sale-purchase agreement is rarely used but is a method of temporarily decreasing reserves and securities holdings, and is done to slightly prohibit market liquidity for the term of the matched sale-purchase agreement.
  • Matched sale-purchase agreements contract the economy and are the opposite of repurchase agreements, which expand the financial supply by putting money reserves into the country's economy.
  • This financial arrangement is different than the standard open-market operations (such as selling Treasuries to investors), in that actions by the Federal Reserve make permanent changes to banking reserves and securities levels.

Understanding Matched Sale-Purchase Agreements (MSPAs)

Ultimately, matched sale-purchase agreements are a rarely-used method of temporarily decreasing reserves and securities holdings, done when country governments have limited options. The purpose of a matched sale-purchase agreement is to slightly prohibit market liquidity for the term of the matched sale-purchase agreement.

Since matched sale-purchase agreements occur over short periods of time, they are employed as short-term options for stabilizing a market. This financial arrangement is different than the standard open-market operations (such as selling Treasuries to investors), in that actions by the Federal Reserve make permanent changes to banking reserves and securities levels.

Matched sale-purchase agreements contract the economy and are the opposite of repurchase agreements, which expand the financial supply by putting money reserves into the country's economy. For example, the Bank of Canada employs a type of sale and repurchase agreement to implement a monetary policy called a Purchase and Resale Agreement (PRA). Typically, Purchase and Resale Agreements are undertaken to affect liquidity and interest rates in the money market.

Matched Sale-Purchase Agreements vs. Open Market Operations

As mentioned, 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. Purchases of securities 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.