(Adds details, new record volume, analyst comment) NEW YORK, Sept 22 (Reuters) - The Federal Open Market Committee on Wednesday raised the counterparty limit in overnight reverse repurchase agreements to $160 billion effective Sept. 23, from the current $80 billion, the New York Federal Reserve said in a statement. Reverse repos are conducted by the New York Fed’s Open Market Trading Desk. In a reverse repo, market participants lend cash to the Fed, usually overnight, at an interest rate of 5 basis points, in exchange for Treasuries or another government security, with a promise to buy them back. “The increase in the per-counterparty limit from the current level of $80 billion per day helps ensure that the ON RRP (overnight reverse repo) facility continues to support effective policy implementation,” the New York Fed said. The facility helps to set a floor on short-term rates by giving financial firms a place to park cash in exchange for a return. “This (increase in counterparty limit) will allow the RRP program plenty of room to continue higher as QE (quantitative easing) buying rambles on,” said Scott Skyrm, executive vice president in fixed income and repo at Curvature Securities in New York. Volume at the Fed’s reverse repo window hit a record high of $1.283 trillion on Wednesday, as investors and financial institutions continued to pour in cash. The financial system is swimming in trillions of dollars in bank reserves, which are rising in part because of the U.S. central bank’s asset purchases, the drop in Treasury bill issuance, and a rapid drawdown in the government’s store of funds at the Fed. The Fed launched its reverse repo program in 2013 to soak up extra cash in the repo market and create a strict floor under market rates, particularly its policy rate. In the March meeting, the Fed raised the amount counterparties can lend to $80 billion, from $30 billion. (Reporting by Gertrude Chavez-Dreyfuss Editing by Chris Reese and Sonya Hepinstall)