Annex 1: Examples of Monetary Policy Operations and Procedures

Example 1. Liquidity-providing reverse transaction by fixed rate tender

The ECB decides to provide liquidity to the market by means of a reverse transaction organised with a fixed rate tender procedure. Three counterparties submit the following bids: Counterparty Bid (EUR millions) Bank 1 Bank 2 Bank 3 30 40 70 Total 140 The ECB decides to allot a total of EUR 105 million. The percentage of allotment is: 105  = 75% (30 + 40 + 70) The allotment to the counterparties is: Counterparty Bid (EUR millions) Allotment (EUR millions) Bank 1 Bank 2 Bank 3 30 40 70 22.5 30.0 52.5 Total 140 105.0

 

Example 2. Liquidity-providing reverse transaction by variable rate tender

The ECB decides to provide liquidity to the market by means of a reverse transaction organised with a variable rate tender procedure. Three counterparties submit the following bids: Amount (EUR millions) Interest rate (%) Bank 1 Bank 2 Bank 3 Total bids Cumulative bids 3.15 3.10 3.09 3.08 3.07 3.06 3.05 3.04 3.03         5 5 10 5 5   5 5 5 5 10 10 5     5 5 5 10 15 15 5 10 0 10 10 10 20 30 35 15 15 0 10 20 30 50 80 115 130 145 Total 30 45 70 145 The ECB decides to allot EUR 94 million, implying a marginal interest rate of 3.05%. All bids above 3.05% (for a cumulative amount of EUR 80 million) are fully satisfied. At 3.05% the percentage of allotment is: 94 - 80  = 40% 35 The allotment to Bank 1 at the marginal interest rate is, for example: 0.4 x 10 = 4 The total allotment to Bank 1 is: 5 + 5 + 4 = 14 The allotment results can be summarised as follows: Amount (EUR millions) Counterparties Bank 1 Bank 2 Bank 3 Total  Total bids Total allotment 30.0 14.0 45.0 34.0 70.0 46.0 145 94 If the allotment procedure follows a single rate (Dutch) auction, the interest rate applied to the amounts allotted to the counterparties is 3.05%. If the allotment procedure follows a multiple rate (American) auction, no unique interest rate is applied to the amounts allotted to the counterparties; for example, Bank 1 receives EUR 5 million at 3.07%, EUR 5 million at 3.06% and EUR 4 million at 3.05%

 

Example 3. Issuance of ESCB debt certificates by variable rate tender

The ECB decides to absorb liquidity from the market by issuing debt certificates by a variable rate tender procedure. Three counterparties submit the following bids: Amount (EUR millions) Interest rate (%) Bank 1 Bank 2 Bank 3 Total bids Cumulative bids 3.00 3.01 3.02 3.03 3.06 3.05 3.06 3.08 3.10   5 5 5 10 20 5 5     5 5 5 40 10   5   5 5 5 10 10 10 10   0 10 15 15 25 70 25 15 5 0 10 25 40 65 135 160 175 180 Total 55 70 55 180 The ECB decides to allot a nominal amount of EUR 124.5 million, implying a marginal interest rate of 3.05%. All bids below 3.05% (for a cumulative amount of EUR 65 million) are fully satisfied. At 3.05% the percentage of allotment is: 124.5 - 65  = 85% 70 The allotment to Bank 1 at the marginal interest rate is, for example: 0.85 x 20 = 17 The total allotment to Bank 1 is: 5 + 5 + 5 + 10 + 17 = 42 The allotment results can be summarised as follows: Amount (EUR millions) Counterparties Bank 1 Bank 2 Bank 3 Total Total bids Total allotment 55.0 42.0 70.0 49.0 55.0 33.5 180.0 124.5

 

