Open market operation- carried out at the official level by the Central Bank of the country. The essence is to carry out operations with assets (securities) in the banking system. The short abbreviation is OOR.

An important point is the mechanism for conducting OER. In most cases, the state resorts to auctions, which were already mentioned above. Here, depending on the current situation in the financial markets, it can be used two auction options :

1. Feature of the first method is that the Central Bank announces the interest rate at which it is ready to provide commercial banks with funds in the form of purchasing government assets for a certain period. In particular, this rate may depend on the average rate on deposits on the interbank market and the corresponding period (1-2 months).

Commercial banks decide on the volume of securities that they can sell to the Central Bank at a specified rate. Next, applications are sent to the Central Bank, which are sorted and entered into a special device. Afterwards, the applications are summarized taking into account the assessment of the needs of the country's economy for loans, as well as the need to adjust the volume of money supply.

For example, according to requests from commercial structures, the total price of assets that they are ready to sell to the Central Bank at the rate established by the latter is 20 billion rubles. At the same time, the Central Bank assessed the current situation and decided on the need to attract only 10 billion rubles to cover the needs of the economy, that is, only half of the amount offered by commercial banks. In such a situation, applications will be satisfied, but only 50%.

The use of this option for conducting OER, as well as this method of organizing an auction, allows us to achieve maximum stability in the market and avoid serious fluctuations in interest rates on the interbank market.

2. Second version of OER relevant in a situation where there is an unstable situation in the money market. In this case, the Central Bank does not set the interest rate on purchased securities in advance. In turn, commercial banks must not only specify the volume of assets that they are ready to sell for a specific period, but also the interest rate. When determining the last indicator, each bank proceeds from its capabilities and preferences.

As in the first option, the Central Bank collects received applications, analyzes them and makes a decision taking into account current tasks in relation to financial and credit policy. At the same time, the goal of the Central Bank is to determine the limit of rates that will be optimal for the purchase of assets.

Applications of commercial structures for the sale of assets of the Central Bank (as in the situation with the initial subscription of bills by the Central Bank) must be satisfied at the interest rate specified in the application. The only exceptions can be those options when the interest rate has become lower than the minimum interest rate established by the auction. Applications that specify the minimum Central Bank rate can only be partially satisfied (taking into account a certain proportion to the total price of the assets offered for sale).

Operations to purchase debt assets for a fixed period (including reverse sales) allow the Central Bank not only to increase the size of the credit reserves of commercial banks and “pour” additional funds into the financial sector, but also to limit the overall volume of expansion by withdrawing funds from the credit system.

As already noted, transactions on the open market are carried out by the Central Bank with a certain regularity on a constant day of the week. In this case, the day on which the reverse sale is carried out must be in accordance with the day of acquisition of a new batch of debt securities from commercial structures. Consequently, if the value of the reverse sale of previously purchased securities is greater than the volume of the purchase of a new batch, then in practice this may mean limiting the volume of the bank’s credit resources.

OER can be carried out by the Central Bank on an irregular basis (from time to time), when there is a need to expand or limit the volume of funds in circulation. In such a situation, the Central Bank may sell or purchase securities. Commercial banks, joint-stock companies and LLCs that have the appropriate license can act as counterparties.

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Open market operations are

Hello, friends. On personal issues you often have to communicate with a representative of the Central Bank.

I was very interested to find out which line of work this man had become most tired of over the years of his work experience.

It turned out that the open market had already become like a bone in the throat. To make the scale of the existing tension clearer, I will tell you, dear readers, about open market operations - what they are and what their main features are. Don't pass by such interesting and useful information.

What are open market operations?

The open market is the Central Bank's operations for the purchase and sale of government securities in the secondary market. Open market purchases are paid for by the Central Bank by increasing the seller's bank reserve account.

The total monetary reserves of the banking system increase, which, in turn, leads to an increase in the money supply.

Sales of open market securities by the Central Bank will lead to the opposite effect: the total reserves of banks decrease and, other things being equal, the money supply decreases.

Since the Central Bank is the largest open market dealer, an increase in the volume of purchase and sale transactions will lead to changes in the price and yield of securities.

Therefore, the Central Bank can influence interest rates in this way. This is the best tool, but its effectiveness is reduced by the fact that the expectations of market participants are not entirely predictable.

Advantages of this method:

1. The central bank can control the volume of transactions;
2. operations are quite accurate, bank reserves can be changed to any given value;
3. transactions are reversible, since any error can be corrected by a reverse transaction;
4. the market is liquid and the speed of transactions is high and does not depend on administrative delays.

In the open market, central banks use two main types of operations:

• direct transactions - purchase and sale of securities with immediate delivery. Interest rates are set at auction. The buyer becomes the owner of securities that do not have a maturity date;
• repo transactions are carried out under the terms of a repurchase agreement. Such transactions are convenient because the repayment terms can vary.

The types of open market operations are divided into:

1. dynamic operations - aimed at changing the level of bank reserves and the monetary base. They are permanent and involve direct transactions;
2. protective operations - carried out to adjust reserves in the event of their unexpected deviations from a given level, i.e., aimed at maintaining the stability of the financial system and bank reserves. For this type of transaction, repo transactions are used.

The use of open market operations depends on the level of development, the institutional environment and the degree of liquidity of the government securities market.

