Process

Since most of the money in our time exists in electronic form, and not in the form of banknotes and coins, open market operations are carried out by increasing ( lending) or decrease ( debiting) the amount of base money (monetary base) on the bank's reserve account with the central bank. Thus, the process does not require printing a new currency. However, it increases the central bank's obligation to print money if a commercial bank needs banknotes in exchange for a reduction in electronic balance.

When there is an increased demand for basic money, the central bank must take action if it wants to keep short-term interest rates at the target level. He does this by increasing the supply of basic money. The central bank enters the open market to buy a financial asset (government bonds, foreign currency or other relatively stable assets). In order to pay for the asset, the central bank creates new base money and loans it to the account of the seller's bank of the asset. Thus, the monetary base in the economy increases. Conversely, if the central bank sells assets on the open market, the corresponding amount of base money is debited from the account of the buying bank, thus the monetary base is reduced.

Possible goals

• In inflation targeting, open market operations are used to maintain a certain short-term interest rate in debt markets. The target rate value is periodically changed in order to keep inflation within the established corridor. However, other monetary policy options also use open market operations: the Federal Reserve, the Bank of England and the European Central Bank use open market operations to reach their interest rates.
• In addition to the target level of interest rates, there may be other target indicators for operations on the open market. The goal may be to reduce the money supply, as in the late 1970s and early 1980s in the United States under the chairmanship of Paul Walker.
• With the currency board, open market operations are used to maintain a fixed exchange rate with respect to foreign currency.

Specifics in different countries

USA

Money is created and destroyed with a change in the reserve account of a commercial bank in the Fed. The Federal Reserve has been conducting open market operations since the 1920s through the Open Market Division of the Federal Reserve Bank of New York by order of the Federal Open Market Operations Committee. Open market operations are also one of the ways to control inflation: selling government bonds to commercial banks reduces their ability to issue loans, so part of the money is withdrawn from circulation.

Eurozone

the Russian Federation

The Bank of Russia also has the ability to conduct transactions with corporate bonds and shares (with the latter only in the framework of repurchase transactions); the bank can buy government bonds only in the secondary market in order to prevent direct budget financing. The Central Bank may trade in government securities through the appropriate section of the MICEX, or on the over-the-counter market, while only Russian credit organizations should act as counterparties.

see also

Notes

References

Wikimedia Foundation. 2010.

Open market operations (securities market operations)

One of the functions of the central bank is the purchase and sale of securities, considered one of the most reliable types of financial assets. The main counterparties of the central bank in carrying out these operations are commercial banks. So the central bank gets the opportunity to actively influence the resources available to commercial banks.

Indeed, if the role of the central bank is relatively passive in the implementation of accounting policies (whether commercial banks decide whether to register all bills, whether to obtain a loan secured by their securities), then buying and selling securities on the open market (for example, on the stock exchange) , the central bank can effectively influence the development of monetary relations in the country. In addition, operations in the open securities market are a market instrument that complies with market "rules of the game."

The Central Bank, participating in the auction, is at the same time a full and equal agent of the market, the same as all its other participants. Therefore, the policy of conducting operations on the open market is considered the most effective instrument of monetary policy.

In a period of high market conditions, the central bank forces commercial banks to buy government securities, which significantly limits the ability of commercial banks to provide loans and thereby reduces the amount of money in circulation. During a recession, the central bank performs the reverse operation.

Having understood the effect of the mechanism for regulating the money supply through open market operations, we ask ourselves: why do commercial banks (and the public) agree to buy and sell government securities? The point is: if the central bank sells government securities (for example, bonds), their supply exceeds demand, which means that the prices of these securities are reduced. This increases the attractiveness of buying government securities. If the central bank buys government securities, the demand for them increases, which leads to an increase in their prices. This means that the population has an incentive to sell its government securities.

So, if the central bank sells government securities, then a bond with a face value of $ 100 from 10% per annum can cost, for example, $ 80. The interest on it will be $ 10, which will provide the buyer with an income of 12.5% \u200b\u200b(10/80 one hundred). When the central bank begins to buy securities, demand for them increases, their market price rises (for example, to $ 125), and profitability drops to 8% (10/125 100). Under these conditions, bondholders will prefer to sell them to the state and receive the corresponding exchange rate difference.

