Turmoil in the International Interbank and FX Swap Markets: theories, parity condition, policy matters and risk
Management
Appendices
Aarhus School of Business, University of Aarhus
September 2009
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Turmoil in the International Interbank and FX Swap Markets: theories, parity condition, policy matters and risk
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APPENDIX 1
1.
International Interbank Market Instruments
Today, financial institutions purchase money market instruments, in order to simultaneously earn a
return and maintain adequate liquidity based on the credit ratings. Money market instruments are
issued when ever experienced a temporary shortage of cash, and due to the fact that money markets
serve businesses, the average transaction size is very large (Jeff Madura (2000): 137). There are
several types of money market instruments which are issued in the primary market 1 by corporations
and governments to obtain short term funds through sale in the secondary market (Jeff Madura
(2000): 125), (Levinson (2005): 42). In the following section, the best known instruments will
briefly be described categorised as uncollateralised and collateralised loans.
1.1
Unsecured Loans
The objective of this section is to briefly describe the unsecured loans i.e. Commercial Paper, AssetBacked Commercial Papers, Interbank loans, in order to give a better overall understanding of the
money markets and instruments.
1.1.1
Commercial paper
Beside bank loans as source of short term funds, large firms with good credit ratings, have an
alternative source of funds that is cheaper, explicitly, the sale of commercial paper 2 (Stigum (2007):
79). The market for commercial papers (CP) was first developed in the US in the late 19th century3.
Commercial paper markets have developed rapidly in other countries, and the US share of
worldwide issuance has declined.
A Commercial paper is defined as a short term debt obligation of a private sector firm or a
government sponsored corporation. In general, the paper has a lifespan greater than 90 days but less
1
The primary market is referred to the initial offering of a security i.e. whether a stock, a bond, a loan, or a derivative instrument. While the
secondary market refers to the market where existing securities can be traded between investors (Arvind K. (1994): 166).
2
Few investment banking firms, such a Goldman Sachs, Merrill Lynch and Lehman Brothers (as it use to be) account for most of the placements of
commercial paper (Stigum (2007): 79).
3
It is most important advantage was that it allowed financial healthy companies to meet their short term financing needs at lower rates compared to
borrowing directly from banks. In a time where US bank deposits were not insured, short term corporate debt did not seem to be a more necessarily a
riskier investment for savers than a bank deposit. However, with an introduction of a government created deposit insurance scheme, the popularity of
commercial paper declined. Yet, commercial papers gained its popularity again in the 1980s (by the early 1980s, the annual issuance of commercial
paper in the U.S. was recorded to be one fifth the annual volume of bank lending), as the inflation and high short term interest rates, regulations
limited the interest that banks could pay depositors. Money market funds enabled investors to earn higher rates than what banks were offering, and
non-banking firms discovered that they could raise money cheaper by selling commercial paper to money market funds than by borrowing from
banks. These events resulted the commercial paper market to blossom, and it has continued to grow rapidly, with occasional interruptions due to
conditions in the financial market (Levinson (2005): 43-44).
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than nine months4. Generally, commercial papers are unsecured5, though a commercial paper issue
may be secured by a specific asset of the issuer or perhaps be guaranteed by a bank. All commercial
paper is negotiable, however, most paper sold to investors is held by to maturity due to the small
size and rather illiquid secondary market for commercial papers (Stigum (2007): 52). In recent
years, financial firms have become the most important issuers (Levinson (2005): 43). Today, the
commercial paper markets6 are displayed with a quite high level of liquidity, where there are many
hundreds of billions of dollars that are invested in short term every day (Stigum (2008): 989-990).
Asset-Backed Commercial Paper (ABCP): Another very in style commercial paper is the ABCP7,
which has outpaced the growth of all other segments of CPs. In September 2006 roughly $950
billion of ABCP was outstanding, a nearly 60 per cent increase from five years earlier and more
than half of all CP outstanding8. Stigum (2007) explains one of the main dynamics behind the
growth of the ABCP market as its diversification from the issuance of term ABS transactions
towards CP issuance. Additionally, larger transactions are now facilitated by the market, which has
assisted the growth, and a variety of issuers have established ABCP program (Stigum (2007): 995996). But what is this so in style program? ABCP is issued by a shell company whose only function
is to purchase assets, from one company or many, of a specific type and quality and to then fund
these assets by borrowing in the commercial paper market.
Generally, the assets purchased are either 1) trade receivables or accounts receivable due from
buyers of the products of a company or 2) term receivables such as auto loans and credit card bills.
These two types of financial assets are either liquid or have short maturities, and term receivables
generate a return. Yet, their short maturities are a quite well fit for the commercial paper market.
There are five major types of asset-backed commercial paper i.e. general purpose multiseller, credit
arbitrage, structured investment vehicle, singleseller, and loan backed. The multiseller program is
4
This maturity is stated by regulations. In the United States, the majority of new securities must be registered with the Securities and Exchange
Commission, prior to issuance, but securities with a maturity of 270 days or less are exempt from this requirement (Levinson (2005): 42).
5
Also called unsecured promissory note (IOU) (Lloyd (1997): 62).
6
Although, historically, this has not been the case as for instance with the Penn Central, the stock market crash in October 1987, there appeared a
remarkable volatility in the money markets and a marked widening of quality spreads, nonetheless all sectors of the commercial paper market
continued to display tremendous liquidity. Repeated incident in early 2000s after the defaults by utilities companies in California and Tyco issue,
verifies that the commercial paper markets are less distressed by events outside the commercial paper markets (Stigum (2007): 989-90).
7
See appendix 12, where figure 12.1 illustrates how a typical asset-backed commercial program works. As it is depicted in the figure, there are both
credit enhancement and liquidity providers, which are generally provided by high-quality commercial banks (Stigum (2007): 994).
8
ABCP issuance has surpassed the issuance of financial paper, which had about $700 billion outstanding in September 2006. See appendix 12, for
figure 12.1, which depicts this growth of the ABCP market, which had about the same amount outstanding as the financials did five years earlier
(Stigum (2007): 995-996).
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the largest segment of the ABCP market, consisting generally of financing for term receivables as
well as for securities purchases and asset warehousing. Hence, the structured investment vehicle has
been quit applied for the US housing loans. Hence, these other programs will not be further
elaborated on due to limited paper size and degree of irrelevance (Stigum (2007): 994).
Size of the CP Market
In recent years, the commercial paper market has fluctuated between expansion and contraction, yet
it has even so stayed larger than the Treasury bill market, with $1.7 trillion outstanding in May
2006 compared to $960 billion for Treasury bills (Stigum (2007): 52). In March 2009, BIS (2009)
recorded the amount outstanding by financial institutions was $528.6 billion compared to
governments, institutional organizations and corporate issuers, which was recorded to be $66.8,
$12.9, $49.3 billion, respectively. In December 2009, the total amount of commercial papers
outstanding was recorded to be $2,424.1 billion. Approximately half of international commercial
paper has been denominated in euros, one quarter in dollar and a greater part of the remainder in
sterling (BIS (2009): 90). The greater observed amount in euroes could be explained by the fact that
commercial papers denominated in euros can be traded in the greater amount of countries of the
euro zone with no currency risk9 (Levinson (2005).
Risk involved in CP
The majority of CP is rated with respect to credit risk by credit rating agencies mentioned in chapter
2. This highlights the importance of correct rating in the recent turmoil. In general, for the most
part, merely companies with extremely high credit ratings issue CP as investors demand a very low
default risk, which include issuing new short term debt into the market every few weeks or months.
Due to the credit risk10 and the illiquidity, average yields on CP are slightly higher than those on
Treasure obligations of similar maturities. Yet, CP is one the cheapest sources of external funding
(Stigum (2007): 53). However, CP issuing can lead to the common activity of issuers i.e. to roll
over their paper, using the proceeds of new issue to repay the principle of previous issue. As a
result, this allow issuers to borrow money for longer periods at short term interest rates, which may
be significantly lower than long term rates. The risk perceived by investors is lower, due to the short
term of the obligation. Yet, the continual borrowing programs are not riskless. Given market
9
According to Levinson (2005), the largest single source of international commercial paper issuance is Germany, reflecting the difficulty of issuing
such securities on the German domestic markets, followed by the United States, the UK, the Netherlands and Spain.
10
For instance, the interest rate paid on 30-day CP is usually compared to the federal funds market. Historically, there has been only
a slight risk that a CP issuer might default (Stigum (2007): 53).
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conditions or change in the firms` financial circumstances prohibit a new CP issue, the borrower
would face default if it lacks the cash to redeem the paper that it is maturing. In 2001 and 2002, this
was the case for several major American and European companies. The credit rating agencies
lowered their ratings, resulting in precludes of sale of new CP and therefore confronted them with
shortage of cash. Therefore, the usage of CP also creates a risk concerning the rise of interest rates.
The total cost of successive short term borrowings may be greater than had the firm undertaken
longer term borrowing when rates were low (Levinson (2005): 42-45).
1.1.2
Interbank Loans
Interbank loans are loans extended from one bank to another with which it has no association.
Several of these interbank loans are across international boundaries and used by the borrowing
institution to relend to its own customers. Overnight loans are short-term unsecured loans from one
bank to another. They may be used to help the borrowing bank finance loans to customers, but often
the borrowing bank adds the money to its reserves in order to meet regulatory requirements and to
balance assets and liabilities. The interest rates at which banks extend short-term loans to one
another have implicit international importance. Many financial instruments have interest rates tied
to LIBOR which is the average of rates charged by important banks in the UK for overnight loans to
one another. A newer interest rate, EuroLibor, the rate at which European banks lend to each other,
fulfils the same function for financial instruments denominated in Euros. In the US the Fed funds
rate i.e. the rate at which banks with excess reserves lend to those that are temporarily short of
reserves, is the primary policy lever of the Federal Reserve Board, and for this reason a closely
watched economic indicator. Each of these rates is applied only to loans to healthy, creditworthy
institutions. A bank that believes another bank to be in danger of failing will charge sharply higher
interest rates or may refuse to lend at all, even overnight, for fear that the unsecured loan be lost if
the borrower fails.
