Open market operations
Open market operations are exclusively decided by Bank of Albania, which determines the type of instrument that will be used as well as the relevant terms and conditions of their execution. According to the purpose of their use, open market operations are divided into: main market operations, fine-tuning operations and structural operations. Repurchase and reverse repurchase agreements are used as the main open market operation and as fine-tuning operations, based on the instruments’ lifetime. Outright sale or purchases of the securities are instruments used in structural operations.
REPURCHASE AGREEMENTS (REPO)
Repurchase Agreements are instruments of the open market operations by means of which Bank of Albania sells securities to commercial banks, committing to repurchase them respecting the predetermined conditions. This instrument is used in order to temporary inject liquidity in the banking system. While the reverse repurchase agreements consist in open market operations by means of which Bank of Albania buys securities from commercial banks, committing to resell them under the predetermined conditions. This instrument is used in order to temporary inject liquidity in the banking system.
The securities traded through (reverse) repurchase agreements, are purchased in advance in the primary or secondary market by Bank of Albania or by commercial banks. The securities, subject to these agreements, are: Treasury Bills of Albanian Government and Treasury bonds with remaining maturity not more than 365 days. In these transactions, an asset is sold while the seller simultaneously obtains the right and obligation to repurchase it at a specific price on a future date.
The minimum requested amount to transact through (reverse) repurchase agreement is ALL 10 (ten) million and could be raised only by multiples of the same amount.
The difference between the purchase and repurchase price of the security in these agreements corresponds to the interest due on the amount of money borrowed or lent over the term of the operation. In other words, the repurchase price of the security comprises the respective interest to be paid.
MAIN OPEN MARKET OPERATION
The main open market operation is realized through a seven days maturity (reverse) repurchase agreement which is the main instrument for the implementation of monetary policy by Bank of Albania. The purpose of using this kind of instrument is the short-term liquidity management of the banking system, aimed at stabilizing market interest rates. The interest rate of one week maturity (reverse) repurchase agreement sets the monetary policy stance.
The main features of the (reverse) repurchase agreements can be summarized as follows:
- They are executed through multiple price/fixed amount auctions and through single price/variable amount auctions.
- The auction for these types of agreements is held weekly as standard type auction.
- The interest rate is fixed by Bank of Albania’s Supervisory Council. This rate acts as a floor (reverse repurchase agreements) or ceiling (repurchase agreements) rate for multiple price auctions.
- The maturity of this instrument is seven days.
The instruments used in fine-tuning operations are (reverse) repurchase agreements with overnight, one or three-month maturity. These instruments are used to adjust the fluctuations in the interest rates driven by unexpected fluctuations in market liquidity. The operational features of these (reverse) repurchase agreements are:
- They are executed through quick auctions and/or through bilateral procedures. Their frequency is not standardized.
- The auction is of fixed amount and the interest rate is set by the auction’s participants.
- Bank of Albania has the right to refuse bids, in case the bid rate is deviated from the market interest on the day the auction is held.
- The overnight (reverse) repurchase agreement’s maturity is one day; one month (reverse) repurchase agreement’s maturity is of 28 (twenty eight)days and three months (reverse) repurchase agreement’s maturity is of 91 (ninety one) days.
The instrument used to conduct structural operations consists in the outright transactions. Such operations are intended to be applied in order to adjust the structural liquidity position of the banking system.
The outright transactions refer to outright purchase and sales of securities in the market. Such operations are not reversible and have permanent effect in the money market. They are only employed as transactions to adjust the market structure.
An outright transaction implies a full transfer of ownership from the seller to the buyer with no reverse transaction. The operational features of outright transactions could be summarized as follows:
- They can take the form of liquidity-providing (outright purchase) or liquidity-absorbing (outright sale) operations.
- Their frequency is not standardized.
- Their execution through quick auctions or bilateral procedures is decided by the Monetary Policy Implementation Committee of the Bank of Albania.
- The securities traded in the outright transactions include treasury bills with maturity up to one year with more than seven days to maturity. Also, other highly liquid and credible securities (debt instruments), in book-entry form, approved by Bank of Albania’s Supervisory Council, may be subject to outright transactions. However, up to now, apart the Albanian Government’s treasury bills no other security is approved for these transactions.