Why does the ON RRP facility need to be done on a collateralised basis?

External question — Economics Stack Exchange Author: masiewpao Original post: https://economics.stackexchange.com/questions/58640 License: CC BY-SA 4.0 — https://creativecommons.org/licenses/by-sa/4.0/ Adaptation: HTML converted to plain text; contact email addresses removed. In the context of the Fed, what are the reasons that the ON RRP facility is structured such that loans are collateralised? If we assume the Fed has zero credit risk, what is the benefit of actually exchanging Treasuries for reserves? The Fed can be assumed to service the interest payment and principal the next day, so in theory the collateral is not needed. Is it simply to prevent "volatility" on the commercial banks balance sheets, where the loan principal suddenly "disappears"?

External answer — Economics Stack Exchange Author: dm63 Original post: https://economics.stackexchange.com/a/58646 License: CC BY-SA 4.0 — https://creativecommons.org/licenses/by-sa/4.0/ Adaptation: HTML converted to plain text; contact email addresses removed. Fair question. I can think of two reasons (a) the main users of the RRP, such as money market funds, are usually permitted to invest in either securities or repo. The unsecured instrument you describe sounds like it wouldn’t fall into either category. (B) traditionally , the Fed was already set up to perform Open Market Operations using repos, so it was operationally easy to extend that to create the RRP. Also note that the unsecured instrument you describe does exist - it is the Interest on Reserve Balances whereby banks can park their excess cash at the Fed - but this is only available to banks.