Liquidity Facilities

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Separate to its open market operations (OMO) the Reserve Bank can also provide liquidity to Eligible Counterparties secured by collateral via its liquidity facilities.

  1. The standing facilities are commonly used to provide payments system participants with liquidity as required to support orderly settlement of payments. Intraday, overnight and open repos (repos without a maturity date) are used for this purpose, and are available on pre-specified terms.
  2. In rare circumstances, the Reserve Bank may provide exceptional liquidity assistance (ELA), generally through term repos. Provision of ELA, and associated terms, are at the absolute discretion of the Reserve Bank.

In the context of the RITS Regulations, all repurchase agreements executed under the Reserve Bank's standing facilities are known as Standing Facility (SF) Repos, and any repurchase agreements executed under ELA are known as ELA Repos. These are distinguished from other domestic repurchase agreements executed by the Reserve Bank in its OMO (OMO Repos) and securities lending operations (Securities Lending Repos).

1. SF Repos

Intraday SF repo is intraday funding from the Reserve Bank. These intraday repos carry no interest charge. However, depending upon the method of settlement (see Section 5 below), the repurchase price may be adjusted for certain settlement fees.

Overnight SF repo is where the Reserve Bank agrees to provide funding overnight, typically by extending the maturity of an intraday SF repo to the next business day. The repurchase price of this overnight SF repo is adjusted at a pricing rate set 25 basis points above the Reserve Bank Board's prevailing cash rate target. Again, depending upon the method of settlement, the repurchase price may also be adjusted for certain settlement fees incurred by the Reserve Bank. The Reserve Bank does not expect RITS members to make frequent use of overnight SF repos contracted at a pricing rate that is 25 basis points above the cash rate target.

Open SF repo is SF repo from the Reserve Bank without a maturity date; that is, the term of the repo may be ‘open’. These open SF repos facilitate the smooth functioning of the payments system.

Use of open SF repo to facilitate payments

Open SF repos have a common use to create a liquidity buffer to facilitate payments. For any ESA holder that is a Tier 1 participant in the Bulk Electronic Clearing System (BECS) and/or a New Payments Platform (NPP) participant settling payments using their ESA, the Reserve Bank, in consultation with the ESA holder, determines a minimum ESA balance that the ESA holder should maintain at the close of business each day. These ESA balances create a liquidity buffer for ‘after-hours’ payments (those initiated through the direct entry (DE) system or NPP after 16:45 AEST/AEDT on business days, and all NPP payments on weekends and public holidays); hence, the minimum ESA balance is set with regard to the potential size of these payments. The ESA holder can choose to source the required ESA balances through open SF repos (at a pricing rate equal to the rate on surplus ESA balances), surplus ESA balances, or a combination of both.

To reduce the need for ESA holders to contract intraday SF repos on a regular basis, the Reserve Bank may agree to contract an amount of open SF repos (at a pricing rate equal to the rate on surplus ESA balances) over and above the stipulated minimum ESA balance requirement for an ESA holder. This includes any ESA holder that is neither a Tier 1 BECS participant nor an NPP participant settling payments using their ESA (where the minimum required ESA balance is zero).

The size of the minimum ESA balance requirements and maximum permitted positions in open SF repos are reviewed at least annually by the Reserve Bank, with the outcome of that review communicated in writing to the ESA holder. ESA holders are welcome to contact the Reserve Bank's Domestic Markets Desk in the interim if a change in their payments activity warrants an earlier review. The Reserve Bank will also consider requests to temporarily change positions to accommodate anticipated increases in after-hours payments, such as over public holidays.

Interest on Exchange Settlement Balances

An interest adjustment will apply to an ESA balance based on an ESA holder's applicable minimum ESA balance requirement and the settlement of after-hours DE and NPP payments. An ESA holder's applicable minimum ESA balance requirement is the greater of:

  1. The minimum level of ESA balances that the Reserve Bank has determined that the ESA holder is required to hold to meet their after-hours payments obligations.
  2. An ESA holder's position in open SF repos contracted at a pricing rate equal to the rate on surplus ESA balances.

ESAs will accrue interest at the rate on surplus ESA balances for closing ESA balances held as at midnight up to the ESA holder's applicable minimum ESA balance requirement plus net receipts arising from after-hours DE and NPP payments. Any shortfall in ESA balances from this level will attract the appropriate standing facility rate, being 25 basis points above the cash rate target. Any surplus ESA balances will accrue interest at the rate on surplus ESA balances.

The formula for ESA interest is:

Daily interest = (ESA x Rate on Surplus ESA Balances + (ESA – Applicable Minimum ESA Balance − after-hours DE − after-hours NPP) x p) / 365

where

p = 0, if (ESA − open SF repo − after-hours DE − after-hours NPP) ≥ 0

p = cash rate target +0.0025, if (ESA − open SF repo − after-hours DE − after-hours NPP) < 0

ESA represents the balance of the ESA holder's ESA as at midnight

Rate on Surplus ESA Balances is the interest rate on surplus ESA balances as set by the Reserve Bank Board

Applicable Minimum ESA Balance is the greater of:

  • the minimum level of ESA balances that the Reserve Bank has determined that the ESA holder is required to hold to meet their after-hours payments obligations; and
  • the aggregate purchase price (i.e. starting cash value) of all open SF Repos contracted at a pricing rate equal to the rate on surplus ESA balances by the ESA holder.

after-hours DE is calculated on business days[1] as the net receipts of the ESA holder from those DE payments initiated after 16:45 AEST/AEDT on that day. On non-business days (such as weekends and public holidays), it is the amount of net after-hours DE receipts from the previous business day. For those ESA holders that are not Tier 1 BECS participants, after-hours DE will always be zero.

after-hours NPP is calculated on business days[1] as the net receipts of the ESA holder from those NPP payments settling between 16:45 AEST/AEDT and midnight on that day. On non-business days (such as weekends and public holidays), after-hours NPP includes net NPP receipts settling between 16:45 AEST/AEDT on the previous business day and midnight on the day of calculation. For those ESA holders that are not NPP participants settling payments using their ESA, after-hours NPP will always be zero.