As of March 2005, banks had $12.6 trillion outstanding to banks in other countries, with almost all
of this amount maturing with one year. Banks lend far greater sums to other institutions in their own
country (Levinson (2005): 48-49); Jeff Madura (2000): 125); Stigum (2007): 63-64).
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1.2
Secured Loans
This section aims to describe the secured loans i.e. Banker´s Acceptance, Treasury Bills,
Repurchase Agreements, Time Deposit.
1.2.1
Banker’s Acceptance (BAs)
Before the 1980s, bankers’ acceptances were the major way for firms to raise short-term funds in
the money markets. A banker`s acceptance is another money market instrument, which is a
promissory note issued by a non-financial firm to a bank in return for a loan, with a maturity of less
than six months. The function of the bank is to resell the note in the money market at a discount and
guarantee payment.
There are considerably differences between a BAs and commercial paper. Generally, BAs are tied
to the sale or storage of specific goods, such as an export order for which the proceeds will be
received in two or three months. Additionally, they are not issued by financial firms and do not bear
interest, instead an investor would purchase the acceptance at a discount from face value and then
redeem it for the face value at maturity. In an acceptance, the investor would rely on the guarantor
bank, rather than of the issuing company for their security. BAs have been perceived as a significant
source of financing, when banks were able to borrow at a lower cost than other types of firms. BAs
have allowed manufacturers to take advantage of the greater credit standing of banks. Hence, this
advantage has disappeared as other large corporate borrowers are considered as creditworthy as
banks. BAs are still a vital funding source for some companies, however, their importance has
diminished greatly as a result of the greater flexibility and lower cost of commercial paper
(Levinson (2005): 45). In 1974, the outstanding bankers acceptance was recorded to be $74 billion,
but observing the amount in March 2009, it has been recorded to be zero (Federal Reserve System
(2009): 41). Levinson (2005) highlights that yet they are more extensively issued in some other
countries, in particular Canada (Levinson (2005): 45).
1.2.2
Treasury Bills
Treasury bills are securities issued by national governments with a maturity of one year or less.
They are issued in the governments own currency and considered the safest of all investments in
that currency, and thus account for a large share of money market trading compared to the other
instruments. Levinson (2005) stresses that the combination of money market and long term debt
issuance varies from government to government, and time to time. In early 1996, the US
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government sought to reduce the average length of its borrowing to reduce interest costs, however,
in 2005, announced that it would resume issuance of 30 year bonds to finance increased national
debt. At the end of 2005, the recorded outstanding treasury bills with a maturity of one year or less
was $960.7 billion, amounting to one fifth of the public debt, while in December 2008 the
outstanding amount of T-bills were $1861.2 billion (SIFMA (2009): 1). The government of Japan
had until recently showed a strong preference for long term bonds, but sharply increased its
issuance of short term securities after 2001, whereas the German government rely more heavily on
long term borrowing and less relatively less use of money market instruments. France was relying
more on short term government debt in 2004 but then replaced much of it with long term debt in
2005. And UK has traditionally avoided issuing short term treasury securities, but increased the
stock of short term treasury debt from £2 billion in 2001 to £20 billion in 2005.
The pattern that is depicted is that when governments are unable to convince investors to buy its
long term obligations, treasury bills may become its main source of financing. Levinson (2005)
points this as the main reasons for the steep growth in Treasury bill issuance by the governments of
emerging market countries during the 1980s. Several of these countries have faced inflation and
political instability for years, which have made investors wary of long term bonds, forcing
government and non government borrowers to use short term instruments. Yet, as countries develop
their economies, they are often able to borrow for longer terms rather than relying solely on short
term instruments, as investors feels more secure. E.g. at the end of 1996, 53 per cent of the debt of
the Brazilian government was due within one year, but by 2005 this was instead recorded to be 30
percent.
A number of emerging market countries have issued treasury bills denominated in foreign
currencies, in particular dollars, in order to be able to borrow at lower rates than prevail in their
home currency. Hence, this strategy requires frequent refinancing of short term foreign currency
debt. Given a sudden declined in the value of the currency would raise the domestic currency cost
of refinancing the debt, where the government may not be able to meet its obligations except
foreign investors are willing to purchase new treasury bill issues to repay maturing issues. This
situation resulted in the debt crises in Mexico in 1995, Russia in 1998, and Brazil in 1999.
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Size of the Treasure Bill Market
The overall size of the Treasury bill market changes from year to year, depending upon the chosen
government fiscal policies. The Treasury bill market shrank in the late 1990s as a result of a shift
from budget deficit to budget surpluses, which reduced government debt outstanding in the US,
Canada and most EU countries and few emerging markets, but expanded again after 2000 as many
governments increased their budget deficits to fight recession. In 1999, 2004, and 2008 the
outstanding treasury bills at year end was $1,922 billion, $3,413 billion, and $ 4,956.9 billion
respectively (BIS (2009): 90), (Levinson (2005): 45-47).
1.2.3
Repurchase Agreements (Repo)
Repurchase Agreements, also known as repos, is a short term loan (often overnight), which has a
very vital role in the money market (Lloyd (1997): 63). Briefly, “a repo, or sale and repurchase
agreement, is a sale of a security coupled with an agreement to repurchase the same security at a
specified price at the end of the contract.” And the difference between the sale price and the
repurchase price is the interest rate, known as the repo rate (2008k): 37)11.
The repo offers a profitable short term use for unneeded cash for the investor 12. Thus, repos and
reverse repos allow dealer such as banks and investment banks to maintain large inventories of
money market securities, while protecting their liquidity by lending out the securities in their
portfolios. As a result, repos function as instruments which keep the markets very liquid, which
ensure constant supply of buyers for new money market instruments, and therefore a vital source of
financing for financial institutions (BIS (2008k): 37-38). Furthermore, several dealers as well as
investors also take positions in the repo market to profit from estimated interest-rate changes,
through matched book trading. This might require arranging a repo in one security and a reverse
repo in another, both to expire on the same day, in the hope that the difference in the prices of the
11
Further, elaborated on the transactions involved, a repo is a combination of two transactions. The first transactions includes security dealer, such as
banks, which sells securities it owns to an investor, agreeing to repurchase the securities at a settled higher price at a future date. In the second
transactions, days or months later, the repos are undone as the dealer buys back the securities from the investor. The amount lent to the investor is less
than the market value of the securities (the difference is called the haircut), this is due to the fact that to ensure that it still has sufficient collateral if
the value of the securities should fall before the dealer repurchases (Levinson (2005): 48).
12
A large investor whose investment is greater than the amount covered by bank insurance may think that repos are safer than bank deposits, as there
is no risk of loss if the bank fails. The investor would profit in two different ways. First, it would receive more for reselling the securities than it paid
to purchase them. In fact, it is collecting interest on the money it advances to the dealer at a repo rate. Second, if the investor thinks that the price of
the securities will decrease, the investor can sell them and later purchase equivalent securities to turn to the dealer just before the repo must be
unwound. In the meantime, the dealer would obtain a loan in the cheapest way, and can use the proceeds to purchase even more securities. Given that
the investor sells securities to a dealer and subsequently repurchasing them, the roles are switched. The investor would benefit from using the cash at
an interest rate below of other instruments (Levinson (2005): 50-51).
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two securities will change. One of the reasons for its popularity relies in its nature of flexibility13
(Levinson (2005): 50-51).
Size of Repo Markets
Repo markets have developed at different points in time in the G10 countries. It started in the US, in
the 1920s, 1970s in continental Europe and the British repo market was officially recognized by the
Bank of England Jan 199614 (BIS (2008): 38); Levinson (2005): 50-51). Since, 2002, repo markets
have doubled in size, with gross amounts outstanding at year-end 2007 of roughly $10 trillion in
each of the US and euro repo markets corresponding to 65 percent of euro area GDP, another $1
trillion in the UK repo market corresponding to around 50 percent of UK GDP.
No doubt, despite the presence of collateral, repo markets have rapidly been affected by the
financial turmoil. Concerns about the creditworthiness of counterparties and the ability to realize
the value of the collateral in a sale meant that repo transactions were gradually more limited to short
maturities and against only the highest-quality securities. As financing in unsecured markets
became more expensive or unavailable, financial institutions with funding requirements bid more
aggressively in repo markets to secure financing (BIS (2008k): 38). Another significant market,
which also had been fueled, was the foreign markets to raise unsecured funds via FX swaps and
cross currency swap (Baba et al (2008): 74-75).
In the meantime, traditional repo investors that lend cash pulled back from the market, reducing the
quantity of financing available. At the same time, given an increasing interest in government
securities and hoarding of US Treasuries by investors resulted in a general shortage of top-quality
collateral, with repo rates for US Treasury securities falling to levels close to zero. Taken as a
whole, the US repo market experienced significantly more disruptions than either the euro area or
the UK repo market.
13
The average maturity of a repo is few days, but it is possible to arrange for desired term. Overnight repos are also possible to be arranged where it is
carried with the lowest interest rate but with the condition of repayment the following day. While a term repo, which is settled on a specific date
usually three to six months but carries a slightly higher rate. An open repo is an instrument which continues until one or the other party demands its
termination at a rate close to the overnight repo rate (Levinson (2005): 50-51).
14 The repo market was originally a result of government regulations restrictive the interest banks could pay on short-term deposits (Levinson (2005):
50-51).
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As depicted in figure 1, by mid-2008 the gross market capitalization of the US repo market
exceeded $10 trillion corresponding to around 70 percent of US GDP. It has been suggested that,
prior to the crisis, non government collateral contributed considerably to the rapid growth of the US
repo market.
