Matched Sale-Purchase Agreement (MSPA): What It is, How it Works

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 agreement.

This agreement is also known as a "system MSP."

Key Takeaways

• In an MSPA, the Federal Reserve sells government securities to an institutional dealer or the central bank of another country.
• Under the MSPA, the agreement 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 to slightly restrict market liquidity for the term of the agreement.
• Matched sale-purchase agreements contract the economy and are the opposite of repurchase agreements, which inject money reserves into the country’s economy.
• This financial arrangement is different than standard open-market operations, as actions by the Federal Reserve result in permanent changes to banking reserves and securities levels.

Understanding Matched Sale-Purchase Agreements (MSPAs)

Matched sale-purchase agreements are a rarely-used method of temporarily decreasing reserves and securities holdings, employed when country governments have limited options. The purpose of an MSPA is to slightly restrict market liquidity during the term of the agreement.

Since MSPAs occur over short periods of time, they are used as short-term options for stabilizing a market. This financial arrangement is different than standard open-market operations, as actions by the Federal Reserve lead to permanent changes in banking reserves and securities levels.

MSPAs contract the economy and are the opposite of repurchase agreements, which inject money reserves into the country’s economy. For example, the Bank of Canada employs a type of sale and repurchase agreement called a Purchase and Resale Agreement (PRA) to implement a monetary policy aimed at affecting 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 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 contract the economy. The Federal Reserve uses this technique to adjust and manipulate the federal funds rate, which is the rate at which banks borrow reserves from one another.

As mentioned, open market operations (OMO) refer to the buying and selling of government securities 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 contract the economy. The Federal Reserve uses this technique to adjust and manipulate the federal funds rate, which is the rate at which banks borrow reserves from one another.