As an analogue of open market operations, the Bank of Russia also uses foreign exchange interventions.

Foreign exchange interventions are the purchase and sale of foreign currency on the domestic market to increase or sterilize the money supply. They affect the exchange rate of the ruble against the dollar.

The sale of dollars by the Central Bank will lead to an increase in the ruble exchange rate, while the purchase will lead to its decrease.

If the Central Bank conducts foreign exchange interventions to correct short-term exchange rate fluctuations, then it loses control over bank reserves and, accordingly, over the money supply.

In addition to currency interventions, the Bank of Russia plans to use a more flexible instrument - currency swaps.

Currency swaps are transactions of purchase and sale of currency on the terms of immediate delivery with a simultaneous reverse forward transaction. They allow you to adjust the level of liquidity of the foreign exchange market without creating additional pressure on the ruble exchange rate.

Source: http://site/www.aup.ru/books/m177/3_2.htm

Indirect methods of monetary policy

Central bank operations on the open market are currently the main instrument in world economic practice within the framework of the applied indirect methods of monetary policy.

The Central Bank sells or buys highly liquid securities at a predetermined rate, including government securities that form the country’s internal debt, at its own expense on the open market.

This instrument is considered the most flexible instrument for regulating credit investments and liquidity of commercial banks.

The peculiarity of open market operations is that the central bank can exert market influence on the amount of free resources available to commercial banks, which stimulates either a reduction or expansion of credit investments in the economy, while simultaneously influencing the liquidity of banks, reducing or increasing it accordingly.

Attention!

This influence is carried out through changes by the central bank in the purchase price from commercial banks or the sale of securities to them on the open market.

The main securities with which transactions are carried out on the open market include the most liquid securities that are actively traded on the secondary market, the risk of which is extremely insignificant.

Such securities are various obligations issued by government authorities:

1. debt certificates (Bank of the Netherlands, Bank of Spain, European Central Bank);
2. financial bills (Bank of England, German Bundesbank, Bank of Japan);
3. bonds (Bank of Korea, Central Bank of Chile, Bank of Russia).

The choice of securities depends on the degree of development of the financial market and the independence of the central bank, its ability to conduct transactions not only with government securities, but also with securities of other issuers.

The influence of the central bank on the money market and the capital market is that, by changing interest rates on the open market, the bank creates favorable conditions for credit institutions to buy or sell government securities to increase their liquidity.

Open market operations are usually carried out by the central bank in conjunction with a group of large banks and other financial institutions.

Open market operations are more adapted to short-term market fluctuations compared to accounting policies.

In the open market, central banks use two main types of transactions: direct transactions and repurchase agreements.

Direct transactions mean the purchase and sale of securities for immediate delivery. The buyer becomes the unconditional owner of the securities. These types of transactions do not have a maturity date. Interest rates are set at auction.

REPO transactions are carried out under the terms of a repurchase agreement. Direct repo transactions mean the purchase of securities by the central bank with the obligation of the dealer to buy them back after a certain period.

When concluding reverse repo transactions, or pairs (sometimes they are also called mismatch), the central bank sells securities and assumes an obligation to buy them back from the dealer after a certain period. Such transactions are convenient because repayment periods can vary.

By type, open market operations are divided into dynamic and protective. Dynamic open market operations aim to change the level of bank reserves and the monetary base. They are permanent in nature and involve direct transactions.

Protective operations are carried out to adjust reserves in the event of their unexpected deviations from a given level, i.e., they are aimed at maintaining the stability of the financial system and bank reserves. For this type of transaction, repo transactions are used.

The Bank of Russia used repo transactions widely from 1996 until the financial crisis of 1998. The subject of the transactions were government short-term bonds (GKOs) and federal loan bonds (OFZ).

The condition for concluding a direct repo transaction was the dealer's short position; for concluding a direct repo transaction, the dealer's short position was the result of trading within the limit established by the Bank of Russia.

That is, transactions were concluded only when the dealer’s obligations exceeded the amount of funds previously deposited in the trading system.

After the crisis, the Bank of Russia allowed inter-dealer repo transactions - the conclusion of repo transactions with GKOs - OFZs between dealers meeting certain criteria.

It was assumed that this would allow the Bank of Russia to reduce the volume of money emission through a more rapid redistribution of bank reserves.

The use of open market operations as a monetary policy tool depends on the level of development, the institutional environment and the degree of liquidity of the government securities market.

After the financial crisis of 1998, the Bank of Russia does not have such an opportunity. Operations are hampered by the absence of government securities in demand in the portfolio of the Central Bank of the Russian Federation.

Their resumption will depend on the adoption by the Government of the Russian Federation of a decision to convert a sufficient part of the portfolio into securities with market characteristics.

Today the Bank of Russia carries out transactions only with federal bonds. This is due to the fact that until recently the securities market of the constituent entities of the Russian Federation was not developed to the required extent.

At the same time, the small volumes and low liquidity of these securities did not allow them to be used as a basic instrument for transactions.

The issue of using bonds of the constituent entities of the Federation in the future as the underlying asset for conducting operations on the open market has become increasingly discussed.

Attention!

It should be noted that the Bank of Russia’s decision to admit a particular asset or liability, or a particular issuer, for use in banking operations should not be related to a specific issuer or a specific asset.

Recently, individual corporate issuers have managed to obtain government guarantees for their obligations from some constituent entities of the Russian Federation.