Figure App 1 Repo markets, Amount Outstanding in billions of national currency
Source: (BIS (2008k): 39)
Whereas, two thirds of the collateral is central government bonds from euro area countries, 16
percent from other euro area entities and 12 per cent from other OECD countries. In terms of
issuance, German collateral makes up one quarter of the market, followed by Italian at 13 percent
and French 11 per cent and other euro area at 15 percent. The two third of repos in the euro area,
have a maturity of one month or shorter, with the rest up to one year. By August 2008, the UK repo
market declined to £560 billion. The amounts outstanding are split evenly with maturities of one
month and shorter and longer than one month, hence the turnover is heavily concentrated in short
maturities with two thirds in the overnight segment and only five percent in maturities and five
percent in maturities longer than one month (BIS (2008k): 38-40).
1.2.4
Time Deposits
The term time deposits, also called certificates of deposits (CDs), are interest bearing bank deposits
issued by a commercial bank that cannot be withdrawn without penalty before a specified date to
finance business activities. CDs may last for as long as five years, but those with terms of less than
one year compete with other money market instruments, in particular deposits with terms as 30 days
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are very common (Levinson (2005): 49). Due to the nature of CDs i.e. they are negotiable (i.e.
tradeable) they are also called negotiable CDs, however, non-negotiable CDs can occur and must be
held by the depositor until the maturity date.
Stigum (2007) further states that there exists four types of CDs, categorized based on the issuer.
Domestic CDs are issued by domestic banks, Eurodollar CDs (Euro CDs) are issued outside the US
but are denominated in dollars. Yankee CDs are denominated in dollars, and are issued by the
branch of the foreign bank within the US. Thrift CDs are issued by savings and laon associations
and savings banks (Stigum (2007): 58).
Size of the CD Market: Lloyd (1997) highlights that the volume of negotiable CDs outstanding is
volatile and tends to expand considerably when credit demand escalates (Lloyd (1997): 63). Large
CDs are quite often used by corporations, government to invest cash for short periods of time. In
2008, the US outstanding large time deposits were recorded to be $2,191.6 (SIFMA (2008): 1).
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APPENDIX 2
The greatest rating agencies mentioned above, apply separate categories for each short term debt15,
which is illustrated in Table 1 that express their assessment of the outlook for compliance with the
payment obligation. Coyle (2002) emphasizes that it is to be distinguished between higher
investment grade ratings where the credit risk is low, and the poorer speculative grade ratings where
the risk is higher (Coyle (2002): 135). The highest grade designated by S&P is A-1, for Mood`s P-1
and F-1 for Fitch. All of these ratings, these grades mean low credit risk, or in opposition high
probability of future payments.
Table App 2.1 Summary of Short Term Rating Systems and Symbols
S&P’s
A-1
A-2
A-3
B
C
D
Summary Description
Outstanding creditworthiness.
Low default risk over the near
term, despite speculative grade
characteristics over the
medium to long term.
Outstanding liquidity.
Satisfactory capacity for
timely payments.
Mood’s
P-1
Summary Description
superior ability for
repayment
Fitch
F1
Summary Description
Highest credit quality
The strongest capacity for timely
payment; may have an added "+"
to denote any exceptionally strong
credit feature
P-2
strong ability for
repayment
F2
Adequate capacity for timely
payments, but more
vulnerable to adverse changes
in situations than debt rated A1 or A-2.
Solely speculative capacity
for timely payment
P-3
acceptable ability for
repayment
F3
Good credit quality
Good capacity for timely payment
of financial commitments.
Fair credit quality
Adequate capacity for timely
payment.
NP
Issuers rated Not Prime
do not fall within any
of the Prime rating
categories
B
Very weak creditworthiness.
Issuers with a C have a
combination of poor liquidity
and/or significant event risk,
suggesting a high near-term
default risk.
Default
C
D
Speculative credit quality
Minimal capacity for timely
payment , plus heightened
vulnerability to near term adverse
changes in financial and
economic conditions.
High default risk
Default is a real possibility.
Default
Source: (S&P (2009): 5-6); Fitch Rating (2009): 12), www.Moodys.com (2009), www.standardandpoors.com (2009).
The next highest grade is A-2 (S&P), P-2 (Moody`s), and F-2(Fitch), which means strong ability for
repayment. The next three grades represents an average/acceptable repayment ability i.e. A-3
(S&P), P-3 (Moody`s), and F-3(Fitch). The next grades followed by the latter, Moody`s rating
15
While, similar symbols are used for long term rating systems of the rating agencies, however, this will not be illustrated here as it
is out of the scope of this paper (Anson et al. (2004): 25).
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discontinue, whereas S&P term B-3, and Fitch term B as a weak repayment ability. The C grade
represents very weak repayment ability for S&P and high default risk for Fitch, and D grades
represents default for both rating agencies. Short term debt issues given top grade credit rating by
both S&P´s, Moody`s and Fitch are referred to as A1/P1/F1 debt (Coyle (2002): 136).
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APPENDIX 3
Table App 3.1 Balance Sheet Structure and Liquidity Risk
Assets
Liabilities
Cash
Core deposits
Repo lending
Repo borrowing
Trading portfolio (incl. positive values of derivatives)
Interbank loans and CD`s.
Available for sale
Liabilities in Trading portfolio?
Lending (ordinary loans, syndicated loan1, bridge loan etc).
Subordinated loan
Equity
Source: (Plesner (2008): 5)
Note: 1) A syndicated loan is a large Eurocurrency loan from a group of international banks.
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APPENDIX 4
Figure App 4.1 Covered Interest Arbitrage (CIA)
End
Start
$100 *(1+ id t) <
=>======
(($100*
St)*(1+ if t))/ F90
*(1+ id t)
$100
Dollar Money Market
90 Days
St
Ft=St
St
Sterling Money Market
((
($100* St)*(1+ if t)
*(1+ if t)
$100* St
Source
St David et al. (1998): 125)
St
((
((
Figure App 4.2 Interest Rate Parity (IRP)
End
Start
*(1+ id t)
$100
$100 *(1+ id t) =
======
(($100*
S )*(1+ if ))/
t
Dollar Money Market
90 Days
St
Sterling Money Market
t
F90
Ft=St
St
((
*(1+ if t)
$100* St
SSource:
t
(David et al. (1998): 125)
Notice: given
((rate.
ift
per annum,
ift needs
($100* St)*(1+ if)
St
to be converted to the three-month rate i.e. (ift)/4. Hence, in this illustration, ift is the three month
((
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APPENDIX 5
Footnote: 32
LTCM (Long Term Capital Management), a US hedge fund, which had built up sizeable geared
positions (Gearing is the result of (partly) financing purchases of e.g. securities by direct or indirect
leveraging by means of financial derivatives (futures, options, etc.). This increases the potential
return.) across several markets, financed by borrowing from large American and European financial
institutions. LTCM had speculated in general narrowing of yield differentials and was as a result
severely affected by the significant spreads. Although, a rescue of LTCM was announced, the
market unrest increased and yield differentials widened further (Danmarks Nationalbank (1999):
52-53).
Footnote 33:
The target rate set by the European central bank was at 2 per cent on 6 June 2003 and this remained
unchanged until 6 of December of 2005 (ECB (2003-05): 9, 30, 39). A similar trend was observed
in the U.S, where the federal funds rate between December 2001 and June 2004 changed only from
1.75 per cent to 1.25 per cent (FRBNY (2009)).
Footnote 34:
As the figure 6.1 shows, there are four major groups of actors in the “originate and distribute”
model i.e. originators, intermediaries, investors and third parties. Originators interact directly with
borrowers and generate the assets that are subsequently sold to the intermediaries. The latter then
set up special purpose vehicles (SPVs), which purchase the originated assets and issue securities
backed by these assets. Investors buy the asset backed securities issued by the SPVs according to
their own risk appetites.
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Turmoil in the International Interbank and FX Swap Markets: theories, parity condition, policy matters and risk
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Figure App 6.1: Major Actors in the “Originate and Distribute” Model
Source: ECB (2008-I): 15).
Additionally, the ‘originate and distribute’ model engage a number of third-party service providers
and external evaluators, such as CRAs, trustees, underwriters and servicers, who perform specific
tasks for the various participants, but do not buy or sell assets themselves. It is to be noticed that
participants in the securitization process may serve multiple tasks. E.g. an originator of residential
mortgages may also serve as the servicer of the securities assets. An investment bank may also act,
at the same time as the originator and arranger for certain transactions such as synthetic CDOs. The
organizations of the “originate and distribute” model, therefore implies that there are many bilateral
relationships at work. Thus, agency problems can arise, but as this is out of the scope of this paper,
it will not further be discussed here (ECB (2008-I): 16).
ECB (2007) states the model is not completely new and in fact has been widely used for many
years. The model has been catering for a growing diversity of credit risk appetites, thus contributing
to the stability of the system. Hence, those benefits are based on certain factors such as correct
pricing, accurate risk assessment, proper management of underlying assets and the assumption that
securitisation does not change the incentives for ex ante screening and ex post monitoring (ECB
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Turmoil in the International Interbank and FX Swap Markets: theories, parity condition, policy matters and risk
Management
2007): 12); Kempa (2008): 5). Michael K. (2008) emphasise that none of these assumptions were
obtained during the liquidity crisis in the summer of 2007, which is as the following;
1) given underlying assets often consist of long term loans such as mortgages, the asset-based
securities were considered historically low-liquidity commodities reserved for long term investors.
Yet, the great quantity of liquidity in the asset-based markets, which occurred in the period 20032007, reduced both the volatility and the liquidity risks and as a result the market price. This, hence,
directed to the situation where the market price did not fully captivated the underlying long-term
nature of the traded assets. In addition, the asset-based securities were often acquired by short term
investors, who are specially exposed to liquidity risk. 2) The assessment of the risk of the assets was
based on public credit ratings. Hence, credit rating agencies were solely involved at the stage of the
initial offering of the security, and lacked tracking the subsequent changes in underlying asset
valuations. 3) Regarding the management of the loans, historically the originating banks shared
part of the risk by “equity tranches” in their balance sheets. Hence, the rush in demand allowed the
banks to reduce their own risk exposures to levels that damaged the incentive to appropriately
monitor the loans. 4) The fundamental nature of the “originate and distribute” model is leverage that
allows the originating bank to lend much more than its assets would normally allow. I.e. the
functioning of the originating bank depends on the “distribute” part, which ensures regular inflow
on new capital. If the bank is unable to obtain new finance, it will very rapidly come upon liquidity
issues, as it will not be able to cover its current obligations. In particular, this aspect became vital
during the crisis in the summer of 2007. The developments cited above contributed to the creation
of the asset bubble that burst in mid-July 2007 (Kempa (2008): 5).
