Box E: Normalisation of Domestic Market
Dealing Operations
In response to the financial crisis the Reserve Bank made a number of modifications to dealing
operations within its existing framework.1 To maintain liquidity in term money markets, and to
provide greater certainty of funding for financial institutions, the Bank:
• increased the average maturity of the repos contracted with counterparties and shifted the
composition of the securities it held on repo from government-related securities towards
private securities such as bank bills and certificates of deposit (CDs) (Graph E1);
• expanded the range of private securities that it was willing to purchase on repo to include
securities from distressed markets, such as residential mortgage-backed securities (RMBS)
and asset-backed commercial paper (ABCP). Over time, the range of eligible securities was
expanded to cover all highly-rated private debt securities;
• began accepting related party, or self-securitised, RMBS around the peak of the financial
crisis in October 2008 as it sought to expand the range of funding options for financial
institutions; and
• began offering 6- and 12-month funding each day in its dealing operations.
Some of these repo purchases were accommodated by the Bank increasing Exchange
Settlement Account (ES) balances significantly, as the financial turbulence increased demand for
a risk-free, highly liquid asset (Graph E2). Throughout 2008, ES balances averaged $3.5 billion,
well above the pre-crisis average of around $800 million. Further purchases of securities by the
Reserve Bank were accommodated
by offering term deposits to banks.
Graph E1
These deposits were generally of one
Average Term of RBA Repos
Days
Days
to two weeks duration and enabled
the Bank to expand its dealing in the
market without compromising its
ability to keep the cash rate trading
100
100
at the target.
As was the case in offshore
US dollar markets generally, the
ability of institutions in Asian time
zones to access US dollar funding
became particularly strained during
the latter part of 2008. To that end,
the Reserve Bank implemented a
50
50
0
2007
2009
2008
0
Source: RBA
1 See Guy Debelle, ‘Some Effects of the Global Financial Crisis on Australian Financial Markets’, March 2009, and ‘Market
Operations in the Past Year’, October 2008 for additional background.
S t a t e m e n t
o n
M o n e t a r y
P o l i c y
|
N o v e m b e r
2 0 0 9
63
Graph E2
Balances Held at RBA
$b
$b
Term deposits
20
20
15
15
10
10
ES balances
5
0
5
l
J
l
l
S
D
2007
l
M
l
l
J
S
2008
l
D
l
M
l
J
l
S
2009
D
0
Source: RBA
Graph E3
Balances Outstanding on US$ Repos
US$b
US$b
25
25
20
20
15
15
10
10
5
5
0
l
S
2008
l
D
l
M
Source: RBA
l
J
2009
l
S
D
0
swap facility with the US Federal
Reserve, enabling it to distribute
US dollars to institutions operating
in Australia against the receipt of
Australian dollar securities. The
amount outstanding under the facility
peaked at around US$28 billion in
late November 2008 (Graph E3).
As conditions in domestic
financial markets have progressively
improved, the Bank has normalised
its
dealings
with
market
counterparties, whilst maintaining
the range of securities that it accepts
in its operations. Although the swap
agreement with the Fed remains
operative until February 2010, the
Bank has not auctioned US dollars
since May and all outstanding US
dollar repos have matured. Similarly,
the Bank has not offered term
deposits since March. ES balances
have declined, steadying at around
$1¼ billion over recent months. This
is well below the levels that prevailed
for much of 2008. The Bank no
longer offers 6- and 12-month
funding on a daily basis, although it
remains willing to contract for such
terms when it suits its own liquidity
management purposes.
While the Bank has continued to modify its existing dealing framework, the overriding goal
of market operations has been to keep the cash rate at the monetary policy target. To that end,
the cash rate has continued to trade at the target rate throughout the entire period.  R
64
R e s e r v e
b a n k
o f
A u s t r a l i a