# Floating Rate Repos for Open Market Operations

The RBA is introducing floating rate reverse repurchase agreements (repos) for open market operations (OMO), with a pricing rate that is linked to the cash rate target that prevails over the term of the repo. This will ensure that the price of liquidity at OMO consistently reflects the actual cash rate target, as set by the Reserve Bank Board, plus a spread. It is also robust to an environment of less ample liquidity, when OMO repos may be the marginal source of liquidity for market participants, and when other money market rates – including overnight indexed swap (OIS) rates – may be influenced by the pricing rate on OMO repos.

## Scope

Details regarding floating rate repos only apply to OMO repos, and include any rounds of OMO dealing that may be conducted by the RBA.

While OMO repos will typically be conducted as floating rate repos, the RBA intends to maintain the capability and discretion to conduct fixed rate OMO repos. This may include offering to transact in both fixed rate and floating rate repos as part of the same round of OMO dealing.

Details on changes to substitution arrangements will apply to repos contracted for the purposes of OMO, RBA securities lending and AOFM securities lending.

Consistent with current practice, prior to each round of OMO dealing the RBA will publish the details of the preferred terms to which it intends to deal. For each term, the RBA will specify the hurdle rate and whether fixed or floating rate repos will be preferred. For fixed rate repos, the hurdle rate will continue to be published as a simple interest rate and be determined by the RBA based on term-matched OIS rates plus a spread. For terms where floating rate repos will be preferred, the hurdle rate will be expressed as a spread to the cash rate target. Consistent with this, OMO participants will specify fixed rate bids using a simple interest rate, and floating rate bids will be expressed as a spread to the cash rate target.

A price differential (i.e. an amount akin to interest) will accrue daily on floating rate repos from (and including) the purchase date for the floating rate repo to (but excluding) the repurchase date for the floating rate repo. It will be calculated daily on an actual/365 basis. The pricing rate each day will be equal to the cash rate target that is effective on that day, plus any agreed fixed spread. The aggregate price differential will be rounded to the nearest cent and will be added to the original purchase price for the floating rate repo in order to determine the repurchase price that will be payable on the maturity date of the repo. To illustrate, an example is provided below. The price differential for fixed rate repos will continue to be calculated on an actual/365 basis, being rounded to the nearest cent on maturity.

## Calculating the repurchase price for floating rate OMO repos

Consider an OMO floating rate repo with the following transaction details:

The cash rate target was 1.85 per cent on the purchase date, and it increased to 2.35 per cent effective 7 September 2022. So given the 5 basis point spread, a pricing rate of 1.90 per cent will apply for the 7 days from (and including) 31 August 2022 to (and excluding) 7 September 2022, and a pricing rate of 2.40 per cent will apply for the 21 days from (and including) 7 September 2022 to (and excluding) 28 September 2022.

## Confirmation and Settlement Arrangements

The Bank will continue to publish OMO summary results to Bloomberg and Refinitiv after each round of OMO dealing. This will include the value, weighted average and cut-off rates (for fixed rate repos) or weighted average and cut-off spreads to the cash rate target (for floating rate repos), summarised by term. Consistent with current practice, OMO participants will be advised whether their individual bids were successful via email or private pages on Bloomberg or Refinitiv.

For all successful OMO bids, participants will continue to advise the Monetary Policy Implementation desk (dealingroom@rba.gov.au) of the securities that they wish to sell under repo to the Bank (or, alternatively, their decision to use the ASX Collateral triparty service). In the case of floating rate repos, the Bank will email a written confirmation of the repo which will specify the transaction details for the repo – including the reference rate (the cash rate target) and agreed spread that will be used to calculate the pricing rate each day – to OMO participants. Consistent with current practice, a written confirmation will not be provided for fixed rate repos; confirmation will continue to be via the matching of settlement instructions in Austraclear (see RITS Regulations, Annex A, Section 3, Paragraph 5).