Footnote 38:
As the figure 6.2 depicts, as an aid for the high interest rates followed by the DotCom issues in the
previous years of 2001, the central bank of the US started to increase the high interest rate, in order
to stabilise the DotCom issues and the smaller recession the US economy was drifting gently into in
2001. It is to be remarked that, this type of regulations are very normal, as it is aimed to stimulate
an ailing economy. As it can be seen, mid 2004, an increase of the interest rate starts to take place,
which is occurring until mid 2006 (Plesner (2007): 3).
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Turmoil in the International Interbank and FX Swap Markets: theories, parity condition, policy matters and risk
Management
Figure App 6.2: FED Funds Rates 1991-2007
Source: (Plesner (2007): 3).
Furthermore, beside the stable monetary policy, the markets managed to deal effectively with
several petite crises( i.e. four financial market disturbances, 1) credit market turbulence in may
2005, 2) declines in mature equity markets in May/June 2006, 3) failure of Amaranth Advisers in
September 2006 and 4) the “flight to quality” of late-February/early-March 2007 – “all proved
remarkably contained, short-lived and self-correcting” (ECB (2007): 12), that occurred during the
period, which had a strengthening effect on the perception of stability and safety (ECB 2007): 12).
Footnote 42
As the figure below illustrates, despite the relative smaller size of the structured finance market in
Europe, European participants are exposed to related risks as they invested in US structured finance
products with underlying sub-prime assets. Evaluating with the US transactions where a third of the
issuance remained on US banks balance sheet, approximately 60 percent of the issuance in Europe
remained in European hands. The recent events in the US have impacted financial intermediaries in
Europe as credit risk from US ended up in the hands of global investors.
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Turmoil in the International Interbank and FX Swap Markets: theories, parity condition, policy matters and risk
Management
Figure App 6.3, US, European and Euro Area Banks` WriteDowns in the period from December 2007 to October 2008
Source: (ECB (2008-I): 9).
Figure App 6.4: Write-Downs from Structured Finance Products, broken
down by region and sector of May 2008
Source: (ECB (2008-I): 10).
Although the aggregate amount of write downs is higher in the united state, the amount of write
downs of European banks is remarkable despite the fact that problematic assets were originated in
the US, see figure 6.4. Investigating further the details of the write downs, it can be understood that
European banks write downs were due to their holdings of Asset backed securities CDOs and
Residential Mortgage-Backed Security. Additionally, while risks were geographically separated a
vital part did remain in the banking sector instead of being transferred to other financial sectors
(ECB (2008-I): 10).
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Turmoil in the International Interbank and FX Swap Markets: theories, parity condition, policy matters and risk
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APPENDIX 6
As mentioned in Chapter 3, deepening creditworthiness issues in the US sub-prime mortgage
markets and declining and uncertain values on ABSs secured by these loans triggered a historic
expanded period of substantial and generalized market turmoil. The US money market was one of
the financial markets that were impacted severely by this trigger.
Secured Markets:
Treasury-Bill Market
In chapter 3, it was mentioned that investors reduced or even eliminated their exposure to ABCP 16,
and selected instead for safety of highly liquid and very low risk government securities, which
accordingly resulted in a fall in T-bill yields and as a consequent widen the TED spread, an
indicator of counterparty credit risk. This development of the TED spread has been illustrated by
the figure below.
Figure App 7.1 Three-Month Money Market Spreads
Figure App 7.2 Three-Month LIBOR-OIS Spread
Appendix 8
Appendix 9
Source: (ECB (2007): 31)
Note: The TED spread is the difference between three-month
LIBOR and the three-month Treasury bill yield; the overnight
indexed swap (OIS) spread is the difference between three month
LIBOR and the three-month OIS rate.
Source: (ECB (2008): 29).
Note: (July 2007 – May 2008; basis points) volumes of ABCP
issues maturing in the number of days (x-axis) from the snapshot
date relative to the situation on 18 July 2007.
e.
16
As also can be seen in Chapter 3, the outstanding volumes in the ABCP market shrank in this time frame (ECB (2007): 31).
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Turmoil in the International Interbank and FX Swap Markets: theories, parity condition, policy matters and risk
Management
Repo Markets
Beginning in mid 2007, as mentioned above, a crucial concern about counterparty credit risk and
surging demand for liquidity led to significant disruptions in credit and money markets. Sharp
swings in asset prices resulted in greater uncertainty about the value of collateral, especially hard to
value and less liquid collateral. Consequently, repo markets rapidly reacted showing signs of stress.
In particular, the US repo market appeared to be undergoing stress in this period, while the pricing
in euro area and UK markets indicated calmer conditions. In the US, repo rates became more
volatile and it became challenging to obtain funds at maturities longer than one month. GC repo rate
decreased vis-avisa OIS rates of similar maturity, mirroring increased demand for safe government
securities (Hördahl & King (2008): 42). As many banks no longer wanted to accept the types of
securities as MBSs, ABSs at large, and CDOs as underlying collateral in repo transactions, as a
result, largely solely the repo markets based on government bonds remained fairly liquid 17(Bearing
Point (2008): 21). As can be seen from the figure (x) below, the average repo-OIS spreads over this
period depicts a similar trend across a range of maturities in the US.
Figure App 7.3 US Repo, Libor & OIS Rates,
Three-month rates, in per cent
Source: (Hördahl and King (2008): 43)
Figure App 7.4 US Average General Collateral
Repo-OIS Spreads, in percent
Source: (Hördahl and King (2008): 44).
Note: Horisontal axis measures maturity in days
Prior to mid-2007, GC repo rates were on average 5-10 basis points below comparable OIS rates in
the US, which decreased around 20 basis point during the first seven months of the financial
turmoil, even though there was identified substantial variation around this average. The lower GC
repo rate is due to the presence of collateral as well as the larger market size and greater
participation in repo transactions relative to OIS. Repos using lower rated or less liquid collateral
17
Hence even in these markets the degree of price differentiation across repos transactions with various types of government bonds was larger than
before the crisis (Bearing Point (2008): 21).
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Turmoil in the International Interbank and FX Swap Markets: theories, parity condition, policy matters and risk
Management
such as US agencies or MBS, in general required rather higher interest rates around 1-2 basis points
below OIS rates on average (Hördahl & King (2008): 42). For the time being, repo rates for US
agency securities increased to a premium of 5-10 basis points above OIS rates, an indication of
decreased demand for lower-quality collateral (Hördahl & King(2008): 43).
Commercial Paper Markets
Prior to beginning of the turmoil, the first quarter of 2007, as the figure below shows, the total
amounts of CP outstanding in the US market was reported 2,005 trillions of US dollar and the
outstanding asset-backed commercial paper was below USD 2,000 trillion (IMF (2009): 41); ECB
(2009): 29).
Figure App 7.5 Total Amounts of CP Outstanding in
the US
Source: (BIS (2009-79th): 22).
Note: (In trillions of US dollars). The vertical line
marks 15 September 2008, the date on which Lehman
Brothers filed for Chapter 11 bankruptcy protection.
Figure App 7.6 Maturing ABCP Volumes in Maturity Bucked,
normalised
Source: (ECB (2007): 31)
Note: Volumes of ABCP issues maturing in the number of days
(x-axis) from the snapshot date relative to the situation on 18 July
2007.
Along with concerns related to Lehman Brothers18, the existing strains in the market very fast
spilled over into the commercial paper market, where money market funds are key investor group.
As the figure below illustrates, the amount of outstanding of US commercial paper remained
relatively stable i.e. just below USD 2 trillion after September 2007 and onwards to April 2008,
following a contraction of around USD 350 billion in the initial phases of market tension. Whereas,
18
The company`s role as a broker, led funding markets under pressure from losses on exposures of money market mutual funds to short- and medium
term notes issued by Lehman. This became apparent when the large US fund, Reserve Primary, wrote off more than $780 million worth of Lehman
debt. As a consequent, Reserve Primary became the first major money market mutual fund ever to report less than one dollar`s worth of net assets for
each dollar invested. As a result, this triggered extraordinary volumes of US money market fund redemptions. Hence, this will not be further
discussed due to the scope of the paper (BIS (2008-79th): 23. 26).
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Turmoil in the International Interbank and FX Swap Markets: theories, parity condition, policy matters and risk
Management
the asset backed segment (ABCP), however, continued contracting before recovering merely
modestly in early 2008. ECB (2008) stress that this highlights the ongoing problems in issuing and
rolling over structured products (ECB (2008): 29). BIS (2009-79th) stress that the unsecured
financial paper suffered the largest outflows (BIS (2009-79th): 27).
The total amount of outstanding of US commercial paper, recorded in the fourth quarter of 2008 has
been 1,612 trillion US dollars (IMF (2009): 41). And the conditions in the US commercial paper
market remained weak. This is due to continued declines in outstanding amounts of commercial
paper, while demand for asset backed commercial paper failed to recover and even weakened
further. According to ECB (2009) the decline in the amounts outstanding of commercial paper was
partly due to issuers tapping other sources of funding, such FDIC guaranteed debt issuance. The
latest recorded amount of outstanding commercial paper has been reported to be 1,422 trillion of US
dollars, March 2009 (IMF (2009): 41).
Beside the tensions in the US commercial paper market, the euro commercial paper (ECP) market
was also affected by the turmoil. During August 2007, wields on newly issued paper raised vitally
for certain types of issuers, and the average maturity of newly issued debt decreased significantly.
Figure App 7.6 Paper in the ECP Market
Figure App 7.7 Paper in the ECP Market
Source: (ECB (2007): 83).