Interest is adjusted in arrears on the first business day of each month.

In managing their liquidity, it is expected that ESA holders maintain an ESA balance as at midnight that is at least equal to their applicable minimum ESA balance requirement plus net receipts arising from after-hours DE and NPP payments. ESA holders that meet this expectation are not considered to have received liquidity support from the Reserve Bank. Any shortfall will result in a reduction in the ESA holder's accrued interest for that day (as specified above).

2. ELA Repos

ELA repo may be used in the event that the Reserve Bank, at its discretion, provides ELA.

In rare circumstances, when an Eligible Counterparty is experiencing acute liquidity difficulties, but is solvent, the Reserve Bank may provide ELA if it is judged to be in the public interest. This would generally be done through a term ELA repo for a short period of time. Provision of liquidity and associated terms are at the absolute discretion of the Reserve Bank.

In support of a request for ELA from the Reserve Bank, entities would be expected to:

  • inform their regulator immediately of any liquidity concerns and their intention to request ELA, prior to approaching the Reserve Bank;
  • have already made reasonable efforts to access private sector sources of liquidity; and
  • present evidence of their solvency, including an attestation of positive net worth. [2]

3. Access to SF and ELA Repos

Access to Intraday, Overnight and Open SF repos is only available to Eligible Counterparties for the Reserve Bank's domestic market operations that settle payments across their own Exchange Settlement (ES) account (except where the member is restricted by special terms and conditions relating to its ES account).

For ELA repo, Eligible Counterparties that do not settle repos across their own ES account may also submit a request. However, each specific repo is subject to the agreement of the Reserve Bank.

4. Eligible Securities

For locally incorporated institutions that are subject to the Liquidity Coverage Ratio, any Eligible Securities for open market operations can also be used for SF repos. All other institutions are expected to use securities that could be held in fulfilment of APRA's liquidity policy for the institution.

For ELA repo, eligible securities for the purposes of Reserve Bank's domestic market operations would be acceptable collateral. Exemptions from the Reserve Bank's related-party guidelines would be considered on a case-by-case basis. What classifies as acceptable collateral is at the sole discretion of the Reserve Bank in each instance.

5. Dealing and Settlement Procedures

For intraday, overnight and open SF repos (contracted at a pricing rate equal to the rate on surplus ESA balances) eligible counterparties are able to contract until the close of the SWIFT End Session within RITS (6.30 pm AEST, 8.30 pm AEDT, unless otherwise advised; see details of the RITS Settlement Sessions). Either party to an open SF Repo is also able to terminate the repo for same-day value up to 30 minutes prior to the close of the SWIFT End Session. (However, unless otherwise agreed by the Reserve Bank, an open SF Repo should not be terminated on its purchase date; that is, on the day it was initiated.) In the normal course of events, the Reserve Bank will terminate pre-existing open SF Repos periodically. This allows for the collection of the accrued price differential (if any) on outstanding positions. Upon termination, ESA holders may seek to contract new SF Repos.

Those RITS members that are not ‘Evening-Agreed’ banks (see RITS Evening Participation Arrangements) should contact the Reserve Bank's Domestic Markets Desk if they intend to unwind an SF Repo after the close of the RITS Settlement Close Session (5.15 pm AEST/AEDT). RITS members that believe they will be unable to unwind an SF Repo on its agreed maturity date must contact the Domestic Markets Desk.

Within the Austraclear system, eligible counterparties for Intraday SF repos are able to unilaterally execute such repos against Australian Government Securities and semi-government securities. For advice on using this functionality, contact the Austraclear Help Desk (+61 1300 362 257).

Intraday SF repos contracted via the unilateral facility should only be used for intraday purposes. Where the term of an Intraday SF repo contracted via the unilateral facility extends overnight, the repurchase price is automatically adjusted at a pricing rate that is 25 basis points above the Reserve Bank Board's prevailing cash rate target. Consequently, RITS members seeking to establish an open position in SF repos (against any eligible security) should arrange the transaction with the Reserve Bank's Domestic Markets Desk. Likewise, any SF repo against a security not accepted by Austraclear's unilateral facility must be arranged with the Domestic Markets Desk.

Where an SF repo is settled via means other than the unilateral facility within Austraclear, the Reserve Bank may incur Austraclear settlement fees. For those SF repos contracted for intraday maturities, the Reserve Bank recovers the cost of its settlement activity through an adjustment to the repurchase price.

When an open position in an SF repo has matured and the Reserve Bank has agreed to contract a new SF repo against the same security for settlement on the same day, the Reserve Bank may permit the cash and security movements in the two transactions to be netted for the purposes of settlement. Settlement details need to be confirmed with the Domestic Markets Desk.

Footnotes

A business day is a ‘Settlement Day’ as defined in the RITS Regulations [1]

More background on the Bank’s arrangements for ELA can be found in RBA Board Minutes (September 2021) [2]