All OMO repos will continue to be matched and settled in Austraclear using the Repo Settlement method. OMO participants will be responsible for ensuring all transaction details are successfully matched with the RBA for settlement to occur in accordance with Austraclear’s own matching criteria (see box below). For all OMO repos, the RBA will cease using the auto-unwind facility in Austraclear. Instead, the RBA will submit unwind instructions in Austraclear on the maturity date of OMO repos (or on the settlement date for any substitutions). In the case of maturing floating rate repos, the repurchase price will reflect the sum of the original purchase price and the total accrued price differential as determined according to the realised cash rate target (and the agreed spread) during the term of the repo.

## Austraclear matching criteria for repurchase agreements

The following fields from each counterparty’s settlement instructions are required to match in Austraclear in order to proceed to settlement. Fields listed below that describe the second leg of a repo (that is, the maturity/repurchase) must match when the repo commences, but can then be revised prior to the maturity of a repo. Such revisions will be necessary for floating rate repos if the cash rate target changes during the term of the repo.

At the commencement of a repo, the following details must match:

• Counterparty
• ISIN (of the securities being purchased)
• Face value (of the securities being purchased)
• Settlement date (purchase date)
• Consideration (purchase price)
• Repo rate (pricing rate)
• Maturity settlement date (repurchase date)
• Unwind consideration (repurchase price)

For the repo rate field, the RBA will use the applicable repo rate for floating rate repos at the time that the repo commences. For example, if at the start of the repo the cash rate target is 2.00% and the agreed spread is 5 basis points, the repo rate in Austraclear will be 2.05%.

At the maturity of a repo, the following must match:

• Counterparty
• ISIN (of the securities being repurchased)
• Face value (of the securities being repurchased)
• Maturity settlement date (repurchase date)
• Unwind consideration (repurchase price)

## Substitutions

A substitution is where an institution requests that securities sold to the RBA under repo are returned to the counterparty in exchange for different securities of approximately equal value. At present, for repos contracted through the Reserve Bank’s OMOs and securities lending facilities, substitutions are effected by termination of the original repo and agreeing to contract a new repo (whose repurchase date and pricing rate match the original repo). The purchase price of the replacement securities must be equal to, or closely approximate, the repurchase price of the original securities under the original repo. In other words, the price differential that had accrued on the original repo up to the date of the substitution must effectively be paid to the RBA as part of the substitution.

In future, substitutions under certain repos with the RBA – including OMO repos, RBA securities lending repos and AOFM securities lending repos – will continue to involve the termination of the original repo and the payment of any accrued price differential at the time of the substitution. However, the securities being delivered to the Bank as part of the substitution will be transferred to the Bank in exchange for a cash amount equal to the purchase price (at the start of the original repo). Accordingly, substitutions will no longer be net cash-neutral, with the net cash movement (to the RBA) equal to the accrued price differential on the returned securities. An example that illustrates the new arrangements is provided in the box below. The RBA will accept reasonable requests for substitutions submitted prior to 3:00 PM (AEST/AEDT) on the date that the substitution is due to take place. Requests for substitutions on a future value date will not be accepted.

## Change in collateral substitution arrangements

Consider a fixed rate OMO repo with the following transaction details:

On 21 September 2022, the counterparty requests the substitution of all securities sold to the RBA under this repo.

## Timeline

The RBA aims to introduce floating rate OMO repos at the start of February 2024. The changes to the settlement of substitutions will likely be introduced a little before the implementation of floating rate repos, and will only apply to new repos that commence on or after this date. The precise timing for both of these changes will be confirmed in due course.

## Status

These technical notes are published by the RBA as a guideline only. They are intended to assist participants in RBA domestic market operations to better understand how RBA domestic market operations will operate in practice. They are not legally binding. The terms and conditions which apply to domestic market operations repos are set out in the RITS Regulations.

## Contact

Please direct all enquiries to Monetary Policy Implementation.