Note: (Jan. 2007 - Nov. 2007; in days)
Note: (Jan.2007-Oct.2007; in days)
As the above figure (to the right) depicts, the pattern of rising yields and shortening maturities
became even more prominent for asset backed ECP issues as commercial paper investors turn into
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Management
highly unwilling to buyers of newly issued ABECPs due to uncertainty about the true value of the
assets held by the issuing vehicles.
Figure App 7.8 Outstanding Volumes of Euro-Commercial Paper (ECP)
Source: (ECB (2007): 83).
Note: (Jan. 2007 - Oct. 2007; USD billion)
As figure app. 7.8, illustrates, the reluctance of investors to buy newly issued papers was also
mirrored in the total outstanding volumes, which declined crucially, in particular in the ABECP
section. ECB (2007) stress that tensions in the euro money market peaked before the end of August
and the interbank market afterward began to show signs of increasing activity. The activity intensity
in the ECP market also showed some signs of recovery, although investors remained very choosy in
their choice of issuers and some debt, in particular ABECP, still remained difficulties to place.
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Turmoil in the International Interbank and FX Swap Markets: theories, parity condition, policy matters and risk Management
APPENDIX 8 DETAILED CHRONOLOGY OF SELECTED CB ACTIONS DURING 9 AUGUST 2007-12 JUNE 2008
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Turmoil in the International Interbank and FX Swap Markets: theories, parity condition, policy matters and risk Management
Date
9August 2007
10 Aug 2007
Central Bank
SNB
ECB
Type of Action
RMO
C
RMO
BOC
C
RMO
RBA
BoJ
RMO
RMO
SNB
ECB
RMO
BoC
C
RMO
RMO
Description
Overnight fine-tuning operation to provide the market with additional funds of CHF 1,4 bn.
“..closely monitoring markets and stands ready to act to assure orderly conditions in the euro money markets”
Overnight fine-tuning operation for EUR 95 bn.
Met all demand at the policy rate of 4 %(instead of conducting more usual variable rate tender), which meant
that it allowed to inject an amount of liquidity matching counterparties demand, that would not be obtained with
the ECB regular liquidity analysis.
“..would like to assure financial market participants and the public that it will provide liquidity to support the
stability of the Canadian financial system and the continued functioning of financial markets”.
Executed three special purchase and resale agreements /SPRA) over the course of the day totalling CAD 1.64 bn,
leaving settlement balances at CAD 1.8 bn.
Conducted regular operations that were larger than normal.
Injected T+0(same day start) overnight funds equal to JPY 1 trillion in the morning and T+1 (next day
start) one week funds equal to JPY 600 bn in the afternoon.
Overnight auction injection to regular operation of CHF 1.7 bn
“Continues to closely monitor the conditions in the euro money market”
Overnight fine-tuning operation for EUR 61 bn.
Executed three Special Purchase and Resale Agreements (SPRA)s totalling CAD 1.685 bn and leaving
settlement balances at CAD 1.6 bn
Fed
C
RMO
“.. is providing liquidity to facilitate the orderly functioning of financial markets [and] will provide reserves as
necessary through reserve management operations to promote trading in the federal funds market at rates close
to the Federal Open Market Committee’s target of 5¼%.”
Conducted an extraordinary three auctions of overnight repurchase agreements totaling USD 38 bn, with the
final auction occurring in the early afternoon, well provided far exceeded banks` remaining need to accumulate
reserves to meet reserve requirements for the maintenance period under way.
13 Aug 2007
BoJ
ECB
BoE
RMO
RMO
C
14 Aug 2007
SNB
CO
15 Aug 2007
ECB
BoC
RMO
CO
16 Aug 2007
17 Aug 2007
BoC
Fed
C
C
Provided T+0 one week funds equal to JPY 600 bn.
Conducted overnight fine tuning operation for EUR 48 bn.
Screen announcement reminding counterparties that standing facilities have been, and continue to be
available every day throughout the day.
Announcement of wider range of collateral for daily repo auctions, but the move was not related to the
turmoil in money markets.
Conducted an overnight fine tuning operation for EUR 8 bn.
Temporarily expansion of list of eligible securities for intraday liquidity operation to incl. collateral
that is accepted for the standing liquidity facility of banks, which includes CP but not ABCP.
Welcoming market based framework for addressing the problems facing non bank ABCP.
The FOMC announced
anafintermeeting
statement that downside risks to growth had increased
Sidein27
43
Turmoil in the International Interbank and FX Swap Markets: theories, parity condition, policy matters and risk Management
MSFC
appreciably.
Reduced the spread between the primary credit facility rate and the federal funds target rate from 100
to 50 basis points, and increased the allowable term on loans from overnight to 30 days. The changes
were intended to provide depositories with greater assurance about the cost and availability of funding.
Conducted regular operations involving a vitally larger net injection of funds and markedly longer
term than normal.
Conducted a supplementary long term refinancing operation (LTRO) with three month maturity for
EUR 40 bn.
Reminded banks that it did accept ABCP and clarified that it would accept paper for which the
pledging bank was providing liquidity or credit support.
22 Aug 2007
RBA
RMO
23 Aug 2007
ECB
LTO
26 Aug 2007
Fed
C/CO
5 Sep 2007
ECB
C
“Volatility in the euro money market has increased and the ECB is closely monitoring the situation. Should this
persist tomorrow, the ECB stands ready to contribute to orderly conditions in the euro money market”.
BoE
Other
Announced that reserves banks raised their aggregate reserves targets by 6% for the Sep maintenance
period, and that it would offer additional reserves if secured overnight rates continued to exceed bank
rate by an unusual amount.
RBA
C/CO
Announced that the list of collateral acceptable for repo would be expanded beginning on 17 Sep to
incl. additional bank-issued liabilities and on 8 October to include AAA RMBS and P-1 residential
mortgage-backed CP.
BoC
C/CO
12 Sep 2007
ECB
LTO
13 Sep 2007
SNB
BoE
RMO
LTO
RMO
Indicated that it was committed to provide liquidity and that effective 7 Sep would restore standard
terms for SPRAs.
Conducted a supplementary long term refinancing operation (LTRO) with three month maturity for
EUR 75 bn.
Absorbed liquidity directly in the interbank market, whenever interbank overnight repo rates dropped
25 basis point below the SNB´s auction rate.
18 Sep 2007
BoE
RMO
19 Sep 2007
BoE
C/CO/COU
6 Sep 2007
As the secured overnight rates continued to exceed the policy rate by more than usual, the BoE
supplied additional reserves equivalent to 25% of the aggregate target. To accommodate this
additional supply, the range around banks’ reserves targets within which reserves holdings are
remunerated was widened from ±1% to ±37.5%.
Supplied additional reserves equivalent to a further 25% of the aggregate reserves target via an
exceptional two-day repo open market operation (OMO). The ranges around reserves targets
remained unchanged at ±37.5%.
Announced plans to conduct four three month term auctions against a much wider range of collateral
than is eligible in the weekly OMOs (and to a wider set of counterparties). Bids were to be submitted
as a spread (minimum 100 basis points) over Bank Rate prevailing over the term of the auctions. In
the period between the announcement and the date of the first auction, market rates fell substantially,
such that obtaining funds in the auction became expensive relative to prevailing market rates. No bids
were received in any of the auctions.
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Turmoil in the International Interbank and FX Swap Markets: theories, parity condition, policy matters and risk Management
The additional 25% of reserves first offered in the previous weekly OMO were reoffered, as were the
additional 25% of reserves offered at the unscheduled fine-tuning OMO. That meant additional
reserves equivalent to 50% of the aggregate target were offered. Accordingly, the range around
reserves targets were widened to ±60%.
The additional 25% of reserves first offered in the previous weekly OMO were again reoffered. But the
additional 25% of reserves offered at the unscheduled fine tuning OMO were not reoffered. Ranges
were maintained at ±60%.
Injected T+0 overnight funds equal to JPY 1.6 trillion on the semi-fiscal year-end
Daily SPRAs and elevated settlement balance levels reflecting pressure on overnight rate.
20 Sep 2007
BoE
RMO
27 Sep 2007
BoE
RMO
28 Sep 2007
End SepMid Oct
3 Oct 2007
BoJ
BoC
RMO
RMO
BoE
Other
Announced that reserves banks raised their aggregate reserves targets by a further 13% for the
October maintenance period. Ranges around reserves targets were set at ±30%.
8 Oct 2007
12 Oct 2007
BoJ
ECB
ECB
LTO
C
RMO
Began operations that extended over year end, earlier than in 2006
Announced its new liquidity management policy
7 Nov 2007
BoE
Other
8 Nov 2007
22 Nov 2007
23 Nov 2007
ECB
ECB
ECB
C
LTO
Announced that it would renew the two supplementary three-month LTROs of Aug and Sep
Renewed the first supplementary LTRO for an amount of EUR 60 bn as announced on 8 Nov.
C
26 Nov 2007
Fed
C
28 Nov 2007
29 Nov 2007
Fed
BoE
LTO
C
30 Nov 2007
ECB
C
3 Dec 2007
SNB
C/LTO
5 Dec 2007
BoE
Other
“The ECB has noted re-emerging tensions in the euro money market. To counter the re-emerging risk
of volatility, the ECB intends to reinforce […] its policy of allocating more liquidity than the benchmark
amount in main refinancing operations […].”
Announced it planned to conduct a series of term repurchase agreements that would extend into the
new year in response to heightened pressures in money markets for funding through the year-end.
Also said it planned to provide sufficient reserves to resist upward pressures on the federal funds rate
above the FOMC’s target rate around year-end.
Conducted a 43-day repo auction to supply USD 8 billion (as announced on 26 Nov).
Announced it would offer GBP 10 billion of reserves via a five-week repo OMO to alleviate concerns
that market conditions would be particularly tight over the yearend.
Announced its year-end liquidity management policy, including the lengthening of its main refinancing
operation settling on 19 December to two weeks (from one week).
Announced and conducted a repo with onemonth maturity for CHF 4 billion to cover needs over yearend.
