The financial policy of the country in one way or another determines the material well-being of each citizen. Therefore, it is very useful to keep abreast of operations on the open market, which are arranged both by the Central Bank of Russia and similar government agencies of other countries. In the article we will get acquainted with the concept itself, consider the features of such operations, take a look at their current varieties.
What is it?
Open market operations are operations of the Central Bank of the state on the sale and purchase of government securities in secondary markets. Such acquisitions are paid by the Central Bank by increasing the reserve accounts of seller banks.
The essence of the operation is the total increase in the monetary reserves of the banking system. And this fact already leads to an increase in the entire money supply in the country.
If we consider the reverse open market operation (the sale by the Central Bank of government securities), then we will observe the exact opposite effect: a decrease in the total monetary reserves of banks, a decrease in the total money supply in the country.
All this makes the Central Bank of the state the largest dealer in open markets. An increase in the volume of transactions for the sale and purchase of securities will lead to a change in both their prices and profitability.
Thus, the central bank can influence the interest rates set by banks. The effectiveness of such an instrument of open market operations may be reduced due to the unpredictable expectations of other participants.
Method Advantages
Here is a list of good points. This is what the Central Bank's open market operations lead to:
- The ability to control the volume of transactions on the market.
- These operations are quite accurate, therefore, they can change bank reserves by strictly defined amounts.
- The nature of operations is reversible. That is, any mistake, inaccuracy can be really quickly fixed by a reverse transaction.
- The market is active, liquid: the speed of transactions is quite high. In addition, they are independent of various administrative delays.
Types of operations
Bank operations in the open market can be of two main types:
- Direct deals. This is the sale and purchase of securities with the immediate delivery of these documents. Interest rates will be set directly at the auction. As a result, the buyer becomes the owner of securities with no maturity.
- REPO transactions. Such operations are mandatory on the terms of the repurchase of securities. Convenience of transactions is that maturities are allowed to vary.
Types of operations
We continue to disclose the term "open market operations". They can also be divided into two types:
- Dynamic. Their goal is to change the level of money supply and reserves of banks. Be sure to be permanent. As a rule, direct transactions will be dynamic.
- Protective. They are carried out to adjust bank reserves in case of unplanned deviations from a given level. The purpose of such operations: maintaining the stability of both the reserves of banks and the financial system in general. Here already repo transactions will be used.
The use of a particular operation on the open market of the Central Bank of the Russian Federation depends on several factors:
- The degree of development of the financial system.
- Institutional environment.
- Liquidity indicators of the government securities market.
Currency Interventions
One of the most popular analogues of operations on the open securities market is the so-called foreign exchange intervention of the country's Central Bank.This is the name of the purchase and sale of various foreign currencies in the domestic market, which can also be aimed at increasing / sterilizing the total money supply. For example, the Central Bank can affect the ratio of the dollar to the ruble.
Everything is very simple: the sale of Central Bank dollars will smoothly lead to an increase in the national currency of the Russian Federation, the purchase of dollars will lead to a decrease in the ruble.
If the Central Bank turns to foreign exchange interventions in order to adjust for any short-term fluctuations in the exchange rate, it loses its control over bank reserves. And, therefore, over the supply of money supply.
Therefore, the Bank of Russia in the near future, in addition to currency interventions, strive to use a much more flexible tool, which are considered currency swaps. These are called operations for the purchase and sale of currency with immediate delivery and an urgent reverse transaction. The advantage of currency swaps is that they allow you to adjust the liquidity of foreign exchange markets. But at the same time they do not create additional pressure on the national currency rate.
Indirect methodology of monetary policy
Open market operations between commercial banks and the Central Bank in global economic practice are considered the main tool when applying indirect methods of monetary policy.
The bottom line is simple. The Central Bank sells or buys securities with high liquidity at a predetermined rate. Among them are state ones that form the country's domestic debt. Operations are suitable in the open market due to the Central Bank.
And today this tool is considered the most flexible in the field of regulation of both commercial investments and the liquidity of commercial banking organizations.