These issuers apply to the Central Bank of the Russian Federation with a request to include their assets in the list of securities for conducting operations by the Bank of Russia on the open market.

The inclusion of an asset of a corporate issuer in the list of securities accepted by the Bank of Russia as collateral actually initially gives a positive result.

The issuer's securities are included in the Lombard List of the Central Bank of the Russian Federation - a list of securities that are accepted as collateral for repo transactions.

This may cause an increase in the attractiveness of such securities and an increase in trading activity with them. However, the Central Bank of the Russian Federation does not undertake any obligation to keep these securities on the Lombard List forever.

At the slightest unfavorable change in the circumstances of the issuer's financial position, the Bank of Russia excludes such securities from the Lombard lists, which violates the stability of the securities market.

To avoid such a situation on the securities market, he decided not to include bonds of individual issuers in his transactions.

In addition, it does not have the ability to monitor the financial position of each issuer to determine to what extent its bonds are appropriate to remain on the pawn list.

The specifics of regulation of the Russian stock market are such that the Central Bank of the Russian Federation can carry out operations on the stock market only in the government securities sector of the Moscow Interbank Center.

Any other transactions with equity securities cause problems with obtaining a license as a professional participant in the stock market.

To maintain liquidity in the government securities market, the Bank of Russia uses “repo operations”.

The Bank of Russia may provide funds to a primary dealer in the securities market to close a short open position (i.e. when liabilities are greater than claims) in exchange for government securities.

The dealer undertakes to repurchase the same securities after a certain period of time, but at a different price. The term of the repo transaction is fixed and is 2 days.

The repo market is a fairly effective short-term instrument of the Bank of Russia’s monetary policy and one of the indirect instruments for maintaining liquidity in the government securities market.

Source: http://site/eclib.net/3/18.html

Open Market Operations

Open Market Operations are deposit and credit repo operations, transactions for the purchase and sale of assets (securities or currency).

Open market operations are conducted primarily using government securities.

Open market operations are monetary operations and, in countries with an active interest rate policy, constitute the operating basis for the monetary policy of the country's central bank.

Their use, along with the mechanism of mandatory reserve requirements and standing deposit and overnight credit operations, makes it possible to effectively regulate the monetary market and implement monetary policy.

Open market operations are divided into the following types:

• regular;
• operations for refinancing or depositing for a longer period (usually 3 months, less often - 6, 9, 12 months);
• adjustment operations;
• structural operations.

Regular open market operations are the most common operations of central banks. They are carried out regularly on a clearly defined schedule.

Most often these are deposit or credit transactions on the open market with 7 or 14 day terms.

Regular open market operations are the operational basis of the monetary policy of central banks and are used to regulate interest rates, manage market liquidity and reflect the state of monetary policy.

Regular open market operations provide the bulk of bank refinancing in conditions of insufficient liquidity or sterilization of banks' liquidity in conditions of its excess level.

The interest rate for regular operations on the open market is recognized as the base rate of the central bank and is a reference point for the cost of money for monetary market entities.

Attention!

Refinancing or deposit operations for a longer period (usually 3 months, less often - 6, 9, 12 months) are carried out at market rates according to the standard tender procedure on a repayable basis with monthly regularity.

Adjustment operations are intended to quickly correct unexpected fluctuations in market liquidity in order to smooth out the impact on interest rates.

They do not have standardized terms and regularity and are carried out mainly in the form of reverse transactions, less often they can take the form of direct transactions, foreign currency exchange swaps and attracting time deposits through quick tenders or bilateral procedures.

Structural operations are carried out at the initiative of the central bank for the structural regulation of the financial market through the issuance of debt certificates, reverse and forward operations on a regular or irregular basis.

Source: http://site/discovered.com.ua/glossary/operacii-na-otkrytom-rynke/

What are open market operations?

Open market operations are a kind of transactions carried out exclusively at the official level by the central bank of a particular country.

Open market operations ("OMO") consist of any purchase and sale of government securities, and sometimes commercial securities, by a central bank authority for the purpose of adjusting the money supply and credit conditions on an ongoing basis.

Open market operations can also be used to stabilize prices of government securities, a goal that conflicts with the central bank's temporary lending policy.

When the central bank buys securities on the open market, the effect will be to increase the reserves of commercial banks, from which they can expand their lending and investment.

To increase the value of government securities, which is equivalent to reducing interest rates and to reduce interest rates, usually thereby encouraging investment in business.

Open market operations typically involve short-term government securities (in the United States, often Treasury bills).

Observers disagree about the wisdom of such a policy. Proponents believe that dealing with both short-term and long-term securities will distort the interest rate structure and hence the allocation of credit.

Opponents argue that this would be appropriate because interest rates on long-term securities have a more direct impact on the long-term trend of investment activity, which is responsible for fluctuations in employment and income.

Federal Reserve System

Open market operations are the Federal Reserve System's (Fed) most flexible and frequently used means for implementing a government's monetary policy.

The Federal Reserve has several different types of OMOs at its disposal, although repos and securities purchases are the most commonly used.

Open market operations allow the Fed to influence the supply of reserve balances in the banking system and thereby influence short-term interest rates and the achievement of other monetary policy objectives.

In addition to open market operations, the Fed can influence the level of reserve balances by either reinvesting proceeds from maturing securities in the open market account into new securities (reserve and neutral) or redeeming them with maturing securities (reserve drainage).