Announced that reserves banks had raised their aggregate reserves targets by a further 7% for the
December maintenance period. This meant that banks’ chosen aggregate target had increased by
37% since the August maintenance period. Ranges around reserves targets were set at ±30%.
Conducted a liquidity fine-tuning operation (the first of this kind in line with its communication on 8
October). It absorbed EUR 30 billion with a five-day maturity (until the subsequent regular main
refinancing operation (MRO)).
Announced that reserves banks had raised their aggregate reserves targets by a further 6% for the
November maintenance period. Ranges around reserves targets were set at ±30%.
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Turmoil in the International Interbank and FX Swap Markets: theories, parity condition, policy matters and risk Management
6 Dec 2007
BoE
LTO
11 Dec 2007
ECB
LTO
12 Dec 2007
BoC, BoE,
ECB, Fed,
SNB, BoJ,
Riksbank
C
Offered GBP 10 billion of reserves via a five-week repo OMO to alleviate concerns that market
conditions would be particularly tight over the year-end.
Renewed the second supplementary LTRO for an amount of EUR 60 billion as announced on 8
November.
Jointly announced several coordinated measures designed to make turn-of-the year funding available
directly to a larger number of financial institutions and against a broader set of eligible collateral.
Fed: Introduced a Term Auction Facility (TAF) to provide term loans to depository institutions against
the wide range of collateral already accepted at the discount window; announced first four auction
dates. Established swap lines between the Federal Reserve, on the one hand, and the ECB (USD 20
billion) and the SNB (USD 4 billion), on the other.
ECB: Announced two US dollar liquidity providing operations, in connection with the TAF, against
ECB-eligible collateral for a maturity of 28 and 35 days; to take place on 17 and 20 December.
SNB: Announced a 28-day US dollar repo auction (for up to USD 4 billion) against SNB-eligible
collateral, to take place on 17 December.
BoE: Expanded the amount of three-month funds to be offered at the scheduled long term OMOs in
December and January to GBP 10billion; widened the range of high quality collateral accepted for
funds advanced at the three-month maturity.
BoC: Announced plans to enter into term purchase and resale agreements (term PRA) extending over
the year-end; temporarily expanded the range of securities eligible for these transactions.
13 Dec 2007
14 Dec 2007
17 Dec 2007
BoC
C
SNB
BoC
SNB
SNB
LTO
LTO
LTO
LTO
ECB
RMO
LTO
C
BoJ and Riksbank: Did not announce additional operations but welcomed the measures taken by the
other central banks.
Announced its intention to broaden the collateral accepted for the Standing Lending Facility to include
ABCP (by end-March 2008) and US Treasuries (expected by mid- 2008). Consultation with market
participants on the eligibility criteria for ABCP to take place in the next two months.
Conducted a repo with one-month maturity for CHF 6.7 billion to cover needs over year-end.
Conducted the first term PRA operation (CAD 2 billion to mature on 10 January).
Conducted a repo with three-week maturity for CHF 3.8 billion to cover needs over year-end.
Conducted a repo with three-week maturity for CHF 2 billion to cover needs over yearend.
Conducted USD repo auction for USD 4 billion in one-month funds with settlement on 20 December.
- Conducted a liquidity absorbing fine-tuning operation (FT) for an amount of EUR 36.6 billion.
From 17 December until 3 January, it would conduct nine liquidity absorbing FTs. It would also
conduct a liquidity absorbing FT on the last day of the maintenance period, 15 January 2008.
- Conducted TAF auction for USD 10 billion in one-month funds.
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Turmoil in the International Interbank and FX Swap Markets: theories, parity condition, policy matters and risk Management
-
18 Dec 2007
Fed
ECB
LTO
RMO
BoE
LTO/CO
BoC
21 Dec 2007
Fed
LTO
LTO
LTO
C
28 Dec 2007
2008
4 Jan
9 Jan
BoJ
RMO
Fed
BoE
C
10 Jan
SNB
C
C
LTO
C
LTO
20 Dec 2007
ECB
Fed
ECB
14 Jan
SNB
ECB
Fed
Other
15 Jan
BoE
LTO
LTO
17 Jan
28 Jan
BoJ
ECB
Fed
Fed
LTO
LTO
LTO
C
ECB
C
SNB
C
BoE
Other
1 Feb
4 Feb
6 Feb
Clarified the specification of the exceptional two-week MRO to be allotted on the following day:
as a minimum it would satisfy all bids at and above the weighted average rate of the MRO
settled the previous week, ie 4.21%.
Conducted TAF auction for USD 20 billion in one-month funds with settlement on 20 December.
Provided EUR 350 billion in a two-week reverse operation (EUR 168 billion above the so-called
benchmark amount).
Conducted the first extended three-month repo OMO for GBP 10 billion against a wider range of highquality collateral.
Conducted the second term PRA operation (CAD 2 billion to mature on 4 January).
Conducted TAF auction for USD 10 billion in one-month funds.
Conducted TAF auction for USD 20 billion in one-month funds with settlement on 27 December.
Announced the intention to conduct biweekly TAF auctions for as long as necessary to address
elevated pressures in short-term funding markets.
Injected T+0 overnight funds equal to JPY 800 billion on the year-end.
Announced the intention to conduct two USD 30 billion TAF auctions in January.
Announced that reserves banks had reduced their aggregate reserves targets by 8% for the January
maintenance period. Ranges around reserves targets remained at ±30%.
Announced intention to conduct a USD repo auction of maximum USD 4 billion, on 14 January.
Announced intention to conduct two TAF auctions of USD 10 billion each, on 14 and 28 January.
Conducted USD repo auction for USD 4 billion in one-month funds with settlement on 17 January.
Communicated ahead of the February maintenance period that it “will, for as long as needed, allocate
more liquidity than the benchmark amount in main refinancing operations to accommodate the
demand of counterparties to fulfill reserve requirements early within the maintenance period”.
Conducted TAF auction for USD 30 billion in one-month funds with settlement on 17 January.
Conducted the second extended three month repo OMO for GBP 10 billion against a wider range of
high-quality collateral.
Began operations that extended over fiscal year-end, earlier than in 2007.
Conducted TAF auction for USD 10 billion in one-month funds.
Conducted TAF auction for USD 30 billion in one-month funds with settlement on 31 January.
Announced intention to conduct two USD 30 billion TAF auctions in February, maintaining the auction
sizes at the January level.
Announced decision not to participate in TAF loan auctions with the Fed in February, citing
significantly improved dollar liquidity in Europe.
Communicated that it would not renew its US dollar auction maturing on 14 February.
Announced that reserves banks increased their aggregate reserves targets by 1% for the February
maintenance period. Ranges around reserves targets remained at ±30%.
Side 31 af 43
Turmoil in the International Interbank and FX Swap Markets: theories, parity condition, policy matters and risk Management
7 Feb
ECB
C
11 Feb
20 Feb
Fed
ECB
LTO
LTO
25 Feb
29 Feb
5 March
Fed
LTO
C
Other
7 March
Fed
C
LTO
10 March
11 March
Fed
LTO
C
Fed
BoE
BoC, BoE,
ECB, Fed,
SNB, BoJ,
Riksbank
Announced decision to renew the two supplementary three-month LTROs of November and
December.
Conducted TAF auction to supply USD 30 billion in one-month funds.
Renewed the November supplementary LTRO at the same size of EUR 60 billion (as announced on 7
February).
Conducted TAF auction to supply USD 30 billion in one-month funds.
Announced intention to conduct two TAF auctions of USD 30 billion each, on 10 and 24 March.
Announced that reserves banks had decreased their aggregate reserves targets by 5% for the March
maintenance period. Ranges around reserves targets remained at ±30%.
- Announced an increase in the size of March TAF auctions to USD 50 billion each. Announced
it was in close consultation with foreign central bank counterparts concerning liquidity
conditions in markets.
- Initiated a series of 28-day term repo auctions (expected total of USD 100 billion). In this
“Single-Tranche OMO Program”, primary dealers may elect to deliver as collateral any of the
types of securities eligible as collateral in conventional OMOs.
Conducted TAF auction to supply USD 50 billion in one-month funds.
Jointly announced specific measures to address liquidity pressures.
Fed: Introduced a Term Securities Lending Facility (TSLF) to lend up to USD 200 billion of Treasury
securities to primary dealers, against a pledge of other securities, for a term of 28 days. Increased the
Fed’s existing temporary swap line with the ECB to USD 30 billion and that with the SNB to USD 6
billion. Extended the swap lines’ term to 30 September 2008.
ECB: Announced a TAF operation of up to USD 15 billion at 28-day maturity, to be conducted on 25
March.
SNB: Announced a US dollar repo auction of up to USD 6 billion at 28-day maturity, to be conducted
on 25 March.
BoC: Announced two term PRA operations to be conducted on 20 March and 3 April.
BoE: Announced continuation of its expanded three-month repo OMO against a wider range of
collateral, to be offered at the scheduled operations on 18 March and 15 April. A minimum bid rate
was introduced, based on the three-month OIS swap rate.
Fed
LTO
BoJ and Riksbank: Did not announce additional operations, but welcomed the measures taken by the
other central banks.
Conducted a single-tranche OMO to provide USD 15 billion in 28-day funds.
Side 32 af 43
Turmoil in the International Interbank and FX Swap Markets: theories, parity condition, policy matters and risk Management
12 March
ECB
LTO
14 March
SNB
Fed
LTO
C/Other
16 March
(Sunday)
Fed
C
MSLFT
17 March
BoE
RMO
18 March
BoE
LTO/CO
20 March
Fed
ECB
LTO
RMO
BoE
C/RMO
BoC
Fed
LTO
C
Fed
SNB
ECB
Fed
SNB
Fed
LTO
LTO
LTO
LTO
LTO
Other
28 March
ECB
C
31 March
Fed
BoJ
C
RMO
24 March
25 March
27 March
Renewed the December supplementary LTRO at the same size of EUR 60 billion (as announced on 7
February).
Conducted a three-month repo auction to supply CHF 4 billion.
