THE RESERVE BANK OF AUSTRALIA’S OPEN MARKET OPERATIONS

This document is intended primarily for institutions that participate in or are planning to participate in the Reserve Bank of Australia’s (RBA) daily open market operations. It outlines key issues such as who may participate, the types of transactions the RBA will enter into, the types of securities in which the RBA will deal, the subsequent arrangements for managing those securities and the dealing process itself.

Eligible Counterparties

Any member of the Reserve Bank Information and Transfer System (RITS) which has treasury operations in Australia and is able to execute and settle transactions with the RBA through the Austraclear System in an efficient and timely manner is eligible to participate in the daily open market operations.

Types of Transactions

The RBA undertakes its open market operations primarily using repurchase agreements in eligible securities and outright transactions in short-dated government securities. The RBA also occasionally uses same-day value foreign exchange swaps to supplement operations in domestic securities markets. Swap transactions do not form part of the regular morning process and are not considered further in this document.

Counterparties that enter into repurchase agreements with the RBA are bound, under the RITS regulations, by the terms of The Bond Market Association/International Securities Market Association (TBMA/ISMA) Master Repurchase Agreement, as amended for Australia by Exhibit A of the RITS Regulations.

The Morning Operations

Open market operations are conducted almost every business day between 9.30 am and 10.00 am. (On rare occasions, the RBA may decide not to conduct open market operations if it judges that the system has the appropriate amount of liquidity.) The following outlines the key elements and timing of the operations.

Announcement of Open Market Operations

The RBA releases the key parameters for its daily open market operations at 9.30 am each day. This information is published on the RBA’s pages on the electronic news services (Reuters – RBA27; Bloomberg – RBA8). The release notes:

• The cash rate target.
• The change, if any, in the cash rate target from the previous day.
• The previous day’s aggregate end-of-day Exchange Settlement (ES) balances.
• The RBA’s estimate of the ‘cash position’ (the net flow of liquidity between the RBA and the rest of the banking system) for the day. The term ‘deficit’ refers to a net outflow from the system to the RBA while the term ‘surplus’ refers to a net inflow to the system from the RBA.
• Whether the RBA is looking to buy securities (inject liquidity), sell securities (withdraw liquidity) or is not proposing to deal at all.
• The terms for which the RBA prefers to undertake repurchase agreements. On most days, the RBA nominates two or three such terms, usually between overnight and around 30 days.

Deadline for Approaches (Bids/Offers)

• Approaches by eligible counterparties must be made to the Domestic Markets Desk between 9.30 am and 9:45 am by telephone on +61 2 9551 8321 or by direct line. All lines are recorded.
• In general, a bid or offer submitted to the RBA may not be modified or withdrawn after 9.45 am. It may be modified or withdrawn prior to 9.45 am.

Structure of Approaches for Repurchase Agreements

• In general, approaches should be made on a cash value basis, unless otherwise agreed with the RBA.
• The minimum size for bids for cash or offers of cash under repurchase agreement is $20 million. Smaller amounts will be considered at the RBA’s discretion.
• Participants bidding for cash under repurchase agreement do not need to nominate the specific maturities of the securities they will provide to the RBA at the time of the approach. However, participants do need to specify at the time of the approach the class of securities that will be offered in the repurchase agreement. (‘General Collateral’ or ‘Private Securities’; see Eligible Securities for the different classes of securities). Securities provided under a single repurchase agreement must be entirely of one class or another.
• There is no limit on the size or number of bids or offers that each participant can make. A participant making multiple bids/offers can set an aggregate limit.
• Bids and offers for repurchase agreements should be quoted on an actual/365 day basis, using a simple interest calculation, payable at maturity. Quotes should be expressed to two decimal places.
• When making bids and offers for repurchase agreements the desired term in days must also be nominated. Participants may nominate terms other than the RBA’s preferred terms and may nominate a range of terms.
• Participants offering cash under repurchase agreement to the RBA should do so on the basis that the securities provided by the RBA will be domestic government securities with remaining maturities of greater than 12 months. The RBA does not provide prior indications to participants of what lines of stock it will be providing under repurchase agreement and will not accept requests for specific securities.

