NEW YORK, March 4 (Reuters) - The New York Federal Reserve said on Tuesday it would increase the limit for each counterparty in its reverse repurchase agreement facility to $7 billion per firm, from $5 billion, effective on Wednesday.
The Fed has been testing the reverse repo facility since September as a way to help control short-term interest rates, and has seen strong demand from money market funds and other bidders.
In reverse repos, the Fed temporarily drains cash from the financial system by borrowing funds overnight from banks, large money market mutual funds and others, and offering them Treasury securities as collateral. Banks and the funds are currently receiving 5 basis points, or 0.05 percent, for the overnight loan, up from 1 basis point in September.
The tool is designed to mop up excess cash in the financial system, which if left unchecked could keep rates lower than perhaps desired by the Fed at a later date.