Open market operations  - the most widely used method of regulating the money supply in countries with developed, stably functioning economies, which also have a fairly capacious and reliable market for government bonds (USA, UK, Canada).

There are several reasons for this. Firstly, this is the fastest and easiest way to solve the problem of regulating credit funds, and therefore, the pace of development of production. In addition, a fairly accurate calculation is possible here - it is always clearly determined how many government bonds need to be sold or, conversely, bought up. Secondly, the use of the discount rate is difficult, in particular, because commercial banks in the developed market system rarely use central bank loans and usually because they invest heavily in the purchase of government bonds.

Therefore, more often than not, it performs an information function rather than a stimulating one, and in countries with developed market economies this tool is rarely used. The use of the reserve ratio is also difficult in these countries. This is due to the fact that the funds in the reserve do not bring interest, in fact, remaining dead capital. And the increase in the volume of such capital is undesirable neither to commercial banks, nor to society as a whole. Note that in the credit policy of Russia, the practice of conducting such operations is still in its infancy.

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3.2.4. Open market operations

The operations of the central bank on the open market are currently the main instrument in world economic practice in the framework of the applied indirect methods of monetary policy. The Central Bank sells or buys at a predetermined rate highly liquid securities, including government securities, which form the country's domestic debt, at its own expense in the open market. This tool is considered the most flexible tool for regulating credit investments and liquidity of commercial banks.

A feature of open market operations is that the central bank can have a market effect on the amount of free resources available to commercial banks, which stimulates either a reduction or expansion of credit investments in the economy, while simultaneously affecting banks' liquidity, correspondingly decreasing or increasing it. This effect is carried out by changing the central bank's purchase price from commercial banks or selling them securities on the open market.

The main securities that are traded on the open market include the most liquid securities actively traded in the secondary market, the risk of which is extremely low. Such securities are various obligations issued by authorities:

debt certificates (Bank of the Netherlands, Bank of Spain, European Central Bank);

financial bills (Bank of England, German Bundesbank, Bank of Japan);

bonds (Bank of Korea, Central Bank of Chile, Bank of Russia).

The choice of securities depends on the degree of development of the financial market

and the independence of the central bank, its ability to conduct operations not only with government securities, but also with securities of other issuers.

The impact of the central bank on the money and capital markets is that by changing interest rates on the open market, the bank creates favorable conditions for credit institutions to buy or sell government securities to increase its liquidity. Open market operations are conducted by the central bank, usually in conjunction with a group of large banks and other financial and credit institutions.

Open market operations are more suited to short-term market fluctuations compared to accounting policies.

In the open market, central banks use two main types of operations: direct transactions and repurchase agreements.

Direct transactions mean the purchase and sale of securities with immediate delivery. The buyer becomes the undisputed owner of the securities. Such transactions do not have a maturity. Interest rates are set at auction.

Repurchase agreements are subject to a repurchase agreement. Direct REPO transactions mean the purchase of securities by the central bank with the obligation of the dealer to buy them back after a certain period. When concluding reverse repos or doubles (sometimes called mismatches), the central bank sells securities and assumes the obligation to buy them from the dealer after a certain period of time. Such transactions are convenient in that maturities can vary.

By types of open market operations are divided into dynamic and protective.

Dynamic open market operations are aimed at changing the level of bank reserves and the monetary base. They are permanent, and direct transactions are used to carry them out.

Protective operations are carried out to adjust the reserves in case of unexpected deviations from the set level, i.e. they are aimed at maintaining the stability of the financial system and bank reserves. For such transactions, repos are used.

Bank of Russia repo transactions were widely used from 1996 to the 1998 financial crisis. The subject of transactions was government short-term bonds (GKO) and federal loan bonds (OFZ).