“… is monitoring market developments closely and will continue to provide liquidity as necessary to
promote the orderly functioning of the financial system.”
The Board voted unanimously to approve the arrangement announced by JPMorgan Chase and Bear
Stearns.
Announced the introduction of a Primary Dealer Credit Facility (PDCF), which allows primary dealers
access to overnight discount window loans. The facility would be in operation for at least six months.
Lowered the primary credit rate to 25 basis points (from 50 basis points) above policy rate; increased
the maximum allowable loan term to 90 days (from 30 days).
Conducted an exceptional fine-tuning OMO to supply an extra GBP 5 billion (25% of reserves target)
in a three-day repo.
Conducted the third expanded three-month repo OMO for GBP 10 billion against a wider range of
high-quality collateral.
Conducted a single-tranche OMO to provide USD 15 billion in 28-day funds.
Conducted a fine-tuning operation to provide EUR 15 billion ahead of the long holiday weekend in
Europe.
Announced reoffering of the extra GBP 5 billion (offered on 17 March) in the weekly OMO of 20 March
and in weekly OMOs over the rest of the current maintenance period.
Conducted term PRA operation to supply CAD 2 billion in one-month funds (to mature on 17 April).
Announced modifications to the terms and conditions for the new TSLF (to allow acceptance of a
broader range of collateral than previously announced); provided details for the first auction on 27
March.
Conducted TAF auction to supply USD 50 billion in one-month funds.
Conducted USD repo auction to supply USD 6 billion in one-month funds.
Conducted TAF auction to supply USD 15 billion in one-month funds.
Conducted a single-tranche OMO to provide USD 15 billion in 28-day funds.
Conducted a three-month repo auction to supply CHF 5 billion.
Conducted the first weekly TSLF auction with offering amount USD 75 billion (against Schedule 2
collateral).
Announced its decision to conduct two EUR 25 billion supplementary six-month LTROs (2 April and 9
July) and further supplementary three-month LTROs of EUR 50 billion each (21 May and 11 June).
Announced its intention to conduct two TAF auctions of USD 50 billion each, on 7 and 21 April.
Injected T+0 overnight funds equal to JPY 3 trillion on the fiscal year-end.
Side 33 af 43
Turmoil in the International Interbank and FX Swap Markets: theories, parity condition, policy matters and risk Management
SNB
ECB
BoC
LTO
RMO
CO
LTO
LTO
Other
2 April
3 April
ECB
4 April
7 April
Fed
ECB
Fed
LTO
LTO
LTO
9 April
BoE
Other
10 April
15 April
Fed
BoJ
BoE
Other
LTO
LTO/C
Fed
LTO
BoC
LTO
Fed
Other
LTO
LTO
LTO
LTO
Other
17 April
BoC
Fed
18, 21 April
18 April
21 April
RBA
SNB
22 April
SNB
Fed
Fed
24 April
29 April
1 May
2 May
ECB
Fed
BoE
Fed
BoC
Fed
SNB, ECB,
Fed
LTO
LTO
Other
LTO
LTO
Other
C
Conducted a three-month repo auction to supply CHF 4 billion.
Conducted a fine-tuning operation to provide EUR 15 billion in overnight funds.
Announced the eligibility criteria for accepting ABCP as collateral for the standing liquidity facility.
Conducted the first supplementary six month LTRO to supply EUR 25 billion.
Conducted term PRA operation to supply CAD 2 billion in one-month funds (to mature on 1 May).
Conducted the second TSLF auction with offering amount USD 25 billion (against Schedule 1
collateral).
Conducted a single-tranche OMO to provide USD 15 billion in 23-day funds.
Conducted TAF auction to supply USD 15 billion in one-month funds.
Conducted TAF auction to supply USD 50 billion in one-month funds.
Announced that reserves banks had raised their aggregate reserves targets by 18% for the April
maintenance period. Ranges around reserves targets remained at ±30%.
Conducted third TSLF auction with offering amount USD 50 billion (against Schedule 2 collateral).
Began operations that extended over quarter-end, earlier than in 2007.
Conducted the fourth expanded three-month OMO against a wider range of collateral, for an increased
amount of GBP 15 billion.
Conducted a single-tranche OMO to provide USD 20 billion in 28-day funds.
Conducted term PRA transaction to supply CAD 2 billion of 28-day funds (to mature on 15 May).
Conducted fourth TSLF auction with offering amount USD 25 billion (against Schedule 1 collateral).
Conducted repos with maturities of up to one year against collateral that includes RMBS.
Announced that it would renew its USD repo auction maturing on 24 April.
Conducted TAF auction to supply USD 15 billion in one-month funds.
Conducted TAF auction to supply USD 50 billion in one-month funds.
Launched a Special Liquidity Scheme in which banks can swap high-quality but temporarily illiquid
assets for treasury bills for a term of one year (renewable to up to three years).
Conducted USD repo auction to supply USD 6 billion in one-month funds.
Conducted a single-tranche OMO to provide USD 20 billion in 28-day funds.
Conducted TSLF auction with offering amount USD 75 billion (against Schedule 2 collateral).
Conducted a single-tranche OMO to provide USD 20 billion in 28-day funds.
Conducted term PRA transaction to supply CAD 2 billion of 28-day funds (to mature on 29 May).
Conducted TSLF auction with offering amount USD 25 billion (against Schedule 1 collateral).
Fed: Announced increase in size of TAF auctions to USD 75 billion each; expansion of eligible
collateral for Schedule 2 TSLF auctions to include AAA/Aaa-rated ABSs.Increased the existing swap
line with the ECB to USD 50 billion and that with the SNB to USD 12 billion. Extended the swap
lines’ term to 30 January 2009.
Side 34 af 43
Turmoil in the International Interbank and FX Swap Markets: theories, parity condition, policy matters and risk Management
SNB: Announced increase in frequency of USD repo auctions to bi-weekly, while keeping size at USD
6 billion each.
5 May
6 May
7 May
8 May
13 May
15 May
19 May
20 May
21 May
22 May
27 May
29 May
2 June
3 June
4 June
BoE
Other
ECB
Fed
SNB
Fed
BoE
LTO
LTO
LTO
LTO
Other
Fed
Fed
BoC
Fed
ECB
Fed
SNB
BoE
Other
LTO
LTO
Other
LTO
LTO
LTO
LTO/CO
Fed
ECB
Fed
Fed
BoC
LTO
LTO
Other
LTO
LTO
Fed
Other
C
LTO
LTO
LTO
LTO
Other
ECB
Fed
SNB
Fed
BoE
ECB: Announced increase in the size of TAF auctions to USD 25 billion each.
Set reserve target ceiling for each reserve scheme member as the higher of GBP 2.5 billion and 5% of
its sterling eligible liabilities, with effect from the maintenance period starting on 8 May.
Conducted TAF auction to supply USD 25 billion in one-month funds.
Conducted TAF auction to supply USD 75 billion in one-month funds.
Conducted USD repo auction to supply USD 6 billion in one-month funds.
Conducted a single-tranche OMO to provide USD 20 billion in 28-day funds.
Announced that reserves banks had raised their aggregate reserves targets by 5% for the May
maintenance period. Ranges around reserves targets remained at ±30%.
Conducted TSLF auction, offering amount USD 50 billion (Schedule 2 collateral).
Conducted a single-tranche OMO to provide USD 20 billion in 28-day funds.
Conducted term PRA transaction to supply CAD 2 billion of 28-day funds (to mature on 12 June).
Conducted TSLF auction, offering amount USD 25 billion (Schedule 1 collateral).
Conducted TAF auction to supply USD 25 billion in one-month funds.
Conducted TAF auction to supply USD 75 billion in one-month funds.
Conducted USD repo auction to supply USD 6 billion in one-month funds.
Conducted an expanded three-month OMO against a wider range of collateral, for a reduced amount
of GBP 1.6 billion. Announced that it would maintain its expanded three-month OMOs on 17 June and
15 July. With the launch of the Special Liquidity Scheme, these OMOs would be reduced to GBP 5
billion each.
Conducted a single-tranche OMO to provide USD 20 billion in 28-day funds.
Conducted a supplementary three-month LTRO of EUR 50 billion (as announced on 28 March).
Conducted TSLF auction, offering amount USD 75 billion (Schedule 2 collateral).
Conducted a single-tranche OMO to provide USD 20 billion in 28-day funds.
Conducted term PRA transaction at a reduced amount of CAD 1 billion (to mature on 26 June), in the
light of improved market conditions.
Conducted TSLF auction, offering amount USD 25 billion (Schedule 1 collateral).
Announced that it would conduct TAF auctions of USD 75 billion each on 2, 16 and 30 June.
Conducted TAF auction to supply USD 25 billion in one-month funds.
Conducted TAF auction to supply USD 75 billion in one-month funds.
Conducted USD repo auction to supply USD 6 billion in one-month funds.
Conducted a single-tranche OMO to provide USD 20 billion in 28-day funds.
Announced that reserves banks had raised their aggregate reserves targets by 6% for the June
Side 35 af 43
Turmoil in the International Interbank and FX Swap Markets: theories, parity condition, policy matters and risk Management
5 June
9 June
Fed
ECB
Other
C
10 June
11 June
12 June
Fed
ECB
BoC
LTO
LTO
LTO
Fed
Other
maintenance period. Ranges around reserves targets remained at ±30%.
Conducted TSLF auction, offering amount USD 50 billion (Schedule 2 collateral).
“continues to closely monitor liquidity conditions and notes some tensions in money market rates for
maturities over the end-of-semester […] remains ready, if needed, to smooth conditions around the
end-of-semester”.
Conducted a single-tranche OMO to provide USD 20 billion in 28-day funds.
Conducted a supplementary three-month LTRO of EUR 50 billion (as announced on 28 March).
Conducted term PRA transaction at a reduced amount of CAD 1 billion (to mature on 10 July), in the
light of improved market conditions.
Conducted TSLF auction, offering a mount USD 25 bn.
Source: (BIS-No.31 (2008): 22-40).