Open market operations are one of the three main tools used by the Federal Reserve to achieve its monetary policy objectives.

Other instruments change the conditions for borrowing discounts and adjust required reserve ratios. Execution of OMOs in the "open market" - also known as the secondary securities market, purchases the Federal Reserve's most flexible means of pursuing its purposes.

By adjusting the level of reserve balances in the banking system through open market operations, the Fed can offset or maintain persistent, seasonal, or cyclical changes in the supply of reserve balances and thereby affect short-term interest rates and expansions of other interest rates.

Monetary policy and the efficiency of using reserve balances

The Federal Open Market Committee is the top monetary policy authority of the Federal Reserve System.

Delegates responsibility for the implementation of U.S. monetary policy to the Market System open account manager at the Federal Reserve Bank of New York through authorizations. This permission is contained in the minutes of the first meeting of each year.

A manager is responsible for employees at the Federal Reserve Bank of New York. Thus, the bureau performs open market operations on behalf of the entire Federal Reserve System.

After each policy meeting, which occurs every six to eight weeks, the FOMC issues a SOMA Manager Directive, which sets out the approach to monetary policy that the FOMC considers appropriate for the specified period of time between its meetings.

The Directive contains the rate at which the FOMC would like to receive funds for trading for a certain period.

The Federal Reserve conducts open market operations with primary dealers, dealers in government securities that have an established trading relationship with the Federal Reserve.

Attention!

Thus, while the policy target rate is the unsecured lending rate between banks (the Fed Funds), and the Federal Reserve operates in the collateralized lending market with primary dealers (repos).

This structure works because primary dealers have accounts with clearing banks, which are depository institutions.

Therefore, when the Federal Reserve sends and receives funds from a dealer's account to its clearing bank, the action adds or drains reserves into the banking system.

Because of this adjustment to the supply of reserve balances, open market operations affect federal funds and the interest rate that depository institutions pay when they borrow unsecured reserve balances over time from each other.

Banks may borrow reserves from the federal funds market to meet reserve requirements set by the Federal Reserve and to maintain adequate balances in their Fed accounts to cover checks and electronic payments on their behalf.

Changes in the federal funds rate often have a strong impact on other short-term rates.

In order to most effectively influence the level of reserve balances, the Federal Reserve has created what is called a "structural deficit."

That is, it has created constant additions to the supply of reserve balances, which are somewhat less than the volume of the total demand. Then on a seasonal and daily basis, everything is positioned to add balances temporarily to get to the right level.

Specifically, the bureau creates a “SOMA” portfolio by purchasing U.S. Treasury securities on the open market. Because the COMA buy-and-receive portfolio, the securities purchased in it are typically held until maturity and are included in the Fed's securities purchases in ever-increasing levels of reserve balances.

In addition to the COMA portfolio, the Fed's overall portfolio includes long-term repo books and a short-term repo book. Repos are also called repurchase agreements or RPS, which is a form of collateralized lending where the Fed lends money to the primary dealers and the primary dealers give high-quality securities to the Fed as general collateral for the loan.

REPO transactions

While the COMA portfolio offsets factors that continually drain or remain from the banking system in the form of Federal Reserve notes, repo accounting is used over the long term to offset seasonal movements in factors.

Long-term repos currently have a maturity of 14 days and are conducted every Thursday early in the morning.

The repo book is short-term, consisting of repo transactions with shorter than 14-day maturities, and a predominance of overnight repo transactions.

These transactions are typically carried out every day to fine-tune the level of bank reserves needed that day.

Although typically these transactions will add balances, sometimes the system must have outstanding balances, in which case the bureau will conduct a reverse repo transaction.

Reverse repo transactions are the opposite of RP. Instead of the loan money going to the dealers, the desk borrows money from the dealers against the collateral from the system's open market account.

Repos and reverse repos can be conducted for a period of up to 65 business days. They are usually settled on the same day, although they can be resolved earlier.

For information on eligible repos to be secured, the Federal Reserve Act and the internal authorization that exists in the minutes for the first annual meeting should be reviewed.

Collection of information, preparation and conduct

Staff begins each workday by collecting information about market activity from a range of sources.

Fed traders are discussed with primary dealers about how the stock market may unfold the next day and how the dealers' task of financing their securities positions is progressing at that point.

The staff also speaks with major banks about their reserve needs and the banks' plans to meet them and about the performance of brokers and their activities in this market.

Collecting data on bank reserves for the previous day and forecasting factors that may affect reserves for future days is a task for operational staff.

The staff also receives information from the Treasury about its balance sheet at the Federal Reserve and also assists in Treasury management. this balance and treasury accounts in commercial banks.

Attention!

Following discussions with the Treasury, stock forecasts have been completed. Then, after reviewing all the information collected from various sources, the bureau staff needs to develop a plan of action for the day.

This plan is reviewed with stakeholders around the system during a conference call each morning.

Conditions in financial markets, including domestic securities and money markets, as well as foreign exchange markets, are currently being reviewed.

When the conference call is completed, the table conducts any agreed upon open market transactions.

The Bureau initiates this process by announcing the OMO through an electronic auction system called FedTrade, an option for dealers to submit bids or offers, as appropriate.

