Open Market Operations or Central Bank Bill (CBB) sale is a monetary policy implementation tool. In order to manage fluctuations in the interbank short term rate and reserves, the BoM trades with banks the following central bank securities with different yields and maturities:
- Sell central bank bonds with maturities of one week and 12 weeks to recall reserves from the interbank market;
- Repo sale central bank bonds with a maturity of up to a week to supply reserves into the interbank market.
Trade of the securities can take one of the five forms:
- Trade with a stable yield, unlimited bidding;
- Trade with a stable yield, limited bidding;
- Trade with competing by rate within a certain interval;
- Yield with an upper limit, unlimited bidding;
- Trade with competing by rate, limited bidding.
4-week maturity Central Bank Bills
In order to create an appropriate yield curve, mid-term financial instruments have been created on the money market, including the 4-week CBB. This bill had been issued and auctioned between September 1st of 2014 to August 1st of 2016, through the trade with competing rate and 28 days intervals.
On April 2nd of 2018, BoM reintroduced the 4-week CBB to the market, with fourth form of trade (yield with an upper limit, unlimited bidding). Auction of this bill takes place every Monday, with weekly basis.
1 week Central Bank Bill (CBB) is a central bank’s main monetary policy tool that plays an important role in managing the banks’ reserves. Yield of this bill represents the policy rate of the BoM and guides rate on the interbank money market. Once with a stable rate and unlimited bidding, the 1-week CBB was originally introduced in July 2007 to be auctioned on the interbank market every Wednesday which has attracted significant interest from the banks. The commercial banks now can invest their excess reserves in short term high yield assets, which has led to considerable changes in the reserve management system of banks.
For the favorable adjustment of CBB rate along with the market principles, 1-week CBB has been held in a type of competing by rate since May 2010. The upper and lower limits of the auction rate are targeted to be the policy rate +/-2 percent. For this type of trade, target policy rate acts as an average trade rate. This frames to make the interbank rate as the operational target in medium term.
Since April 2011, 1-week CBB has been traded at the policy rate as an upper bound without an announced bidding. The trade has been taking place three times a week on Monday, Wednesdays, and Fridays since March 2013. If the BoM aims to maintain a certain level of reserves trade volume is determined based on the banks’ bidding.
/Currently the trade of the 12-week CBB is temporarily suspended/ In order to create an instrument with medium maturity on the money market, the BoM has started trading a 12-week CBB on the interbank market beginning on August 19, 2016. To create an appropriate yield curve, the BoM must define only the first segment of the yield curve whereas the market should define the remaining segment of the curve. Therefore, while the BoM attempts to affect the short term rates via the 1-week CBB rate, the 12-week CBB rate correlates to factors such as future bidding, and risk and reserves expectations.
The trading is performed under the principle of competing by rates on pre-announced amount with the maximum limit of interest rate (policy rate + 1 percentage point). The maximum limit of interest rate intends to cover arbitrage between the Central Bank Bill and repo trading.
In order to issue long-term securities to attract the interbank excess reserves, the Bank of Mongolia introduced 28-week maturity CBB, starting November 28, 2018. Auctions are held every two weeks on Wednesday, with a limited bidding and competing rate.
The primary trade of the government bill has suspended on November 2017, and the amount of such securities held by the banks has declined. Therefore, as 4-week maturity CBB has limited access to the repo financing with 90 days, the central bank introduced 28-week maturity bill.
The 28-week maturity CBBs will help to increase interbank activity, to improve the monetary policy transmission mechanism, to facilitate resource management, and to decrease short-term interest rate fluctuations. Moreover, by issuing 28-week CBBs the Bank of Mongolia will be able to determine the yield curve up to 6 months, and facilitate the interest rate to be determined by the market mechanism.
One week maturity repo transactions
/Currently the trade of the One week maturity repo is temporarily suspended/ The BOM announces repo trades to supply resources to the interbank market in order to reduce resources fluctuation and manage short-term rates. The repo trades are performed with fixed rates (policy rate + 1 percentage point) regardless of amount limitation.
Repo rate up to 7 days is equal to policy rates plus 1 percentage points:
Repo rate = Policy rate + 1 percentage points
Repo rate can be valid up to 7 days and announced by the BOM. Repo transactions should be done based on the bills (CBB and Government bond) listed in securities list developed by the BoM’s Risk Management Unit.