Note: RMO = Reserve Management Operation, C= Communication, CO= Collateral, MSFC= Modification to standing loan facility terms, FOMC= Federal Open Market Committee, LTO= Longer-term
operation, COU= Counterparties
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Turmoil in the International Interbank and FX Swap Markets: theories, parity condition, policy matters and risk
Management
Appendix 9: Central Banks
Figure App9.1 Central Bank Responses to the Crisis
Objective
Adopted Measures
Credit
Market and
Broader
Financial
Conditions
CP Funding/ Purchase/ Collateral Eligibility
ABS funding/purchase/collateral Eligibility
Corporate bond funding/
purchase/collateral eligibility
Purchase of public sector securities
Purchase of other non-public sector Securities
Fed
X7
X12
X15
ECB
X13
BoE
X8
X8
X8
BoJ
X9
X8
X16
X17
X14
BoC RNB
X10
X11
X11
10
X
SNB
X
X18
Source: (BIS (2009abc): 97; BIS (2008-No.31): 6).
Notes: Fed = Federal Reserve; ECB = European Central Bank; BoE = Bank of England; BoJ = Bank of Japan; BoC = Bank of
Canada; RBA = Reserve Bank of Australia; SNB = Swiss National Bank. _ = yes; blank space = no.
7) Finance purchase of short-term certificates of deposit, commercial paper (CP) and asset-backed CP (ABCP) (Money Market
Investor Funding Facility, Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility and Commercial Paper
Funding Facility (CPFF)). 8) Asset Purchase Facility. 9) Increase frequency and size of CP repo operations and introduce outright CP
purchases. 10) Term Purchase and Resale Agreement Facility for Private Sector Instruments. 11) Acceptance of residential
mortgage-backed securities and ABCP as collateral in repo operations. 12) Finance purchase of asset-backed securities (ABS)
collateralised by student, auto, credit card and other guaranteed loans (Term Asset- Backed Securities Loan Facility). 13) Purchase of
covered bonds. 14) Expand range of corporate debt as eligible collateral and introduce loan facility against corporate debt collateral.
15) Purchase Treasury debt as well as direct obligations of and MBS backed by housing-related government-sponsored enterprises.
16) Purchase Japanese government bonds to facilitate smooth money market operations; not intended to influence bond prices. 17)
Purchase equity held by financial institutions. 18 Purchase foreign currency securities.
The third category: Influence Credit Market and Broader Financial Conditions.
The third category of policy responses, received more emphasis as the tension in the financial
markets deepened. These measures focused on directly alleviating tightening credit conditions in
the non-bank sector and easing broader financial conditions i.e. provision of funds to non-banks to
improve liquidity and reduce risk spreads in particular markets such as commercial paper, ABSs,
and corporate bonds, as well as direct purchase of public sector securities to influence benchmark
yields more generally.
As figure App 9.3 illustrates, as a result of the actions by central banks, the balance sheets expanded
substantially and their composition changed as well. When examining the figure further, it is
apparent that the different measures have been employed by different countries as there is a
difference between the degree of emphasis on private versus public sector, and bank versus nonbank markets. For instance, as the top left hand panel shows, the Federal Reserve focused much on
non-bank credit markets as well as on private sector securities i.e. such as Commercial Paper
Funding Facility (CPFF) and the Term Asset-Backed Securities Loan Facility (TABSLF), which
captured in the “Lending” in the chart. As it can be observed, the lending increased rapidly in year
2008, compared to the Eurosystem and BoJ.
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Turmoil in the International Interbank and FX Swap Markets: theories, parity condition, policy matters and risk
Management
The BoE, in contrast, began to concentrate its Asset Purchase Facility (APF) primarily on purchases
of government bonds, which is defined as “Other assets” in figure App. 9.3 (bottom left-hand
panel), whereas the ECB focused on banking system liquidity by conducting fixed rate full
allotment refinancing operations with maturities of up to 12 months, which is shown in “lending” in
figure App. 9.3, the top right hand panel, and by purchasing covered bonds. Looking at BoJ, it can
be observed that extensive efforts were directed at improving funding conditions for firms through
various measures subject to commercial paper and corporate bonds.
These various measures stress the differences in financial structures. For instance, the more direct
intervention in non-bank credit markets in the US, is consistent with the in the main that the market
based system of US. Whereas the focus in the euro area to supporting banks reflects a larger
reliance on bank-based intermediation in the region (BIS (2009abc): 101).
Figure App 9.2 Central Bank Collateral, in Billions of Respective Currency Units
Source: (BIS (2009-79th):102).
Note: 1 Collateral pledged to various facilities. 2 Collateral pledged in Eurosystem credit operations. 3 Including covered, uncovered
and corporate bonds and other marketable assets. 4 Monthly average value of collateral held for monetary policy. 5 Assets purchased
under repurchase agreements by the BoJ.
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Turmoil in the International Interbank and FX Swap Markets: theories, parity condition, policy matters and risk
Management
Figure App 9.3 Central Bank Assets and Liabilities, in billions of respective currency units
Source: BIS (2009-79th): 98).
Note: 1) Securities held outright (including TSLF). 2) Repurchase agreements, term auction credit, other
loans and CPFF. 3) Including to central banks. 4) Issued by euro area residents and general government debt
in euros. 5) Including US dollar liquidity auctions. 6) Including US dollar liquidity auctions and asset
purchase facility. 7) Open market operations, including issuance of Bank of England sterling bills
Side 39 af 43
Turmoil in the International Interbank and FX Swap Markets: theories, parity condition, policy matters and risk Management
APPENDIX 10
Figure App 10.1 ECB Monetary Policy Instruments
Monetary Policy
Operations
Open Market Operations
(OMO)
Objective
The purpose of OMO is to steer
interest rates, managing liquidity
situations and signaling the stance
of monetary policy. The OMO of
Eurosystem can be divided into four
categories, as in the coloum to the
right.
Instruments
Types of Transactions
Maturity
Frequency
Procedure
Provision Liquidity
Absorption of Liquidity
Main Refinancing
Operations
Reverse
-
One week
Weekly
Standard tenders
Executed by the
national central
banks.
Longer Term
Refinancing
operations
Reverse
-
Three months
Monthly
Standard tenders
Fine Tuning
Operations
Reserve and Foreign
Exchange Swaps
-
Non-standardised
Non-regular
Quick tenders
Bilateral
procedures
Structural
Operations
Reverse
Issuance of debt
certifi cates
Standardised/non
standardised
Regular and
non-regular
. Outright sales
-
Non-regular
Overnight
Access at the discretion of
counterparties
Standard tenders
Outright
Standing Facilities
Aimed to provide and absorbing
overnight liquidity, signal the
general stance of monetary policy
and bound overnight market interest
rates.
Two standing facilities are available
to eligible counterparties.
Marginal Lending
Facility
Reverse
Deposit Facility
Deposits
Source: (ECB (2008tttt): 8).
Side 40 af 43
Overnight
Turmoil in the International Interbank and FX Swap Markets: theories, parity condition, policy matters and risk Management
Figure App 10.2 Implemented Fed Programs
Overall Market Liquidity Support
System Open
Market
Account
(SOMA)
(OMOs) i.e. the purchase and sale of securities in the open market by a central bank, are a key tool used by the
Federal Reserve in the implementation of monetary policy. Historically, the Fed has used OMOs to adjust the supply
of reserve balances so as to keep the federal funds rate around the target federal funds rate established by the FOMC.
OMOs are conducted by the Trading Desk at the Federal Reserve Bank of New York (FRBNY), which acts as agent
for the FOMC.
Dollar
Liquidity
Swaps
Due to the global situation of bank funding markets, the Fed worked with other central banks in providing liquidity to
financial markets and institutions. Thus, the FRBNY has entered into agreements to establish temporary reciprocal
currency arrangements (central bank liquidity swap lines) with a number of foreign central banks.
Two types of temporary swap lines have been established dollar liquidity lines and foreign-currency liquidity lines.
Lending
Facilities
Lending to
Depository
Institutions
Lending to Primary
Dealers
Commercial Paper
Funding Facility
(CPFF)
ABCP Money
Market Mutual
Fund Liquidity
Facility (AMLF)
Term Asset-Backed
Securities Loan
Facility (TALF)
The discount window assist to relieve liquidity strains for individual depository institutions and for the banking system
as a whole by providing a source of funding in time of need.
On 16 March 2008, the Fed announced the establishment of the PDCF, which is an overnight loan facility that
provides funding to primary dealers and assist promote improved conditions in financial markets more generally.
The CPFF is a facility, authorized under section 13of the Fed Act, that supports liquidity in the commercial paper
markets. The CPFF provides a liquidity backstop to U.S. issuers of CP through a particularly created limited-liability
company (LLC) called the CPFF LLC. This LLC purchases three-month unsecured and ABCP directly from eligible
issuers.
The AMLF is a lending facility that finances the purchases of high-quality ABCP from money market mutual funds
(MMMFs) by U.S. depository institutions and bank holding companies.
On 25 November 2008, the Fed announced the creation of the TALF under the authority of section 13 of the Federal
Reserve Act. The TALF is a funding facility under which the FRBNY extends credit with a term of up to five years to
holders of eligible ABS. The TALF is intended to assist in accommodating the credit needs of consumers and
businesses of all sizes by facilitating the issuance of ABS collateralized by a variety of consumer and business loans; it
is also intended to improve the market conditions for ABS more usually.
Source: (Fed (2009-MR): 4-5, 7-12).
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Turmoil in the International Interbank and FX Swap Markets: theories, parity condition, policy matters and risk
Management
APPENDIX 11
Side 42 af 43
Turmoil in the International Interbank and FX Swap Markets: theories, parity condition, policy matters and risk
Management
APPENDIX 12: ABCP PROGRAM
Figure App 12.1 A typical ABCP Program
Source: (Stigum (2007): 995).
Figure App 12.2 ABCP Outstanding Vs Financial CP
Source: (Stigum (2007): 996).
Side 43 af 43