Structure of Approaches for Outright Transactions

• Securities being offered to, or bid for, by eligible counterparties must be CGS (Treasury Bonds, Treasury Indexed Bonds and Treasury Notes) and issues by Australian State and Territory borrowing authorities and must have remaining terms to maturity of around 18 months or less.
• The minimum size of outright bids for and offers is $10 million. Smaller amounts will be considered at the RBA’s discretion.
• Bid and offers for government securities should be expressed as a yield to maturity and stated to two decimal places./li>

Allocation

• For a given term, the RBA selects the best bid/offer. When considering purchases under repo, the RBA will also take into account the type of securities to be provided.
• Subject to liquidity management constraints, allocations across terms are made on the basis of the relative value of bids/offers, within and across each class of repurchase agreement, compared to prevailing market rates for comparable terms.
• Approaches may be partially filled. Multiple successful approaches at a given term and rate within each class of repurchase agreement are filled on a pro-rata basis if the total of the approaches exceeds the amount the RBA wishes to deal at that term.
• For calculating pro-rata shares, an approach exceeding the total amount of the day’s estimated system cash position will be regarded as equal to the estimated position.
• Pro-rata allocations are based on the amounts available to be dealt after aggregate limits imposed by the participants (if any) are taken into account.
• In the normal course, a minimum allocation of $20 million will apply.
• The RBA does not apply any counterparty limits in the allocation process.

Notification

• The RBA notifies both successful and unsuccessful participants by telephone.
• The RBA endeavours to provide this notification by 10.15 am but does not guarantee to do so.
• Details of successful approaches will be confirmed by an RBA dealer as part of notification and confirmed by the counterparty at that time.
• Details of aggregate results are published over the RBA’s pages on the electronic news services after participants have been notified of results (Reuters – RBA39; Bloomberg – RBA18) at around 10.15 am. These include the value, weighted average and cut-off rates of repurchase agreements dealt, by terms, as well as the value of any outright transactions and same-day value foreign exchange swaps.

Second Round Operations

If the RBA decides to undertake a second round of open market operations, it communicates this decision to market participants via the RBA pages on the electronic news services (Reuters – RBA38; Bloomberg – RBA17). As there is no set time for such an announcement, the RBA may also alert the news services that a second round of dealing is being held.

These operations are conducted in the same way and according to the same rules as the morning operations. The only material difference is their timing. Such operations typically take place during the afternoon but may also take place during the RITS Evening Session.

• The deadline to make approaches for a second round is variable rather than the 15 minutes allowed for the morning operations. The deadline for a second round is noted at the time of an announcement on the above RBA pages.
• The RBA endeavours to respond to all bids and offers within 15 minutes of the deadline for approaches but does not guarantee to do so.

Eligible Securities for Repurchase Agreements

A list of eligible securities, detail of the criteria and the application process for eligibility can be found on the Eligible Securities page on this website.

In addition:

• Securities presented to the RBA under repurchase agreement must not enter the ‘closed period to maturity’; during the term of the repurchase agreement.
• Securities that are currently listed as eligible will lose their eligibility status if they fail to meet the RBA requirements in the future. In these circumstances, counterparties with outstanding repurchase agreements with the RBA will be required to substitute eligible stock as replacement for those securities that have lost their eligibility status. The Domestic Markets Desk will contact those counterparties affected by a change in security eligibility and arrange for substitution.
• When the RBA sells securities under repurchase agreement, the securities are sourced from the RBA’s portfolio of government bonds, including semi-government securities. Counterparties to these transactions will generally receive several different issues trading as general collateral in the repurchase agreement market. The RBA endeavours, where possible, to provide all successful counterparties with the same securities on a pro-rata basis.

Calculation of Settlement Proceeds - Repurchase Agreements

• The consideration for the first leg of the transaction is calculated using the face value and the prevailing yield to maturity of the eligible security. This yield is that which is current at the time that security details are confirmed with RBA dealers. It is then used to generate a price using the formula defined in AFMA’s Debt Securities Conventions. These may be found at http://www.afma.com.au then select Practices, Standards & Documentation > OTC Market Conventions > Debt Securities.
• Where the RBA cannot identify a timely market price for short-term debt securities, the security will be valued at bank bill swap rate (BBSW) plus 100 basis points until a market price can be identified from a recognised and independent source. Where the RBA cannot identify a timely market price for other securities, the security will be valued at 90 per cent of par value until a market price can be identified from a recognised and independent source.
  
