Chapter 3 - Open Market Operations
Open market operations play an important role in the ESCB's monetary policy, pursuing the aims of steering interest rates, managing the liquidity situation in the market and signalling the stance of monetary policy. With regard to their aim, regularity and procedures, ESCB open market operations can be divided into four categories: main refinancing operations, longer-term refinancing operations, fine-tuning operations and structural operations. Reverse transactions are the main open market instrument of the ESCB and can be employed in all four types of operations. The issuance of debt certificates is the main instrument used for structural absorption operations. In addition, the ESCB has three other instruments available for the conduct of fine-tuning operations: outright transactions, foreign exchange swaps and the collection of fixed-term deposits. In the following sections, specific features of the different types of open market instruments used by the ESCB are presented in detail.
3.1 Reverse Transactions
3.1.1 General Considerations
a. Type of instrument
Reverse transactions refer to operations where the ESCB buys or sells eligible assets under repurchase agreements or conducts credit operations against eligible assets as collateral. Reverse transactions are used for the main refinancing operations and the longer-term refinancing operations. In addition, the ESCB can use reverse transactions for structural and fine-tuning operations.
b. Legal nature
The national central banks may execute reverse transactions either in the form of repurchase agreements (i.e. the ownership of the asset is transferred to the creditor while the parties agree to reverse the transaction through a re-transfer of the asset to the debtor at a future point in time) or as collateralised loans (i.e. an enforceable security interest is provided over the assets but, assuming fulfilment of the debt obligation, the ownership of the asset is retained by the debtor). Further provisions for reverse transactions based on repurchase agreements are specified in the contractual arrangement applied by the respective national central bank (or the ECB). Arrangements for reverse transactions based on collateralised loans take account of the different procedures and formalities required to enable the establishment and subsequent realisation of a relevant interest in the collateral (a pledge) which apply in different jurisdictions.
c. Interest terms
The difference between the purchase price and the repurchase price in a repurchase agreement corresponds to the interest due on the amount of money borrowed or lent over the maturity of the operation, i.e. the repurchase price includes the respective interest to be paid. The interest rate on a reverse transaction in the form of a collateralised loan is determined by applying the specified interest rate on the credit amount over the maturity of the operation. The interest rate applied to ESCB reverse open market operations is a simple interest rate with the day-count convention "actual/360".
3.1.2 Main Refinancing Operations
The main refinancing operations are the most important open market operations conducted by the ESCB, playing a pivotal role in pursuing the aims of steering interest rates, managing the liquidity situation in the market and signalling the stance of monetary policy. They also provide the bulk of refinancing to the financial sector. The operational features of the main refinancing operations can be summarised as follows:
- They are liquidity-providing operations;
- They are executed regularly each week;
- They normally have a maturity of two weeks10;
- They are executed in a decentralised manner by the national central banks;
- They are executed through standard tenders (as specified in Section 5.1);
- All counterparties fulfilling the general eligibility criteria (as specified in Section 2.1) may submit tender bids for the main refinancing operations;
- Both tier one and tier two assets (as specified in Chapter 6) are eligible as underlying assets for the main refinancing operations.
3.1.3 Longer-Term Refinancing Operations
The ESCB also executes regular refinancing operations with a three-month maturity, which are aimed at providing additional longer-term refinancing to the financial sector. These operations represent only a limited part of the global refinancing volume. In these operations, the ESCB does not, as a rule, intend to send signals to the market and therefore normally acts as a rate taker. In order for the ESCB to act as a rate taker, longer-term refinancing operations are usually executed in the form of variable rate tenders. From time to time the ECB indicates the operation volume to be allotted in forthcoming tenders. Under exceptional circumstances, the ESCB may also execute longer-term refinancing operations through fixed rate tenders.
