In accordance with regulations on the implementation of open market operations, the NBS engages in repo and outright purchases and sales of securities.
A repo transaction in securities means such purchase and sale of securities where parties to the agreement have agreed that the seller will sell securities to the buyer on the purchase date, and the buyer will pay the purchase price for such securities to the seller, assuming at the same time the obligation to sell the same securities to the seller on the agreed repurchase date, when the seller will pay the agreed repurchase price.
Repo transactions may be:
- reverse repo transactions – repo sale of securities,
- repo transactions – repo purchase of securities.
In a reverse repo transaction, the NBS sells securities to banks on the sale date, assuming at the same time the obligation to repurchase those securities on the agreed repurchase date. On the sale date, banks pay to the NBS the purchase price of securities, whereas on the repurchase date the NBS pays to banks the purchase price plus interest – repurchase price of securities. The effect of the transaction is a temporary withdrawal of excess liquidity from the banking sector.
In a repo transaction, the NBS buys securities from banks on the purchase date and banks assume the obligation to repurchase those securities on the agreed repurchase date. On the purchase date, the NBS pays to banks the purchase price of securities, whereas on the repurchase date it charges to banks the purchase price plus interest – the repurchase price of securities. The effect of the transaction is a temporary supply of liquidity to the banking sector.
The main features of repo transactions conducted by the NBS
- repo transactions involve a change of ownership of purchased securities;
- the seller is entitled to any proceeds from interest on purchased securities subject to a repo transaction paid during the repo transaction period, including all pay-outs of the part of nominal value during the transaction period; and the buyer has the obligation to credit the entire amount of such proceeds, i.e. to credit the entire amount paid by the issuer of securities to the seller’s account during the repo transaction period;
- the purchase price in repo transactions is determined by applying a downward revision to the nominal value of securities being the subject of repo transaction where the NBS is the buyer, and/or by applying an upward revision to the nominal value of securities being the subject of repo transaction where the NBS is the seller;
- the repurchase price in repo transactions is the amount the seller is obliged to pay to the buyer on the repurchase date. The repurchase price is determined by applying the repo rate to the purchase price for the number of days between the purchase and repurchase date.
An outright transaction in securities means the purchase and sale of securities which does not involve the obligation to resell or repurchase such securities.
To absorb excess bank liquidity, the NBS organised from 2000 to January 2005 outright auction sales of its short-term securities – bills of different maturities. Thus, outright auction sales became the main type of intervention in the money market. From January 2005 to February 2009, the NBS used outright securities transactions only as a supporting instrument in the implementation of monetary policy.