The RBA's Market Operations

IntroductionExchange Settlement Accounts (ESA) are accounts monetary institutions held with the Reserve Bank in order to settle their obligations of buy or selling securities to to each one other and to the RBA. Banks must maintain their Exchange Settlement bills on credit balance at all generation with the RBA. The usual aggregate amount of capital in ESAs ein truthwhere the last few years is $700 millions to $800 millions.

Forms of RBA?s open trade operations(i)Commonwealth Government Securities (CGS)In order to control the target coin in rate, RBA gutter purchase or sell short- get windd CGSs outright. By purchasing a security from a bevel outright, RBA credits funds into Bank?s ESAs. This transaction is known as RBA fooling or providing fluidness to banks. On the other hand, if RBA sells a security to a bank outright, the ES funds will be recede from the bank?s ESA. The process is known as withdrawing or reducing liquidity out of financial system.

(ii)Repurchase treatysInstead of conducting proceeding outright, RBA erect undertake transactions under buy agreements. That means RBA app burn down purchase or sell securities and simultaneously enter into an agreement with banks to reverse the transactions at the later de experimental conditionined date and with an agreed price.

One of the Reserve Bank?s main objectives is to implement monetary policy by rehearse commercialise operations and influence its set gold rate. It has a capacious flexibility in its policy settings in order to stop that its cash rate does not materially deviate from a de edgeined level and react to ever-changing financial securities industrys. As can be seen in Graph 1, most of transactions during the last 10 years were done in buyback agreements, some in foreign exchange agreements and a very small portion in Commonwealth Securities.

By using those instruments, Bank conducts its sales or purchases in accordance to withdraws for cash by market participants. As there are ask for liquidity in the market, Bank purchases securities or enters into repurchase agreements. This results in an increase in funds in exchange colonisation accounts. Conversely, as there are surplus funds in the market, Bank sells securities to reduce balance in exchange stoppage funds. In doing these exercises, Bank?s aim is to maintain demand and supply of funds in equilibrium.

Problems in Australian financial markets in recent monthsProblems that emerged in the Australian money market in the latter months in 2007 are caused by the sub-prime loanword market in the US. Since August 2007, there is a significantly sharp increase in demand for ES funds, hence, placing a huge pressure on a short term money markets. Investment vehicles such as residential mortgage lenders, hedge funds used to use short term asset-backed commercial papers to fund their long term investments or to finance sub-prime residential mortgages (similar to Low Doc Loan in Australia). In order to ask for more liquidity as short term funding is dried up, those financial vehicles and so turned to their sponsoring banks which became very cautious and unwilling to commit.

In addition, native markets for securities related to mortgages are virtually shut down.

Investors are campaign away from new mortgage-backed securities issues. As a consequence, banks are coerce to retain those loans they originated, in turn, creating a pressure for demanding more cash from other sources. Because of this uncertainty in the credit markets, banks get unwillingly lending to each other. Hence, again, cash is highly sought after from all market participants.

In order to respond to liquidity problems, the Reserve Bank has stepped in and acted as a the Nazarene in number of ways.

(i)Injecting a significant amount of cash into financial market.



At one point, Exchange Settlement funds change magnitude to $5.5 billion compared to a normal level of $750m.

(ii)Increasing its type in conducting more repurchase agreements, particularly in bank bills and certificates of deposits. At the same time, Bank reduces its holdings on government securities. As a result, Bank?s holdings of domestic bank bills and CDs increased two-fold.

(iii)Increasing maturities of repos in order to tackle a substantial rise in demand for long term funding. As a result, maturities extend from a normal level of 20 years to over 50 days and in some cases, go beyond 3 months.

(iv)Reducing its exposures in foreign exchange swaps to issue more for domestic needs.

(v)Broadening the range of securities Bank can use for collateral, namely, high quality long term securities, asset-backed commercial papers, and residential mortgage-backed securities.

ConclusionThe Reserve Bank influences the Exchange Settlement Accounts held with financial institutions to inject or withdraw liquidity. Its tool is mainly on repurchase agreements, taking collaterals over a range of securities with various maturities. over the recent months, the Bank has performed extremely well in monitor the provision for liquidity and as a result, avoiding market turmoil.

ReferencesRBA (2007), ? primeval Bank Market operations?, Bulletin, September, pp. 19-26 (excluding pp. 23-24)RBA (2007), ?Open Market Operations and Domestic Securities?, Bulletin, December, pp. 25-31RBA website, 2007, Open Market Operations, RBA, Australia. Viewed at 20 April 2008 hypertext transfer protocol://www.rba.gov.au/DomesticMarketOperations/open_market_operations.html

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