The operational features of the longer-term refinancing operations can be summarised as follows:
- They are liquidity-providing operations;
- They are executed regularly each month;
- They normally have a maturity of three months10;
- They are executed in a decentralised manner by the national central banks;
- They are executed through standard tenders (as specified in Section 5.1);
- All counterparties fulfilling the general eligibility criteria (as specified in Section 2.1) may submit tender bids for the longer-term refinancing operations;
- Both tier one and tier two assets (as specified in Chapter 6) are eligible as underlying assets for the longer-term refinancing operations. However, national central banks have a choice of eligible assets, if they so wish, subject to the approval of the Governing Council of the ECB. For example, a national central bank could accept only (marketable and/or non-marketable) private debt instruments or require a minimum quota of these debt instruments.
3.1.4 Fine-Tuning Reverse Operations
The ESCB can execute fine-tuning operations in the form of reverse open market transactions. Fine-tuning operations aim to manage the liquidity situation in the market and to steer interest rates, in particular in order to smooth the effects on interest rates caused by unexpected liquidity fluctuations in the market. The potential need for rapid action in the case of unexpected market developments makes it desirable for the ESCB to retain a high degree of flexibility in the choice of procedures and operational features in the conduct of these operations:
- They can take the form of liquidity-providing or liquidity-absorbing operations;
- Their frequency is not standardised;
- Their maturity is not standardised;
- Liquidity-providing fine-tuning reverse transactions are normally executed through quick tenders, although the possibility of using bilateral procedures is not excluded (see Chapter 5);
- Liquidity-absorbing fine-tuning reverse transactions are executed, as a rule, through bilateral procedures (as specified in Section 5.2);
- They are normally executed in a decentralised manner by the national central banks (the Governing Council of the ECB will decide whether, under exceptional circumstances, bilateral fine-tuning reverse operations may be executed by the ECB);
- The ESCB may select, according to the criteria specified in Section 2.2, a limited number of counterparties to participate in fine-tuning reverse operations;
- Both tier one and tier two assets (as specified in Chapter 6) are eligible as underlying assets for fine-tuning reverse operations.
3.1.5 Structural Reverse Operations
The ESCB can execute structural operations in the form of reverse open market transactions, aimed at adjusting the structural position of the ESCB vis-à-vis the financial sector. The operational features of these operations can be summarised as follows:
- They are liquidity-providing operations;
- Their frequency can be regular or non-regular;
- Their maturity is not standardised a priori;
- They are executed through standard tenders (as specified in Section 5.1);
- They are executed in a decentralised manner by the national central banks;
- All counterparties fulfilling the general eligibility criteria (as specified in Section 2.1) may submit tender bids for structural reverse operations;
- Both tier one and tier two assets (as specified in Chapter 6) are eligible as underlying assets for structural reverse operations.
3.2 Outright Transactions
a. Type of instrument
Outright open market transactions refer to operations where the ESCB buys or sells eligible assets outright on the market. Outright open market operations are executed only for structural and fine-tuning purposes.
b. Legal nature
An outright transaction implies a full transfer of ownership from the seller to the buyer with no connected reverse transfer of ownership. The transactions are executed in accordance with the market conventions for the debt instrument used in the transaction.
c. Price terms
In the calculation of prices, the ESCB acts in accordance with the most widely accepted market convention for the debt instruments used in the transaction.
d. Other operational features
The operational features of ESCB outright transactions can be summarised as follows:
- They can take the form of liquidity-providing (outright purchase) or liquidity-absorbing (outright sales) operations;
- Their frequency is not standardised;
- They are executed through bilateral procedures (as specified in Section 5.2);
- They are normally executed in a decentralised manner by the national central banks (the Governing Council of the ECB will decide whether, under exceptional circumstances, fine-tuning outright operations may be executed by the ECB);
- No restrictions are placed a priori on the range of counterparties to outright transactions;
- Only tier one instruments (as specified in Section 6.1) are normally used as underlying assets in outright transactions.
3.3 Issuance of Debt Certificates
a. Type of instrument
The ESCB may issue debt certificates. Debt certificates are issued with the aim of adjusting the structural position of the ESCB vis-à-vis the financial sector so as to create (or enlarge) a liquidity shortage in the market.
b. Legal nature
The certificates constitute a debt obligation of the issuing entity vis-à-vis the holder of the certificate. The certificates are issued and held in a book-entry and/or dematerialised form in securities depositories in the euro area. The certificates are transferable without restrictions.
c. Interest terms
The certificates are issued in discount form, i.e. they are issued at below the nominal amount and are redeemed at maturity at the nominal amount. The difference between the issue amount and the redemption amount equals the interest accrued on the issue amount, at the agreed interest rate, over the maturity of the certificate. The interest rate applied is a simple interest rate with the day-count convention "actual/360". The calculation of the issue amount is shown in Box 1.