Example 4. Liquidity-absorbing foreign exchange swap by variable rate tender

The ECB decides to absorb liquidity from the market by executing a foreign exchange swap operation on the EUR/USD rate by means of a variable rate tender procedure. (Note: The euro is traded at a premium in this example.) Three counterparties submit the following bids: Amount (EUR millions) Swap points (x 10,000) Bank 1 Bank 2 Bank 3 Total bids Cumulative bids 6.84 6.80 6.76 6.71 6.67 6.63 6.58 6.54 6.49   5 5 5 10 25 10 5     5 5 10 35 20 10 5   5 5 5 5 40 10 10 0 10 15 15 25 100 40 25 5 0 10 25 40 65 165 205 230 235 Total 65 90 80 235 The ECB decides to allot EUR 158 million, implying 6.63 marginal swap points. All bids above 6.63 (for a cumulative amount of EUR 65 million) are fully satisfied. At 6.63 the percentage of allotment is: 158 - 65 = 93% 100 The allotment of Bank 1 at the marginal interest rate is, for example: 0.93 x 25 = 23.5 The total allotment of Bank 1 is: 5 + 5 + 5 + 10 + 23.5 = 48.5 The allotment results can be summarised as follows: Amount (EUR millions) Counterparties Bank 1 Bank 2 Bank 3 Total Total bids Total allotment 65.0 48.5 90.0 52.5 80.0 57.0 235.0 158.0 The ECB fixes the spot EUR/USD exchange rate for the operation at 1.1300. If the allotment procedure follows a single rate (Dutch) auction, at the start date of the operation the ESCB buys EUR 158,000,000 and sells USD 178,540,000. At the maturity date of the operation, the ESCB sells EUR 158,000,000 and buys USD 178,644,754 (the forward exchange rate is 1.130663 = 1.1300 + 0.000663). If the allotment procedure follows a multiple rate (American) auction, the ESCB exchanges the amounts of EUR and USD as shown in the following table: Spot transaction Forward transaction Exchange rate Buy EUR Sell USD Exchange rate Sell EUR Buy USD 1.1300 1.1300 1.1300 1.1300 1.1300 1.1300 1.1300 1.1300 1.1300   10,000,000 15,000,000 15,000,000 25,000,000 93,000,000       11,300,000 16,950,000 16,950,000 28,250,000 105,090,000     1.130684 1.130680 1.130676 1.130671 1.130667 1.130663 1.130658 1.130654 1.130649   10,000,000 15,000,000 15,000,000 25,000,000 93,000,000         11,306,800 16,960,140 16,960,065 28,266,675 105,151,659     Total 158,000,000 178,540,000   158,000,000 178,645,339

 

Example 5. Liquidity-providing foreign exchange swap by variable rate tender

The ECB decides to provide liquidity to the market by executing a foreign exchange swap operation on the EUR/USD rate by means of a variable rate tender procedure. (Note: The euro is traded at a premium in this example.) Three counterparties submit the following bids: Amount (EUR millions) Swap points (x 10,000) Bank 1 Bank 2 Bank 3 Total bids Cumulative bids 6.23 6.27 6.32 6.36 6.41 6.45 6.49 6.54 6.58   5 5 10 10 20 5 5       5 10 40 20 5 5     5 5 5 20 20 10 10     10 10 20 40 80 35 20 5   10 20 40 80 160 195 215 220 Total 60 85 75 220 The ECB decides to allot EUR 197 million, implying 6.54 marginal swap points. All bids below 6.54 (for a cumulative amount of EUR 195 million) are fully satisfied. At 6.54 the percentage of allotment is: 197 - 195 = 10% 20 The allotment to Bank 1 at the marginal interest rate is, for example: 0.10 x 5 = 0.5 The total allotment to Bank 1 is: 5 + 5 + 10 + 10 + 20 + 5 + 0.5 = 55.5 The allotment results can be summarised as follows: Amount (EUR millions) Counterparties Bank 1 Bank 2 Bank 3 Total Total bids Total allotment 60.0 55.5 85.0 75.5 75.0 66.0 220 197 The ECB fixes the spot EUR/USD exchange rate for the operation at 1.1300. If the allotment procedure follows a single-rate (Dutch) auction, at the start date of the operation the ESCB sells EUR 197,000,000 and buys USD 222,610,000. At the maturity date of the operation, the ESCB buys EUR 197,000,000 and sells USD 222,738,838 (the forward exchange rate is 1.130654 = 1.1300 + 0.000654). If the allotment procedure follows a multiple rate (American) auction, the ESCB exchanges the amounts of EUR and USD as shown in the following table: Spot transaction Forward transaction Exchange rate Sell EUR Buy USD Exchange rate Buy EUR Sell USD 1.1300 1.1300 1.1300 1.1300 1.1300 1.1300 1.1300 1.1300 1.1300   10,000,000 10,000,000 20,000,000 40,000,000 80,000,000 35,000,000 2,000,000     11,300,000 11,300,000 22,600,000 45,200,000 90,400,000 39,550,000 2,260,000   1.130623 1.130,627 1.130,632 1.130,636 1.130,641 1.130,645 1.130,649 1.130,654 1.130,658   10,000,000 10,000,000 20,000,000 40,000,000 80,000,000 35,000,000 2,000,000     11,306,270 11,306,320 22,612,720 45,225,640 90,451,600 39,572,715 2,261,308   Total 197,000,000 222,610,000   197,000,000 222,736,573

ECB - European Central Bank