New system aims to increase efficiency of liquidity management in Saudi banking system.
The Saudi Central Bank (SAMA) announced that it will conduct repo, reverse repo and Open Market Operations (OMO) with locally operating banks using Bloomberg’s Auction System from January 2022.
SAMA had announced in 2018 the completion of the development of the SAMA Bills and Murabaha issuance system using Bloomberg.
“This collaboration with Bloomberg marks the next stage in developing the central bank’s operations. The increased efficiency of liquidity management operations will have a positive impact on the banking sector. It also aligns with international best practice in liquidity management through electronic trading,” said Ayman Alsayari, Vice Governor of SAMA.
Bloomberg’s Auction System, a part of Bloomberg’s enterprise solution for central banks and government financial agencies, is used to perform auction tenders electronically, and by market participants to track these auctions and enter bids. The system provides a safe and secure environment to issue debt and buy back debt, and perform other open market operations including repo and reverse repo auctions, all from a single integrated solution. It is fully integrated with the data, news, analytics and communications tools available on the Bloomberg Terminal. Bloomberg’s auction system is used in more than 30 countries globally.
“Bloomberg’s Auction System is part of a range Bloomberg solutions designed to help bring greater transparency, liquidity and efficiency to capital markets. We are delighted by this ongoing collaboration with SAMA to further support the electronification of its markets,” said Nicholas Bean, Global Head of Electronic Trading Solutions at Bloomberg.
What are repo, reverse repo and open market operations
The repurchase agreement (repo) and the reverse repo agreement (RRP) are two key tools used by many large financial institutions, banks, and some businesses to manage their short term liquidity. Most central banks around the world use the repo and RRP as a method to control the money supply.
Essentially, repos and reverse repos are two sides of the same transaction, reflecting the role of each party. A repo is an agreement between parties where the buyer agrees to temporarily purchase a basket or group of securities for a specified period. The buyer agrees to sell those same assets back to the original owner at a slightly higher price using a reverse repo agreement.
There is constant flow of funds between the central bank and other banks. The rates at which these funds change hands determine the rates at which lenders give loans to others, including retail borrowers.
Repo rate is the rate at which the central bank gives loans to commercial banks against government securities. Reverse repo rate is the interest that central banks pay to banks for the funds that the banks deposit with it. So, if the repo rate increases, it means banks are getting funds from the central bank at a higher cost. This, in turn, will mean that banks will also lend to others at a higher cost. These two rates are key monetary policy tools for central banks in setting short term cost of funds.
Open market operations deals directly with money supply and indirectly interest rates. open-market operation involves the purchases and sales of government securities and sometimes commercial paper by the central banks regulating the money supply and credit conditions on a continuous basis. When the central bank purchases securities on the open market, the effects will be (1) to increase the reserves of commercial banks, a basis on which they can expand their loans and investments; An increase in the price of government securities, equivalent to reducing their interest rates; and a decrease interest rates generally, thus encouraging business investment. If the central bank should sell securities, the effects would be reversed.
(Except for the headline, this story has not been edited by The Finance World staff and is published from a syndicated feed.)