The prerequisite for concluding a direct REPO transaction was the dealer’s short position for concluding a direct REPO transaction, the dealer’s short position following the results of trading within the limit established by the Bank of Russia. That is, transactions were concluded only when the dealer’s obligations exceeded the amount of funds previously deposited in the trading system. After the crisis, the Bank of Russia allowed an inter-dealer repo - conclusion of repos with GKO-OFZ bonds between dealers meeting certain criteria. It was assumed that this would allow the Bank of Russia to reduce the volume of monetary emissions due to a more rapid redistribution of bank reserves.

The use of open market operations as an instrument of monetary policy depends on the level of development, the institutional environment and the degree of liquidity of the government securities market. After the financial crisis of 1998, the Bank of Russia does not have such an opportunity. Operations are hindered by the absence of the state-owned securities in demand in the portfolio of the Central Bank of the Russian Federation. Their renewal will depend on the adoption by the Government of the Russian Federation of a decision to reissue a sufficient portion of the portfolio into securities with market characteristics.

Today, the Bank of Russia only deals with federal bonds. This is due to the fact that until recently, the securities market of the constituent entities of the Russian Federation was not developed to the necessary degree. However, the small volumes and low liquidity of these securities did not allow their use as a basic tool for operations. Increasingly, the issue of using bonds of the constituent entities of the Federation in the future as a basic asset for conducting operations on the open market began to be discussed.

It should be noted that the decision by the Bank of Russia on the admission of an asset or liability, an issuer for use in banking operations should not be associated with a specific issuer or a specific asset. Recently, individual corporate issuers have been able to obtain state guarantees for their obligations from some constituent entities of the Russian Federation. These issuers apply to the Central Bank of the Russian Federation with a request to include their assets in the list of securities for operations by the Bank of Russia on the open market.

Inclusion of an asset of a corporate issuer in the list of securities accepted by the Bank of Russia as collateral at first really gives a positive result. The issuer's securities are included in the Lombard list of the Central Bank of the Russian Federation - a list of securities that are accepted for collateral under REPO transactions. This may cause an increase in the attractiveness of such securities, an increase in the activity of trading with them. However, the Central Bank of the Russian Federation does not undertake to keep these securities in the Lombard list forever. At the slightest adverse change in the circumstances of the issuer's financial situation, the Bank of Russia excludes such securities from the Lombard lists, which violates the stability of the securities market. To avoid this situation on the securities market, he decided not to include bonds of individual issuers in his operations. In addition, he does not have the ability to track the financial position of each issuer in order to determine whether it is advisable to leave his bonds in the pawn list.

The specifics of regulation of the Russian stock market are such that the Central Bank of the Russian Federation can only carry out operations on the stock market in the government securities sector of the Moscow Interbank Center. Any other operations with equity securities cause problems with obtaining a license of a professional stock market participant.

To maintain the liquidity of the government securities market, the Bank of Russia uses “repo transactions”. The Bank of Russia may provide funds to the primary dealer in the securities market to close a short open position (i.e. when the obligations are greater than the requirements) in exchange for government securities. The dealer assumes the obligation to repurchase the same securities after a certain period of time, but at a different price. The repo transaction term is fixed at 2 days. The REPO market is a rather effective short-term instrument of the monetary policy of the Bank of Russia and one of the indirect instruments for maintaining the liquidity of the government securities market.

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State management of a market economy implies guaranteed support by the Central Bank of Russia of the activities of commercial banks. This is due to the fact that the latter are a working link in the monetary system that directly organizes credit relations in the national economy in the real sector of the economy.

Consider the main tools with which the Central Bank pursues its policy in the open market. These include, first of all, a change in the refinancing rate, a change in the norms of required reserves, operations on the open market with securities and foreign currency, as well as some measures that have a strict administrative character.

If we talk about refinancing, then refinancing refers to lending by the Central Bank of Russia to banks and credit institutions to regulate the liquidity of the banking system.

The forms, procedure, terms, conditions and limits of refinancing are established by the Bank of Russia. The Federal Law of the Russian Federation “On Banks and Banking Activities” dated 03.02.1996.

The refinancing rate is a monetary regulation tool by which the Central Bank affects the rates of the interbank market, as well as the rates on deposits of legal entities and individuals and loans provided to them by credit organizations.

The limit of open market operations is approved by the Board of Directors.