For a repo transaction, the announcement states the time and duration of the auction, but does not determine its size. The size of the operation is usually announced later, after the operation is completed.

Dealer offers are evaluated at a competitive, best price. Primary dealers typically allow about 10 minutes to submit their bids and notification of results about a minute after the auction closes.

The auction results will also be simultaneously sent to the bank's external website.

Auctions for direct purchases typically become known later in the morning. The announcement contains a range of maturities for Fed securities, consideration for purchase opportunities, and a list of all securities that will be excluded within that range.

These operations are typically open for about 30 minutes. Dealers bid on the securities, and the Federal Reserve compares the relative advantage of bids across the securities, accepting the best relative bids submitted by the participating parties.

Typically, earnings are reinvested, as is the size of the permanent reserve. From time to time, due to portfolio recommendations or reserve requirements, earnings will be generated, which reduces the portfolio size and completely depletes reserve balances from the banking system.

Source: https://biznes-prost.ru/operacii-na-otkrytom-rynke.html

Open Market Operations of the Central Bank

By buying or selling government securities on the open market, the Central Bank can either inject resources into the state's credit system or withdraw them from there.

Open market operations are usually carried out by the Central Bank together with a group of large banks and other financial institutions.

Operations for the purchase/sale of securities on the open market are used in the practice of most central banks.

These operations can be one of the main tools for regulating bank liquidity on a daily basis (for example, in the USA, Canada and Australia), or used as an anti-crisis tool to carry out additional injections of funds into the banking sector and/or impact on longer-term profitability in the government segment and corporate bonds (in particular, the Bank of England, the Bank of Japan, the US Federal Reserve).

In the practice of the Bank of Russia, transactions for the purchase/sale of securities on the open market are used on a relatively small scale as an additional tool for regulating bank liquidity.

The main factor reducing the potential for its use of this instrument is the relative narrowness and low liquidity of the Russian government securities market.

In addition, during the period of formation of a banking liquidity surplus, the use of this instrument is limited by the relatively small size of the Bank of Russia’s own securities portfolio.

According to the legislation, the Bank of Russia can purchase/sell both government and corporate debt securities on the market (shares only within the framework of repo transactions).

At the same time, the purchase of government securities by the Bank of Russia can only be carried out on the secondary market (in order to limit the possibilities of direct emission financing of the budget).

In the practice of the Bank of Russia, the purchase/sale of corporate securities was used only as part of repo transactions, or when selling securities received as collateral under repo transactions in the event of improper fulfillment by counterparties of their obligations under the second part of the transaction.

Direct transactions for the purchase/sale of government securities without obligations to resell/repurchase are used irregularly by the Bank of Russia.

Let us assume that there is a surplus of money supply in circulation in the money market and the Central Bank sets the task of limiting or eliminating this surplus.

Attention!

In this case, the Central Bank begins to actively offer government securities on the open market to banks and other business entities that buy government securities through special dealers.

As the supply of government securities increases, their market price falls, and interest rates on them rise, and, accordingly, their “attractiveness” to buyers increases.

The population (through dealers) and banks begin to actively buy government securities, which leads to a reduction in bank reserves.

A reduction in bank reserves, in turn, reduces the money supply by a proportion equal to the bank multiplier.

Let us now assume that there is a shortage of funds in circulation in the money market. In this case, the Central Bank pursues a policy aimed at expanding the money supply, namely: the Central Bank begins to buy government securities from banks and the population.

Thus, the Central Bank increases the demand for government securities. As a result, their market price rises and their interest rate falls, making Treasury securities “unattractive” to their holders.

The population and banks begin to actively sell government securities, which leads to an increase in bank reserves and (taking into account the multiplier effect) to an increase in the money supply.

A repo operation is a transaction consisting of two parts: the sale and subsequent purchase of securities after a certain period at a predetermined price.

The difference between the sale and purchase prices is the cost of borrowing through a repo transaction.

The mechanism of repo transactions implies that for the period of provision of funds, the securities acting as collateral become the property of the lender, which reduces the credit risk for this type of transaction and simplifies the resolution of situations in the event of default by the borrower.

Currently, REPO operations are used by the Bank of Russia only to provide liquidity to commercial banks.

In the first part of the transactions, the Bank of Russia acts as a buyer, and its counterparty - a credit institution - as a seller of securities accepted as collateral.

In the second part of the transactions, the Bank of Russia resells the securities of the credit institution at the price established at the time of the transaction.

REPO operations with the Bank of Russia are carried out in organized trading on the MICEX Stock Exchange and the St. Petersburg Currency Exchange, as well as not in organized trading using the information system of the Moscow Exchange and the Bloomberg information system.

Reverse modified repo operations, which provide for the sale by the Bank of Russia of securities from an established list with an obligation to repurchase, were used by the Bank of Russia as a tool for absorbing bank liquidity until 2004 and are not currently carried out.

Example. At the beginning of 2014, the ruble exchange rate began to fall rapidly. Due to growing inflationary fears, this situation no longer suited the Bank of Russia.

The monetary regulator stopped one-day repo operations with banks that previously used the proceeds for speculation in the foreign exchange market, and also reduced offers on seven-day repo operations conducted on Tuesdays.

As a result, commercial banks began to take profits on foreign exchange positions to fill liquidity gaps, and the ruble began to strengthen.

