The Reserve Bank today announced a facility to improve the anchoring of short-term wholesale interest rates to the official exchange rate (OCR).
From July 20, 2022, the Reserve Bank will allow eligible counterparties to lend New Zealand dollars (NZD) through a permanent repurchase facility (Repo).
The initial parameters of the permanent pension facility are as follows and will be subject to regular review:
- The Standing Repo Facility will allow eligible counterparties to lend NZD overnight and overnight on a secured basis.
- Collateral provided by the Reserve Bank as collateral for NZD will be nominal New Zealand Government Bonds (NZGB) as general collateral.
- NZD deposited through the Standing Repo Facility will be remunerated at the Official Exchange Rate (OCR) minus 15 basis points.
- Settlement can take place on the same day or on T+1 (transaction day plus 1 banking day).
- The ongoing repurchase facility will be available between 3:00 p.m. and 4:00 p.m. New Zealand time each business day and a total facility of $5 billion will be available for each value date.
- The operation of this installation as well as the rules and directives which apply to it are detailed on the Rules and Operating Guidelines Page.
The installation will be available from July 20, 2022.
Details of the standing repo facility will be published on the Reserve Bank’s pages on Bloomberg and Refinitiv, and on the Reserve Bank’s Standing Facility Statistical Tables (D12).
This facility announcement relates to the implementation of monetary policy and has no bearing on the monetary policy stance of the Reserve Bank.
Questions and answers on the permanent pension facility
Why is the Reserve Bank introducing a permanent repo facility?
Short-term interest rates have generally traded at or near the OCR since the elimination of credit levels on ESAS accounts in 2020. At very high levels of settlement liquidity, the Reserve Bank noted some instances where short-term market rates traded below OCR. The Reserve Bank is reviewing its facilities and operations to ensure that short-term market rates remain well anchored at all levels of cash settlement.
The purpose of the Standing Repo Facility (SRF) is to help anchor short-term market interest rates near the OCR by allowing a wider range of counterparties, in particular non-EEAS participants, to access a deposit facility remunerated at a rate close to the OCR.
How will the permanent pension facility be used?
The Reserve Bank will allow registered counterparties to deposit NZD with the Reserve Bank overnight or overnight. In return for depositing NZD, the Reserve Bank will provide the counterparty with nominal New Zealand Government Bonds (NZGB) as collateral.
A details page for the permanent repo facility will be published on the Reserve Bank’s pages on Bloomberg and Refinitiv at 11:00 a.m. NZT each day, outlining the volumes available for each tenor (overnight and the following tomorrow) and the interest rate of the facility. The Reserve Bank will allow a maximum of NZ$5 billion to be deposited against bonds in aggregate per proposed settlement date. For example, if $2 billion of NZD was deposited on the next day’s expiry the previous day, only $3 billion will be available on the overnight expiry that day.
Registered counterparties can call the Reserve Bank’s portfolio management team using the dedicated dealing lines between 3:00 p.m. and 4:00 p.m. NZT to request use of the facility. The facility will operate on a first come, first served basis. A results page will be posted as soon as possible after the window closes.
Why is the permanent repo facility priced at OCR minus 15 basis points?
The pricing of the facility represents a compromise between effectively anchoring rates and maintaining an incentive for activity in the general private collateral repo market. The Reserve Bank will regularly review the operational design of the facility, and the facility may be adjusted over time as needed.
Why is there a maximum limit of $5 billion per settlement date?
The $5 billion facility limit is an initial parameter designed to allow careful monitoring of usage and the resulting impact on short-term market rates and the level of settlement cash, as well as market reactions. The Reserve Bank will regularly review the operational design of the facility, and the facility may be adjusted over time as needed.
How often will the permanent pension facility be reviewed?
The Reserve Bank will regularly review the operational design of the facility, based on usage, financial market conditions and market reactions, to ensure that short-term market interest rates are trading at or close to OCR.
What is a General Collateral Buy-Back Agreement?
General collateral repurchase transactions are those where the specific security provided as collateral is only identified after other terms of the transaction have been agreed. The standing repo facility will provide nominal New Zealand Government Bonds (NZGB) as collateral for the transaction, with the exact bond being provided at the discretion of the Reserve Bank.
What will be the impact of the level of settlement cash on the permanent pension facility?
We expect the use of the SRF to be higher when the level of cash settlement is high and short-term market interest rates are trading below the OCR. When the level of cash settlement is lower and short-term market rates are trading closer to the OCR, market participants will have less incentive to use the facility.
What is the impact of the permanent repo facility on the Reserve Bank’s balance sheet?
The size of the Reserve Bank’s balance sheet will remain the same with the use of the facility, but the composition of liabilities will change. The deposit of cash in the repurchase transaction will reduce the settlement cash on the RBNZ balance sheet and increase the repo liabilities by an equal and offsetting amount.
How is the Standing Repo Facility different from the Bond Lending Facility?
The SRF allows counterparties to deposit NZD in exchange for nominal NZGB as general collateral, thereby earning a rate close to OCR on their investment.
The Bond Lending Facility (BLF) allows approved counterparties to borrow specific New Zealand government bonds from the Reserve Bank. Counterparties will use the BLF when a specific bond is difficult to find on the secondary market. The facility aims to mitigate settlement fails in the interbank market.
Both facilities will be offered at the same time, between 3:00 p.m. and 4:00 p.m. NZT daily. The BLF is currently remunerated at OCR minus 25 basis points, a lower interest rate than the SRF, due to the specificity of the bonds loaned.
Why don’t all market players have ESAS accounts?
Market participants applying for an ESAS account must meet the RBNZ access criteria. There are a number of factors to determine if a candidate is eligible. Note that the Reserve Bank has recently launched a review of its policy and criteria for access to ESAS accounts (regulation) (see link below). For some market participants, administration or financial infrastructure costs may also limit the benefit of having an ESAS account rather than operating through a settlement bank.
Who can use the Standing Repo Facility?
Market participants can access the facilities and operations of the RBNZ by registering as domestic counterparties. Domestic counterparty registration allows a wider range of market participants to access near-OCR priced facilities and transactions, without the need for an ESAS account. Market participants must register as a counterparty to participate in open market operations (OMO) and use the Overnight Reverse Repo Facility (ORRF), SRF and BLF.
Applicants must be financial institutions with a regular presence in wholesale financial markets, either as a market participant or as a financial market infrastructure (FMI) contributing to the soundness and efficiency of the neo financial system. -zeelandish. Participation in the repurchase transactions offered in the OMOs and available through the ORRF, SRF and BLF requires the signing of a 2011 Global Repurchase Agreement (“GMRA”) with the RBNZ. The Reserve Bank will deal with each request on a case-by-case basis. The RBNZ Operating Rules and Guidelines for National Markets provide further information on registered counterparty applications.