Box 1. Issuance of debt certificates
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Where:
The issue amount is:
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d. Other operational features
The operational features for the issuance of debt certificates can be summarised as follows:
- The certificates are issued in order to absorb liquidity from the market;
- The certificates can be issued on a regular or non-regular basis;
- The certificates have a maturity of less than twelve months;
- The certificates are issued through standard tenders (as specified in Section 5.1);
- The certificates are tendered and settled in a decentralised manner by the national central banks;
- All counterparties fulfilling the general eligibility criteria (as specified in Section 2.1) may submit tender bids for subscribing debt certificates.
3.4 Foreign Exchange Swaps
a. Type of instrument
Foreign exchange swaps executed for monetary policy purposes consist of simultaneous spot and forward transactions of the euro against foreign currency. They are used for fine-tuning purposes, mainly with the aim of managing the liquidity situation in the market and steering interest rates.
b. Legal nature
Foreign exchange swaps executed for monetary policy purposes refer to operations where the ESCB buys (or sells) euro spot against a foreign currency and, at the same time, sells (or buys) it back forward at a specified repurchase date. Further provisions for foreign exchange swaps are specified in the contractual arrangement applied by the respective national central bank (or the ECB).
c. Currency and exchange rate terms
As a rule, the ESCB operates only in widely traded currencies and in accordance with standard market practice. In each foreign exchange swap operation, the ESCB and the counterparties agree on the swap points for the transaction. The swap points are the difference between the exchange rate of the forward transaction and the exchange rate of the spot transaction. The swap points of the euro vis-à-vis the foreign currency are quoted according to general market conventions. The exchange rate terms of foreign exchange swap operations are specified in Box 2.
Box 2. Foreign exchange swap operations
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M
or 
or 
d. Other operational features
The operational features of foreign exchange swaps can be summarised as follows:
- They can take the form of liquidity-providing or liquidity-absorbing operations;
- Their frequency is not standardised;
- Their maturity is not standardised;
- They are executed through quick tenders or bilateral procedures (see Chapter 5);
- They are normally executed in a decentralised manner by the national central banks (the Governing Council of the ECB will decide whether, under exceptional circumstances, bilateral foreign exchange swaps may be executed by the ECB);
- The ESCB may select, according to the criteria specified in Section 2.2, a limited number of counterparties to participate in foreign exchange swap operations.
3.5 Collection of Fixed-Term Deposits
a. Type of instrument
The ESCB may invite counterparties to place remunerated fixed-term deposits with the national central bank in the country in which the counterparty is established. The collection of fixed-term deposits is envisaged only for fine-tuning purposes in order to absorb liquidity in the market.
b. Legal nature
The deposits accepted from counterparties are for a fixed term and with a fixed rate of interest. No collateral is given by the national central banks in exchange for the deposits.
c. Interest terms
The interest rate applied to the deposit is a simple interest rate with the day-count convention "actual/360". Interest is paid at the end of the maturity of the deposit.
d. Other operational features
The operational features for the collection of fixed-term deposits can be summarised as follows:
- The deposits are collected in order to absorb liquidity;
- The frequency with which deposits are collected is not standardised;
- The maturity of the deposits is not standardised;
- The collection of deposits is normally executed through quick tenders, although the possibility of using of bilateral procedures is not excluded (see Chapter 5);
- The collection of deposits is normally executed in a decentralised manner by the national central banks (the Governing Council of the ECB will decide whether, under exceptional circumstances, the bilateral collection of fixed-term deposits may be executed by the ECB)11;
- The ESCB may select, according to the criteria specified in Section 2.2, a limited number of counterparties for the collection of fixed-term deposits.
ECB - European Central Bank