Operations with Bank of Russia bonds

The issuance by central banks of their own short-term bonds is quite widespread in the world practice of conducting monetary policy.

These operations are used especially actively in countries with developing financial markets, which are characterized by a systematic surplus of liquidity in the banking sector.

Their own bonds, in particular, are issued by the central banks of South Korea, Israel, Brazil, Chile, and the Republic of South Africa.

The placement of central bank bonds is used to sterilize liquidity, usually for periods from several months to 1 year, but it is also possible to use longer-term securities (with terms up to 3-5 years).

Operations with central bank bonds are a fairly flexible tool for regulating bank liquidity, since the credit institution that holds them can, if necessary, use them as collateral for interbank lending operations and/or attracting refinancing from the central bank.

In addition, the credit institution can also sell these securities on the secondary market, or, if so provided, sell them to the central bank.

Attention!

The Bank of Russia issues its own bonds (Bank of Russia bonds - OBR) on a regular basis in order to regulate the liquidity of the banking sector.

During periods of formation of a stable surplus of banking liquidity, operations with OBR are one of the market instruments for sterilizing liquidity (this type of operation also includes deposit auctions).

The convenience of using OBR transactions for credit institutions is the possibility of early sale of securities on the secondary market, as well as the possibility of using them as collateral both for interbank lending transactions and for Bank of Russia liquidity provision operations.

OBRs are included in the Lombard List of the Bank of Russia and are accepted as collateral for Bank of Russia loans secured by collateral (blocking) of securities and direct repo operations of the Bank of Russia.

OBRs are issued in the form of zero-coupon discount bonds, which provides for the sale of bonds to holders at a price less than par value, with subsequent redemption of bonds at par value in the absence of coupon payments to holders during the circulation period of the issue.

The right for the Bank of Russia to issue its own bonds for the purpose of implementing monetary policy is established by Art. 44 of the Federal Law of July 10, 2002 No. 86-FZ “On the Central Bank of the Russian Federation (Bank of Russia)”.

The issue of OBR is carried out in accordance with Art. 27.5-1 of the Federal Law of April 22, 1996 No. 39-FZ “On the Securities Market” and Bank of Russia Regulations of March 29, 2006 No. 284-P “On the procedure for issuing Bank of Russia bonds.”

5.2.1. The essence of government securities

Government securities are debt obligations of the issuer (the state, most often represented by the Treasury) to the acquirer of these obligations (the holder of government securities) in that the issuer undertakes to repay the securities on time and in full, to pay interest due, if any. from the agreement on the purchase of securities, as well as fulfill other obligations specified in the agreement.

In the world, centralized issue of securities is used as an instrument of state regulation of the economy: as a lever of influence on monetary circulation and control of the volume of money supply; and also as a means of non-emission covering the deficit of state and local budgets, a way to attract funds from enterprises and the population to solve certain specific problems. Government securities are traded in the national currency of the issuer.

The central bank helps the government determine the best moment to issue bonds, their price, yield and other characteristics that make the issue attractive to investors, and the best place to place the bonds. To successfully cope with this task, the bank must have accurate and timely information about the state of the economy, the flow of credit resources, etc. Despite efforts to be extremely informed, the bank is sometimes forced to make decisions before statistics confirm the expected event . Therefore, he conducts his own research, the results of which are usually published and are of great interest to scientists, economists, managers, and employees of financial institutions.

5.2.2. Pricing models for government securities

When analyzing the pricing mechanism for government securities, one should distinguish between elements that are predetermined by government agencies issuing securities and those that are formed under the influence of the secondary market, and therefore reflect market processes of the collision of supply and demand. The market elements of this mechanism are not much different from the pricing models for currencies and securities. But elements subject to state influence acquire specific features.

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The main features of pricing for government securities are laid down by their issuers at the stage of developing and accepting the conditions for issuing securities, determining the market space for their distribution and operation. If such space is extremely narrow, the price of government securities is almost uniquely determined by such predetermined parameters as the initial offering price, redemption price, interest rate and premium. In this case, the price is tied to the date of sale of the security and may well be called fixed. However, the space of the secondary market and its area of ​​operation are not limited, and the issuer is able to predetermine only the initial price of the primary placement and the final redemption price, while intermediate prices during the entire period of validity of the securities are set by the market, and not by the government agencies issuing them.

Government Bond Yield

There are two main types of value of government securities:

Denomination – the price set by the issuer, with a certain coupon yield (yield);
market value – the price of a security on the secondary market.

The yield of a security is inversely proportional to its market value.

Example. The paper was purchased from the issuer by Bank A at a par value of 100 conventional units. The coupon yield (yield) is 3%. After 1 year, the state returns the debt to Bank A 100 units and coupon income, which is 3 conventional units.

If Bank A sold the paper to Bank B for 95 units on the secondary market, then Bank B, having redeemed the paper at par, would receive 100 units - the principal amount of the debt and 3 units - the coupon income. Thus, Bank B’s income on the security was (100 – 95) + 3 = 8 units (in the example, the calculations are simplified compared to calculations on the real market).

When bond yields rise, which means their prices fall, there is an increased interest in investing in this financial instrument (Fig. 5.2.1). To purchase bonds, you need national currency, i.e. the demand for currency increases, which leads to an increase in the exchange rate of this currency. In this case, it is necessary to take into account not only changes in yields, but also to compare the yields of bonds of different countries, since the most profitable bonds are of interest.