• For transactions where the RBA is purchasing securities under repurchase agreement, a margin is applied to the market value of the transaction.
• The second leg of the transaction will take place on the maturity date of the repurchase agreement. The consideration for the second leg of the transaction is calculated as the consideration for the first leg plus an interest payment. This interest payment is based on the interest rate at which the repurchase agreement was contracted and the term of the repurchase agreement.

Calculation of Settlement Proceeds - Outright Transactions

The consideration of an outright transaction will be determined by the yield accepted by the RBA in the open market operations and agreed with the counterparty at that time. This yield is then used to generate a price using formulas defined in AFMA’s Debt Securities Conventions. These may be found at http://www.afma.com.au as discussed in the previous section.

Delivery of Securities

• Settlement of all securities must be processed through the Austraclear System on a Delivery-versus-Payment (DvP) basis.
• The Austraclear System Day Session is open between 9.15 am and 4.28 pm. Trades (both outright and repurchase agreements) are to be entered during this session. Trades should be completed by the close of the Day Session. Requests for session extensions should be made directly to Austraclear via the Austraclear Help Desk (1300 362 257) or the RITS Help Desk (1800 659 360). An exception to this requirement would be made in the case where a second round of operations was undertaken in the RITS Evening session.
• For instructions regarding specific functionalities refer to the Operating Rules of Austraclear Limited.
• If at any stage it becomes apparent to a counterparty that it may fail to deliver cash or securities to the RBA, contact should be made immediately with the Domestic Markets Desk (+61 2 9551 8321).

Margin Maintenance

Initial Margin

As noted above, when securities are sold to the RBA under repurchase agreement, the repurchase agreement is subject to an initial margin consistent with arrangements set out in the Global Master Repurchase Agreement. This margin is expressed as a percentage of the required market value of the repurchase agreement. The initial margin will vary with the type of securities given as collateral:

• For ‘General Collateral’ (i.e. securities issued or guaranteed by the Commonwealth Government, issued by State and Territory central borrowing authorities, certain supra-national organisations, foreign governments and agencies) as well as bills and Certificates of Deposit (CDs) issued domestically by an ADI with an ES account at the RBA, the margin is 2 per cent.
• For other short-term debt securities (CP and ABCP), as well as long-term asset-backed securities (e.g. CMBS, RMBS), the margin is 10 per cent.
• For other long term securities, the margin varies with the maturity and credit rating as follows:
  

  ---

  Margins by Time to Maturity and Credit Rating
  Percentage of market value of security

  ---

  Time to Maturity	0-1 years	1-5 years	5-10 years	> 10 years
  AAA-Aa3	2.0	4.0	6.0	8.0
  A1-A3	2.0	5.0	7.0	9.0

  
  Where ratings are split, the lowest rating will apply in determining the margin. Note that for securities rated below AAA, only securities issued by ADIs will be eligible.
• For eligible AAA-rated residential mortgage-backed securities (RMBS) which have been accepted from a related party, the 10 per cent margin is applied to the ‘Valued Assets’ underlying a security. Valued Assets comprise:
  • Prime domestic full-doc residential mortgages insurable by an acceptable mortgage insurer, and
  • similarly qualified low-doc residential mortgages but only up to a maximum equivalent to 10 per cent of the value of all assets underlying a security.

  Mortgages in the pool underlying a RMBS that do not meet the requirements for Valued Assets will be fully discounted by the RBA. For example, assume that Valued Assets underlying a $100 RMBS amount to $95. In this case, the RBA will provide $86.36 ($95 divided by 1.1) for the $100 of RMBS.

• For eligible P-1-rated asset-backed commercial paper (ABCP), which have been accepted from a related party, the 10 per cent margin is applied to the ‘Valued Assets’ underlying a security. Valued Assets comprise:
  • Prime domestic full-doc residential mortgages (including in securitised form) insurable by an acceptable mortgage insurer, and
  • similarly qualified low-doc residential mortgages (including in securitised form) but only up to a maximum equivalent to 10 per cent of the value of all assets underlying a security.

  Mortgages and other assets in the pool underlying an ABCP that do not meet the requirements for Valued Assets will be fully discounted by the RBA. For example, assume that Valued Assets underlying a $100 ABCP amount to $85. In this case, the RBA will provide $77.27 ($85 divided by 1.1) for the $100 of ABCP.

