NBE sets benchmark with new directive


National Bank of Ethiopia (NBE) has issued the first in its kind directive, ‘open market operations and standing facilities directive no. MFAD/OMO and SFs/001/2021’ that will formalize the money market. The directive will be in effect as of August 2, 2021.
On its preamble, the directive explained that the issuance of the directive has become necessary to establish open market operations and standing facilities as instrument for effective management of liquidity in the financial system for purposes of conducting monetary policy.
It is to be recalled that Capital had reported that NBE had drafted the first directive ever to formalize and involve the existed trust based money market between banks with a modern scheme.
On the directive, NBE says that it has the powers and duties to make short term and long term refinancing facilities available to banks and other financial institutions; and issue its own debt and payment instruments for this purpose.
The directive shall be applicable to financial transactions between the NBE and banks operating in the country that maintains reserve requirements with NBE for the purpose of OMO and SFs.
Banks shall be able to access SFs from NBE and participate in OMO.
The effectiveness of the directive is stated as one that would be the bench marks for the up coming capital market.
The directive article 7.1 stated that if the government securities or NBE securities are trading in the market, the valuation of eligible collateral will be determined by the prevailing market value.
Article 7.2 added that in the absence of market value, the valuation of eligible collateral will be determined by the present value of the future cash flows of the asset, whereby the discount factors will be determined by the central bank and published on its website.
Under sub article 3 of the same article it stated that eligible assets to be pledged as collateral must be registered in the accounts of the respective participant banks opened at the National Bank and maintained in the Book Entry System.
According to the directive under OMO, NBE may conduct main or standard operations, fine tuning or non-standard operations, which is a quick auction when it is deemed desirable to have a rapid impact on the liquidity situation in the money market, or structural operations.
NBE may use five different kinds of instruments including outright transactions, granting collateralized loans, repo or reverse repo transactions, and issuing NBE certificates for its open market operations.
Article 9 of the directive indicates that NBE may issue debt securities (NBE Certificates) for its monetary policy operations or liquidity management. The NBE Certificates shall be issued at a nominal value of one million birr and in multiplies thereof. The NBE Certificates shall be issued at a discount from a per value of 100,000 birr.
The NBE Certificates can be traded on the secondary market, which includes all selling and buying operations, while the certificates trading at secondary market it is limited to only among banks.
The SF has lending and deposit facilities.
The auction has three types of auction formats; fixed price auction, variable price auction, and single or uniform price auction.
The fixed price auction is that NBE sets the rates and the participant banks bid on the quantity. The variable price auction is that NBE sets the overall quantity, and the participating banks bid on the price and successful bids are allotted at individual submitted auction price.
Single or uniform price auction is that NBE sets the overall quantity, and the participating banks bids on the price and one single price (cut-off or stop rate) derived from the auction is awarded to all successful bidders, while the price will be determined by the resulting marginal price from the auction.