5.2.3. Open market operations of central banks

One of the most important means of regulating money circulation is open market operations, which consist of the Central Bank selling or purchasing government securities, bankers' acceptances and other credit obligations from commercial banks at a market or pre-announced rate. In case of purchase, the Central Bank transfers the corresponding amounts to commercial banks, thereby increasing the balances in their reserve accounts. Upon sale, the Central Bank debits the amounts from these accounts. Thus, these operations are reflected in the state of the reserve position of the banking system and are used as a method of its regulation.

In Russia, open market operations mean the purchase and sale by the Central Bank of the Russian Federation of government securities that have a high degree of liquidity. Commercial banks are the main investors in the securities market, which expands the regulatory influence of the Central Bank of the Russian Federation on their lending capabilities.

Currently, in world economic practice, open market operations are the main means of regulating money supply. This is primarily due to the unusually high flexibility of this instrument, which allows one to influence the monetary situation in short-term periods and smooth out unwanted fluctuations in the money supply.

Stabilization monetary policy is implemented as expansionary (expanding the supply of money) during an economic downturn and as restrictive (restraining the growth of the money supply or reducing the supply of money) during a period of “overheating” of the economic situation.

Expansionary Policy, Easy Money Policy. It is carried out at the stage of economic downturn and aims to stimulate it. This is that the FED provides banks with abundant cash resources that can be used for low-cost loans that expand consumer demand as well as business investment. For this purpose, the FED buys government securities, thereby increasing bank monetary resources; interest rates on bank loans decrease, the amount of loans issued and the volume of money in circulation increases, which ultimately leads to an increase in consumer demand.

Restrictive monetary policy (Contractionary Policy, Tight Money Policy). Conducted at the top of the business cycle in order to prevent overheating of the economy, which could lead to uncontrolled inflation and a severe downturn in activity that turns into a crisis. Through timely measures, the FED seeks to limit growth in advance to ensure a smooth deceleration and gentle decline of the economic cycle. To achieve this, government securities are sold, as a result of which the volume of banks' resources falls, interest rates on loans rise, since alternative investment of bank funds gives a high return (interest rates on government bonds are high); the volume of loans falls due to their high cost, leading to a slowdown in business activity, increasing unemployment and suppressing consumer demand.

5.2.4. Types of government securities

Government securities are usually divided into marketable and non-marketable - depending on whether they are traded on the free market (primary and secondary) or are not included in secondary circulation on stock exchanges and are freely returned to the issuer before their expiration date. The bulk of government securities are marketable.

Government securities accepted in world practice include the following.

Treasury bills are short-term government obligations, usually repayable within one year from the time of their issue and sold at a discount, that is, at a price below the par value at which they are repaid (or sold at par, but issued at a price above par). In the USA, such securities are called Treasury Bill (T-Bill, bills).

Medium-term treasury bills, treasury bonds - treasury obligations with maturities from one to five years, usually issued with the condition of paying a fixed interest rate.

USA - 10-year Treasury Note (10-year Treasury notes).

UK – Gilts. Government obligations known as gilt-edged securities.

Japan - JGB (Japanese Government Bonds) - Japanese government bonds: Bank of Japan buys 10- and 20-year JGBs every month to add liquidity to the monetary system.

Eurozone - The German 10-year Bund is commonly used as a benchmark. The FOREX market usually benchmarks 10-year notes against their foreign counterparts, namely the German 10-year Bund for the euro, the 10-year JGB for the Japanese yen and the 10-year Gilt for the British pound. The presence of a spread (difference in yield) between 10-year US Treasury notes and non-US notes affects the exchange rate. More US Treasury notes (rising yields) usually benefits the US dollar against foreign currencies.

Long-term treasury bonds – with a maturity of up to ten years or more; coupon interest is paid on them. Upon expiration, holders of such government securities have the right to receive their value in cash or refinance into other securities. In some cases, long-term liabilities may be repaid on a provisional date, i.e. several years before the official maturity date. In the USA - Treasury-Bonds (T-Bond, bonds). This is the most important indicator of inflation expectations in the markets.

Markets tend to use quantity (rather than price) when it comes to bond levels. As with all obligations, the quantity of 30-year Treasuries is inversely proportional to the price. There is no clear relationship between the long bond and the US dollar. But the following relationship usually holds true: a fall in the bond price (increase in quantity) due to inflationary concerns can “press down” the dollar. The rise could be the result of strong economic data. However, as the supply of 30-year bonds has begun to dwindle due to Treasury recovery efforts, the role of the 30-year bond as a benchmark is gradually being transferred to its 10-year counterpart. As a benchmark asset, long bonds move capital flows for global reasons. Financial or political turmoil in third world markets generates hot interest in US Treasuries due to their safe nature, thus helping the dollar.

Eurobond (eurobonds).

A bond issued outside the issuer's home country, usually by its foreign subsidiaries. These bonds do not necessarily have to be sold in Europe, although their main market is in London. The denomination of Eurobonds is set in the currency of another country deposited in the country of issue, which is why there are Eurodollar and Euroyen bonds.
- A bond offered for sale after issue simultaneously to investors in different countries.
- Bond guaranteed by an international syndicate.