A feature of this function of the Central Bank is that it has a market effect on the amount of free resources available to commercial banks. This causes a reduction or expansion of credit deposits in the economy. And thereby affects the liquidity of the banks themselves - increases or decreases it.
Securities
Let's take a closer look at this function of the Central Bank - the sale and purchase of securities on the open market. What applies to them? The Central Bank mainly works with highly liquid securities. Those that are actively traded in the secondary market. This makes the risk of the transaction relatively small.
Such securities include various debt instruments issued by the government. For example:
- Debt certificates. They are issued by the Bank of the Netherlands, the European Central Bank, and the Bank of Spain.
- Financial bills. Issued by the Bank of Japan, Bank of England, Bundesbank (Germany).
- Bonds. Issued by the Bank of the Russian Federation, the Central Bank of Chile, the Bank of Korea.
Securities Selection Criteria
The choice of a security for the operation depends on two factors:
- The degree of development of the country's financial market.
- The level of independence of the Central Bank itself. Its ability to carry out operations not only with government bonds, certificates and bills, but also with securities of other issuers.
The impact of the Central Bank on the capital market, money supply is that by changing interest rates on the open market, the Central Bank thereby creates favorable conditions for financial institutions to purchase and sell government securities. And this is already able to increase the liquidity of a commercial bank.
Open market operations, of course, are not carried out by the Central Bank alone. Usually a group of large commercial banks and other financial and credit organizations of the state is involved.
REPO operations
If everything is clear with direct credit operations in the open market, repurchase agreements usually raise a lot of questions. They are always held on the terms of the repurchase of securities.If these bonds are bought by the Central Bank from a merchant, then the dealer is obligated to redeem these securities from him back after a predetermined period.
If a reverse REPO transaction is concluded (another name is a pair, mismatch), then the Central Bank already sells securities and undertakes to buy them from a partner after a certain period. Maturities may vary.
Bank of Russia REPO Transactions
As for the domestic Central Bank, it used repos from 1996 until the financial crisis of 1998. There were two subjects of transactions - OFZ (federal loan bonds) and GKO (state short-term bonds).
Then the condition for concluding a direct REPO transaction was a dealer’s short position based on the trading results, within the limits set by the Bank of Russia itself. That is, when the dealer’s obligations exceeded the mass of pre-deposited finance in the trading system.
After the economic crisis of 1998, the Central Bank of the Russian Federation allowed an already inter-dealer repo. That is, the conclusion of repos with OFZs and T-bills between dealers who met certain conditions. It was assumed that such an innovation would help to reduce the volume of money supply due to the dynamic redistribution of bank financial reserves.
There was another fact on the face. After the 1998 crisis, the Central Bank of Russia did not have government securities in its portfolio that would be in demand among dealers.
Central Bank of the Russian Federation today
Today, the Bank of Russia conducts operations on the open market only with federal bonds. The limitation is connected with the fact that until recently in the Russian Federation the securities market of the subjects of the federation was not sufficiently developed. They were distinguished by a small volume and low liquidity. Hence, securities of the level of subjects could not be used as a basic instrument of the Central Bank.
But nowadays, the issue of using the securities of entities as a base for conducting transactions on the open market has become increasingly common. Individual corporate agents are already receiving state guarantees for their obligations from a number of constituent entities of the Russian Federation.
And the inclusion of the corporate issuer's assets in the Lombard list of securities used by the Central Bank really gives positive shifts in the beginning. The attractiveness of such securities is increasing, bidding is actively being held with their participation. But the Central Bank does not give any obligations to keep them in its Lombard lists forever.
If the financial situation becomes unfavorable, the Bank of Russia excludes the securities of the corporate issuer from its lists. This, in turn, leads to a violation of the stability of the open market. For this reason, the Central Bank of Russia decided not to include bonds of individual corporate issuers in its lists.
Open market operations between the country's Central Bank and commercial banks are a matter of national importance. Their main task is to regulate the money supply in the state through the sale and acquisition by the Central Bank of highly liquid securities.