Issuers of eligible RMBS and ABCP must provide the RBA with information on the composition of the collateral pool underlying each security or program, respectively, so that the RBA can apply the correct margin to the security. This information should be reported by emailing a completed Mortgage Collateral Pool Reporting form to eligible_securities@rba.gov.au.

Margin Calls

Each day the RBA revalues all securities held under repurchase agreement (excluding those held under intra-day repurchase agreements) at prevailing market prices. If the current market value of all the securities held under repurchase agreement with a given counterparty falls more than 1 percentage point below the initial margin – e.g. if the initial margin is 104 per cent of the required market value, but the actual margin falls below 103 per cent during the term of the repo – then the RBA will make a margin call on the counterparty. The RBA will call sufficient margin to restore the dollar value of the margin to the dollar value of the initial margin. The initial dollar value of the 1 percentage point variation margin will continue to apply for the term of the repo.

If a counterparty determines that the current market value is more than 1 percentage point of the initial margin, the counterparty may contact the Domestic Markets Desk to request a ‘return’. An RBA dealer will agree with the counterparty the stock, the related repurchase agreement and the volume to be returned. The counterparty may request returns up to an amount that would reduce the current market value of all securities to the value of the initial margin.

Delivery of the Margin

Securities delivered to the RBA to meet a margin call are delivered through the Austraclear System for zero cash. This is commonly referred to as an ‘external settlement’. Delivery must take place by the end of the Austraclear Day Settlement Session.

The securities delivered should be of same asset class as the initial repurchase agreement or securities from the General Collateral class. (See the Eligible Securities page on this website.) For example, if a marginal call is made by the RBA on a repo backed by RMBS, it is possible to meet the call by using other eligible RMBS or, say, Commonwealth Government securities. It is not possible to meet the call by delivering repo-eligible ADI-issued securities or repo-eligible ABCP.

Treatment of Bonds going Ex-interest

In the case where a repurchase agreement spans the start of an ex-interest period and the coupon payment date, the current market value of the securities held under repurchase agreement may drop more than 1 percentage point below the initial margin as a result of the RBA paying away coupons received on those securities. In this case, the RBA may make a margin call at the same time as the cash coupon is paid to the counterparty to restore the dollar value of the initial margin.

Coupon Payments and Principal Repayments

Consistent with the terms of the Global Master Repurchase Agreement, where the RBA receives a coupon payment on a security it has holding under repurchase agreement, unless otherwise agreed, the coupon payment will be passed through to the counterparty that sold the security to the RBA in the first leg of the repo. If, as a result of the pass through, a margin call on the repo is required, the counterparty will be required to meet the margin call with eligible securities.

In the event that a principal repayment occurs on an RMBS, the RBA will pass the cash value of the principal repayment through to the counterparty on the payment date. If, as a result, a margin call is required on the repo, the counterparty will be required to meet the margin call with eligible securities.

Substitution of Securities held under Repurchase Agreement

• While under no obligation to enter into such exchanges, the RBA endeavours to meet requests from counterparties to return to them securities that the RBA holds under an existing repurchase agreement against the receipt of replacement securities.
• Cut off time for notification of a substitution is 3.00 pm on the day that the substitution is to take place. However, the Bank may consider requests after this time in extreme circumstances and at its discretion.
• The counterparty should contact the Domestic Markets Desk (+61 2 9551 8321) with both details of the securities that it wishes to call back together with details of securities that it will offer as replacement. The Bank will price the replacement securities and confirm the cash values of the trades. The cash value required for the replacement securities will be equal to, or closely approximate, the starting consideration plus accrued interest (to the date of the substitution) on the original securities. Replacement securities must be eligible securities. The trades must be completed by the end of the Austraclear Day Settlement Session.
• To protect system liquidity levels, the Bank will ensure that the cash values of the trades are as similar as possible. The Bank will not return any securities until such time as replacement securities have been received in full.
• The RBA will accept substitutions of securities between asset classes, with the exception of General Collateral. For example, it will accept an eligible certificate of deposit as substitution for another eligible certificate of deposit, eligible ADI security, eligible ABCP or RMBS. The RBA will accept a CGS, semi, or other quasi-government maturity as a replacement on any private security repo. However, General Collateral can only be used to replace securities from the General Collateral class. Where the substitution includes a change in the asset class of collateral, the margin applying to that collateral will be adjusted accordingly.

Any queries on these matters should be directed to the RBA’s Domestic Markets Desk on +61 2 9551 8321.