A credit rating expresses the rating company's opinion regarding the issuer's ability and readiness to fulfill its financial obligations in a timely manner and in full. Credit ratings can be assigned to an issuer (sovereign government, regional and local authorities, corporations, financial institutions, infrastructure, insurance companies, managed funds) or an individual debt obligation. Since government securities are backed by the country's assets, long-term government credit ratings can be classified as government securities ratings.

A recommendation regarding whether to buy, sell or hold certain securities,
an opinion on the market price of debt obligations and the investment attractiveness of the issuer for a particular investor.

Moody's (http://www.moodys.com);
Standard & Poors (http://www.sandp.ru);
Fitch Ibca. (http://www.fitchibca.com).

The long-term rating assesses the issuer's ability to timely fulfill its debt obligations. Long-term ratings range from the highest category, “AAA,” to the lowest, “D.” Ratings ranging from “AA” to “CCC” may be supplemented by “plus” (+) or “minus” (-) signs, indicating intermediate rating categories in relation to the main categories.

“Positive” – the rating may increase.
“Negative” – the rating may decrease.
“Stable” – change is unlikely.
“Developing” – the rating may be upgraded or downgraded.

Content

To use this instrument, the country must have a developed securities market. By buying and selling securities, the Central Bank influences bank reserves, interest rates, and therefore the money supply.

To increase the money supply, he begins to buy securities from commercial banks and the public, which allows commercial banks to increase reserves, as well as issue loans and increase the supply of money (the “cheap money” policy).

If the amount of money in a country needs to be reduced, the Central Bank sells government securities, which leads to a reduction in lending operations and the money supply ("cheap money" policy).

Open market operations are the most important, operational means of influence of the Central Bank on the monetary sphere.

Depending on the state of the country’s economy, the Central Bank can choose the following types of monetary policy and certain goals. In conditions of inflation, a policy of “dear money” is being pursued, aimed at reducing the money supply: 1) increasing the discount rate, 2) increasing the required reserve ratio, 3) selling government securities on the open market. The “dear money” policy is the main method of anti-inflationary regulation.

During periods of production decline, a “cheap money” policy is pursued to stimulate business activity. It consists in expanding the scale of lending, weakening control over the growth of the money supply, and increasing the money supply. To do this, the central bank:
1) reduces the discount rate;
2) reduces the reserve ratio;
3) buys government securities.

Banks: their types and functions.

Banks are special economic institutions, their types being centers of credit relations. Their main function is to accumulate funds and lend them out. Banks also accumulate cash income and savings of the population, funds of state, public and other organizations. These amounts themselves are intended to be spent as a means of purchase or payment. Meanwhile, when they fall into the hands of businessmen, they are used to make a profit.

Banks also issue credit means of circulation - signs of value that serve as money in trade turnover and payments (cash, banknotes).

Banks perform their functions in two interrelated types of operations: passive - operations for the formation of banking resources and active - operations for their placement and use (Fig. 12.2.).

Banks' funds consist of their own capital (they form, as a rule, an insignificant part of all funds: in the USA, for example, 8%) and deposits - customer deposits. Deposits are divided into time deposits (investments for a predetermined period and not subject to withdrawal before its maturity) and demand deposits (deposits to current accounts that the bank is obliged to issue upon the depositor’s first request).

Fig. 12.2. Functions of banks

Active operations include a variety of loans: bill, stock, commodity, blank. The most common is bill accounting. The bank buys the bill from the entrepreneur if he seeks to turn it into money before the due date. When issuing cash, a discount percentage is withheld from the amount indicated on the bill of exchange - a fee for providing the amount of money. When the bill of exchange becomes due, the bank presents it for payment to the issuer of the debt obligation. The discount rate can vary greatly. Thus, the highest discount rate of an English bank from November 15, 1979 to July 3, 1980 was 17%. The lowest was 2% from October 26, 1939 to November 7, 1951.

Banks conduct stock transactions - they give loans secured by securities - shares, bonds, mortgages, etc., and also buy such securities. Commodity loans are provided against products that are in warehouses, in transit, or in trade. If the loans are not repaid on time, the pledged securities and inventories become the property of the banks. The largest entrepreneurs, whose solvency is beyond doubt, are provided with a blank loan: the loan is issued without any collateral.

In addition to passive-active operations and settlements, banks are engaged in trading and commission activities - buying and selling gold, exchanging national currency for foreign currency, placing loans, selling stocks and bonds, etc.

Depending on the nature of the functions and operations performed, banks are divided into three main types: central, commercial and specialized (Fig. 12.3.).

Fig. 12.3. Types of banks.

No credit institution is one hundred percent insured against unplanned financial losses, therefore, in the process of its functioning and regulation of banking risk, a financial institution must play an important role in the formation of bank reserves.

In order to ensure its financial reliability, the bank is obliged to create various types of reserves to cover possible losses, the procedure for the formation and use of which is established in most cases by the Bank of Russia and legislative acts. The minimum amount of bank reserves is determined Central Bank of the Russian Federation. The amount of contributions to bank reserves from pre-tax profits is established by federal tax laws.

The bank multiplier is the process of increasing (multiplying) money in the deposit accounts of commercial banks during the period of their movement from one commercial bank to another.

The bank multiplier characterizes the animation process from the perspective of the subjects of the animation. Here is the answer to the question: who multiplies money? This process is carried out by commercial banks. One commercial bank cannot multiply money; it is multiplied by a system of commercial banks.