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Open Market Operations and Standing Facilities (Directive No. 790/2021)

National Bank Of Ethiopia790/2021

Summary

This Directive establishes Open Market Operations and Standing Facilities as instruments for effective management of liquidity in the financial system to conduct monetary policy. It outlines the scope, eligible participants, eligible collateral, and various operations including NBE Certificates issuance, collateralized loans, repo/reverse repo transactions, outright transactions, deposit-taking operations, and standing facilities. It also details auction procedures, settlement, events of default, penalties, and prohibited actions.

Who's affected

Banks operating in Ethiopia that maintain reserve requirements with the National Bank.

Action required

Banks must enter into an agreement with the National Bank to be eligible for standing facilities and open market operations.

Key points

5
  • The directive establishes Open Market Operations and Standing Facilities for liquidity management and monetary policy.
  • It applies to banks operating in Ethiopia with reserve requirements at the National Bank.
  • Various instruments are defined, including NBE Certificates, collateralized loans, repo/reverse repo, outright transactions, and deposit facilities.
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    • Detailed procedures for auctions, collateral valuation, settlement, and default events are provided.
    • Penalties for contravention include financial sanctions and exclusion from monetary policy operations.

Requirements

10
  • Financial transactions shall be in Ethiopian Birr.
  • Eligible Banks must maintain reserve requirements with the National Bank.
  • Eligible Banks must enter into an agreement with the National Bank as per Appendix 1.
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    • Assets eligible as collateral must be the property of the eligible participant, unencumbered, have a later maturity than the operation, and not be issued by the participant or a related party (except Government and National Bank securities).
    • Eligible assets pledged as collateral must be registered in the participant banks' accounts at the National Bank and maintained in the Book Entry System.
    • Participant banks must ensure availability of sufficient funds on their payment and settlement accounts for settlement of operations.
    • Participants are prohibited from engaging in deals that create a dominated position or manipulation on the money market.
    • Participants are prohibited from agreeing among themselves regarding bids prior to an auction, sharing bid information before auction end, using insider information, or bidding on behalf of others.
    • Participants are prohibited from manipulating prices or yields of financial instruments through prior agreement.
    • Participants must comply at all times with the terms and requirements set out in this Directive.

Rights and permissions

10
  • The National Bank has the powers and duties to regulate and determine the supply and availability of money and credit and applicable interest rates.
  • The National Bank has the powers and duties to make short-term and long-term refinancing facilities available to banks and other financial institutions.
  • The National Bank may revise eligibility criteria for participants.
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    • Participant banks have the right to replace eligible collateral if its value exceeds the value of the asset it is covering.
    • In case of an increase in the value of collateral during a repo transaction, the participant is entitled to take the excess from the National Bank.
    • Participant banks may obtain overnight funding from the National Bank through the standing lending facility.
    • Participant banks may make deposits with the National Bank anytime during business hours through the standing deposit facility.
    • Participant banks have no rights to assign deposits placed with the National Bank to a third party.
    • Participant banks are entitled to receive interest (coupon) from securities used as collateral in repo transactions, if the interest rate (coupon) is due during the term of the transaction.
    • Participant banks are entitled to repay the loan and pay the related interest ahead of schedule, with the agreement of both Parties.

Restrictions

21
  • Open Market Operations and Standing Facilities are applicable to financial transactions between the National Bank and Banks operating in Ethiopia that maintain reserve requirement with National Bank.
  • All transactions conducted using these Open Market Operations and Standing Facilities shall be in Ethiopian Birr.
  • The trading of NBE Certificates on the secondary market is limited to only among banks.
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    • The value of eligible assets provided as collateral for collateralized loans must fully cover the loan granted plus a haircut, interest payable and other related payments.
    • During a repo/reverse repo transaction, the ownership of the assets shall be transferred to the purchaser.
    • When performing a repo transaction, the term until the maturity date of the security delivered in the transaction shall not be less than two business days after the maturity date of the transactions.
    • The value of the collateral asset shall be reduced by the haircut.
    • In the case of a decrease in the value of the collateral during a repo transaction, the National Bank shall have the right to call for an additional collateral.
    • The maturity of the standing lending facility shall be overnight.
    • The collateral for standing lending facility must be established before the credit is granted and their adjusted value shall cover 100 percent of the loan, the due interest and a haircut.
    • The maturity of the standing deposits shall be overnight.
    • Funds of eligible participants placed in deposit accounts at the National Bank shall not be part of the required reserves calculation.
    • The term of the deposits may not be extended.
    • Open market operations may be performed through bilateral procedures initiated by the National Bank or concerned bank, on exceptional basis.
    • Participants shall submit their bids on the day of the auction, within the time limits specified in the announcement.
    • No modification or withdrawal of submitted bids is allowed after the time limit provided for the receipt of bids has elapsed.
    • Bids submitted after the time limit provided for in the auction announcement shall not be accepted.
    • If any of the conditions stipulated under the auction announcement are not satisfied, the submitted bids shall not be accepted.
    • Open market operations based on standard auctions are settled on the first business day following the auction date, unless otherwise established by the National Bank.
    • Open market operations based on quick auctions are settled on the same day of the auction, unless otherwise established by the National Bank.
    • Participant is obliged to notify the National Bank of any occurrence of an event of default.

Penalties

3
  • A person who contravenes the provisions of this directive shall be punished in accordance with Article 26 (2/d/) of the National Bank of Ethiopia Establishment (as Amended) Proclamation No. 591/2008.
  • A participant who fails to obey the prohibited actions and obligations set out in article 27 is liable for administrative penalty equal to: Birr 500,000 for the first time, Birr 1,000,000 for the second time, Birr 2,000,000 for the third time.
  • If the participant fails to obey the prohibited actions and obligations, it shall be barred from participating in the NBE’s monetary policy operation auctions for a period of six months (first time), one year (second time), or permanently (third time), in addition to financial penalties.

Objectives

5
  • To regulate and determine the supply and availability of money and credit.
  • To maintain price and financial stability conducive to the balanced growth of the Ethiopian economy.
  • To make short-term and long-term refinancing facilities available to banks and other financial institutions.
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    • To establish open market operations and standing facilities as instruments for effective management of liquidity in the financial system.
    • To conduct monetary policy.

Organizations

1
  • National Bank of Ethiopia

Legal references

2
  • National Bank of Ethiopia Establishment Proclamation No. 591/2008 (as amended)
  • Article 5(4), Article 5(11), Article 15(1), and Article 27(2) of the National Bank of Ethiopia Establishment Proclamation No. 591/2008
Original sourcehttps://justice.gov.et/en/directives/open-market-operations-and-standing-facilities-directive-no-790-2021/
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