LIQUIDITY FACILITIES

To assist Exchange Settlement (ES) account holders manage their liquidity under Real-Time Gross Settlement (RTGS), the Reserve Bank of Australia (RBA) offers a number of liquidity facilities:

• The Intra-day Repurchase Agreement Facility
• The Overnight Repurchase Agreement Facility

Intra-day Repurchase Agreement Facility

Further details are provided in the Operational Note.

The Intra-day Repurchase Agreement Facility assists ES account holders to fund payments prior to the receipt of payments from others. This facility reduces the probability of payment gridlocks and contributes to the efficient recycling of liquidity within the system.

ES account holders use this facility by entering into a repurchase agreement with the RBA. The ES account holder sells eligible debt securities to the RBA under a repurchase agreement and simultaneously receives a credit to its ES account as payment. Later in the day, when the ES account holder is in a position to unwind the repurchase agreement, its ES account is debited and the securities are sold simultaneously back to it.

In an effort to facilitate the smooth functioning of the system, the repurchase agreements under this facility attract a zero interest rate. However, an initial margin is imposed.

The initial margin will vary with the type of securities given as collateral:

• For securities issued by the Commonwealth Government, State and Territory central borrowing authorities, certain supra-national organisations, foreign governments and agencies, and bills and certificates of deposit (CDs) issued domestically by an authorised deposit-taking institution (ADI) with an ES account at the RBA, the margin is 2 per cent.
• For Australian dollar bonds issued by an ADI with an ES account at the RBA, and rated A3 or above, the margin varies with the maturity and credit rating as follows:
  

  ---

  Margins for Bank Bonds 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.
• For eligible AAA-rated residential mortgage-backed securities (RMBS), the margin is 10 per cent. The margin is applied to “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.

  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), the margin is 10 per cent. The margin is applied to “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.

  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.

Overnight Repurchase Agreement Facility

Further details are provided in the Operational Note.

The RBA offers an Overnight Repurchase Agreement Facility to enable holders of ES accounts to borrow overnight from the RBA if they are unable to source sufficient liquidity from the market to meet their settlement obligations. The facility is designed to avoid dislocations in the payments system that can arise from liquidity pressures emerging at the end of the day.

As the name suggests, borrowers obtain funding by entering into an overnight repurchase agreement with the RBA. Eligible securities for this facility are the same as those eligible to be used in the intra-day repurchase agreement facility and a similar margin arrangements apply.

The interest rate on overnight repurchase agreements is 25 basis points above the target cash rate. By setting the repo rate above the cash rate (around which most borrowing and lending is done), the RBA is encouraging RTGS participants to seek funding in the market rather than use the overnight facility at the RBA. Similarly, the rate on ES balances is set 25 basis points below the cash rate target to encourage ES account holders to lend surplus funds into the market rather then leave them with the RBA.

In the five years since the introduction of RTGS, there has been relatively little recourse to the Overnight Repurchase Agreement Facility (Table).