Open market operations vary depending on:

• - conditions of the transaction: purchase and sale for cash or purchase for a period with mandatory reverse sale - reverse operations;
• - objects of transactions: operations with state or private securities;
• - Transaction urgency: short-term (up to 3 months), long-term (up to 1 year or more) operations with securities;
• - areas of operations: only in the banking sector of the securities market or in the non-banking sector of the market;
• - a method of setting rates: determined either by the Central Bank or the market.

Operations on the open market were first actively used in the United States, Canada and the United Kingdom due to the presence in these countries of a developed securities market. Later, this method of credit regulation was widely used in Western Europe.

In the form of conducting market operations of the Central Bank with securities may be direct or reverse. A direct transaction is a regular purchase or sale. The reverse operation consists in the purchase and sale of securities with a mandatory reverse transaction at a predetermined rate. The flexibility of reverse operations, the milder effect of their impact, give popularity to this regulatory tool. Thus, the share of reverse operations of the Central banks of leading industrialized countries in the open market reaches from 82 to 99.6%. If you look, you can see that in essence these operations are similar to refinancing on the security of securities. The Central Bank offers commercial banks to sell him securities on the terms determined on the basis of auction (competitive) tenders, with the obligation to sell them back in 4-8 weeks. Moreover, interest payments that “run up” on these securities during their period of ownership by the Central Bank will belong to commercial banks.

Thus, open market operations are the use of more flexible regulation, since the volume of the purchase of securities, as well as the interest rate used in this case, can change daily in accordance with the direction of the Central Bank policy. Commercial banks, given the specified feature of this method, should carefully monitor their financial situation, while avoiding the deterioration of liquidity.

In fact, the Central Bank of Russia acts as an agent for the Ministry of Finance of the Russian Federation for servicing, as well as a regulatory and control body.

The Central Bank of Russia provides the “organizational” side of the functioning of the market of state short-term bonds (T-bills): holds auctions, repays, prepares the necessary documents, transfers the necessary funds to the account of the Ministry of Finance of the Russian Federation. In addition, he actively participates in the work of the GKO market as a dealer, which makes it possible to have a targeted economic impact on the market depending on the events that occur directly at and around it, and in accordance with the current CBR policy.

At the same time, the Bank of Russia does not set as its goal the extraction of profit from operations in the market. The Central Bank is focused on maintaining a certain level of some indicators of the GKO market, which determines the attractiveness of the GKO market for investors.

The fundamental objective of the Central Bank's operations in the open market is to help the Russian economy achieve a common level of production characterized by full employment and price stability.

Using the support of the state, the Central Bank has the opportunity to provide the payment system with powerful telecommunications facilities necessary for settlements by market participants. The Central Bank is able to register all payment transactions occurring between banks, and qualitatively offset the mutual obligations of banks.

The Central Bank pursues a discount rate policy (also called sometimes a discount policy), acting as a “lender of last resort”. He presents loans to the most financially stable banks experiencing temporary difficulties. The Federal Reserve System (FRS) sometimes provides long-term lending on special conditions. These can be loans to small banks to meet their seasonal cash needs. Sometimes, loans are also provided to banks that find themselves in a difficult financial situation and need help to put their balance in order.

Bank of Russia interest rates are the minimum rates at which the Bank of Russia carries out its operations.

The Bank of Russia may set one or more interest rates for various types of transactions or pursue an interest policy without fixing an interest rate.

The Bank of Russia uses interest rate policy to influence market interest rates in order to strengthen the ruble (Article 37). Federal Law on the Central Bank of the Russian Federation (Bank of Russia) (as amended by Federal Laws dated 26.04.95 No. 65-ФЗ, dated 27.12.95 No. 210-ФЗ, dated 27.12.95 No. 214-ФЗ, dated 20.06.96 No. 80- Federal Law of 02.27.97 No. 45-Federal Law).

Carrying out macroeconomic supervision of the functioning of the banking system as a whole, as well as monitoring the activities of each bank individually, the CBR can quickly take preventive measures to stabilize the financial situation of payment service market participants and reorganize a problem bank in order to prevent a breakdown in the links of the settlement chain due to bankruptcy or illiquidity of its participants.

The Central Bank of the Russian Federation considers the main objective of monetary policy in the open market to reduce inflation while maintaining and possibly accelerating GDP growth while creating the prerequisites for reducing unemployment and increasing real incomes of the population.

Annotation:  The article considers operations related to operations of the Bank of Russia in the open market, analyzes data on operations in the open market conducted by the Bank of Russia in 2013-2016.

Open market operations are part of the banking system's liquidity regulation mechanism, which the central bank implements, guided by monetary policy objectives, as well as considerations of ensuring the stability of the banking system.

By economic nature, open market operations are credit operations to provide liquidity to banks, as well as deposit operations to seize banks' liquidity, which are carried out by decision of the Central Bank on credit institutions that are common to all credit institutions.

In the Russian Federation, the main state body responsible for conducting monetary policy is the Central Bank of the Russian Federation (Bank of Russia), whose policy is carried out in the inflation targeting mode and is aimed at reducing inflation to 4% and further maintaining it near this level.

To do this, a wide range of monetary regulation tools is used, enshrined in the Federal Law “On the Central Bank of the Russian Federation (Bank of Russia)”, however, in actual practice, the main mechanism of the Bank of Russia’s impact on the economy is the change in the key rate, which, in turn, is determined by the results auctions conducted on open market conditions.

These include:

- The main auction operations - liquidity provision / withdrawal auctions under repurchase agreements or deposit auctions for a period of 1 week;

- operations of "fine tuning" - repo auctions for a period of 1 to 6 days, swap auctions for a period of 1 to 2 days, as well as deposit auctions for a period of 1 to 6 days

- additional auction liquidity operations with maturities of 1 week to 36 months, conducted in the form of auctions for the provision of loans secured by various assets.

The dynamics of the volume of auction repo transactions of the Bank of Russia, and the level of average rates based on the results of such auctions, which, in general, correspond to the key rate of the Bank of Russia, are shown in Figure 1. The figure shows that the volumes of liquidity provision to banks as part of repo auctions increased significantly the period 2013-2015, which reflects the growth in demand for liquidity from banks, the rates for these operations increased significantly (Fig. 1).

In our opinion, this is due to the peculiarities of the economic situation that arose in Russia in 2015. In connection with the beginning of a long-term fall in world prices for hydrocarbons, on the export of which the economic development of Russia depends to a large extent, the economic growth rates have fallen, the situation in the real sector of the economy has worsened, a large-scale devaluation of the ruble and an automatic surge in inflation have occurred. In 2014, economic sanctions were introduced against Russia, in particular, blocked access to enterprises and banks to external financing.

As a result, in the banking system of the Russian Federation, since the end of 2014, there have been problems with liquidity, which the Bank of Russia calls structural problems, attributing to the development of a structural economic crisis, as well as to limited access to external financing in connection with the imposition of sanctions. To solve these problems, the Bank of Russia increased its liquidity support through auction repos (Fig. 1).

Subsequently, the volume of liquidity provided to banks through operations on the open market and other instruments of the Bank of Russia decreased, the rates on these operations remain at a relatively stable level, which, in our opinion, indicates the normalization of the situation with liquidity in the banking sector.

Thus, in the Russian Federation, open market operations include auction operations conducted by the Bank of Russia: repos and deposits with a term of 1 week; fine tuning operations; operations to provide loans secured by securities and other assets, and bank guarantees for longer periods. The main ones are auctions for liquidity placement on repo terms, held once a week, and deposit auctions for liquidity withdrawal.

Based on the results of repo auction operations conducted on an open market, the Bank of Russia key rate is determined, the change of which is the main instrument of monetary regulation in the Russian Federation in modern conditions.

Analysis of data on open market operations conducted by the Bank of Russia in 2013-2016 showed that their volumes increased significantly in late 2014 - early 2015. due to liquidity problems caused, in particular, by the deterioration of the macroeconomic situation in the Russian Federation during this period. After the Bank of Russia took measures to overcome this problem, the volume of operations in the open market returned to normal.

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