workshop on developing government bond market 31 october – 2 november 2007, bali, indonesia
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Lessons in Monetary Policy Implementation & The Conduct of Monetary Operations Using Government Bonds. Dato’ Ooi Sang Kuang Bank Negara Malaysia. Workshop on Developing Government Bond Market 31 OCTOBER – 2 NOVEMBER 2007, Bali, Indonesia. Outline. Background - PowerPoint PPT PresentationTRANSCRIPT
31st October – 2nd November 2007
1
Workshop on Developing Government Bond Market31 OCTOBER – 2 NOVEMBER 2007, Bali, Indonesia
Lessons in Monetary Policy Implementation & The Conduct of Monetary Operations Using Government Bonds
Dato’ Ooi Sang KuangBank Negara Malaysia
31st October – 2nd November 2007
2
OutlineOutline
• Background
• Lessons in Monetary Policy Implementation
• Using Government Bond for Monetary Operations Initial Roadblocks Development Initiatives The effectiveness of repo operations
• Recap of key points
31st October – 2nd November 2007
3
Monetary policy aims at achieving sustainable growth in an environment of price stability
Monetary Policy Meeting is held 8 times a year and the statement is issued on the same day
The policy rate is Overnight Policy Rate, currently at 3.5%
Objective of monetary operations: meet the overnight operating target; reinforce monetary policy intention, and manage liquidity in the interbank market.
Monetary operation focuses on managing liquidity in an excess liquidity environment
Background
31st October – 2nd November 2007
4
Overnight policy rate framework is guided within a corridor
Liquidity is managed over the longer horizon using longer-term repo and money market tenders to ensure rates are not persistently too low or too high
Time
Ceiling rate (+25 bps)
Floor rate (-25 bps)
Overnight rate
Policy rate(3.50%)
50 bps corridor on the overnight tenor
Overnight rates to gravitate around policy rate
Lending facility
Deposit facility
Overnight rate as the policy rate and also the operating target
Operating band of 50 basis points to minimise extreme volatility
Standing facility available at the ceiling and floor rate
Overnight rate was chosen as the policy rate
high controllability minimal expectation content
Market determined rates at other tenors.
Background
31st October – 2nd November 2007
5
Instrument Mix as at 4th Oct 2007
Direct borrow ing
31%
Commodity Murabahah
3%
BNM Debt Securities -
Conventional18%
BNM Debt Securities -
Islamic7%
Wadiah11% Others
16%
Repo14%
Range of monetary instruments to sterilise liquidity has been diversified… 2001 vs 2007
Source: Bank Negara Malaysia
Instrument Mix as at end 2001
BNM Debt Securities -
Conventional14%
BNM Debt Securities -
Islamic. 2%
Wadiah16%
Direct borrow ing
68%
Source: Bank Negara Malaysia
Total liquidity:
RM46.2 billion Total liquidity:
RM284 billion
Background
31st October – 2nd November 2007
6
Initial challenges to monetary policy implementation..
High dependence on uncollateralised interbank borrowing and lending through money
market auction.
Large and volatile capital flows since 2000 into financial market – 2000 to 2004 net
capital flows amounted to approximately 3.8% of GDP annually.
Growth of Islamic finance – 2000 to 2006 total asset of Islamic financial institutions as
to compared to the banking system assets has increased from 2% - 7%.
Growth of domestic debt securities market –in Dec 2006 total market size amounted to
USD146.88 billion or 94.8% of GDP.
Greater demand for transparency in monetary policy implementation process and
operations ie: updates on market liquidity.
Background
31st October – 2nd November 2007
7
OutlineOutline
• Background
• Lessons in Monetary Policy Implementation
• Using Government Bond for Monetary Operations Initial Roadblocks Development Initiatives The effectiveness of repo operations
• Recap of key points
31st October – 2nd November 2007
8
Amendments in Central Bank Act was undertaken proactively to overcome impediments to operations…
Effective date Details of amendment Initial Impediment
January 2004 Changes to allow Islamic money market operations that comply to the Syariah law for the purpose of safeguarding monetary stability. Section 42 of Central Bank Act
The conduct of Islamic money market operations was initially not expressly covered by the Act.
October 2006 Changes to allow substantially larger issuance of Bank Negara Monetary Notes, limited up to 100% of the size of international reserves. Section 30 (bb)(i) of Central Bank Act
The limit was previously up to 3 times the total of Bank’s paid up capital and General Reserves Fund (equivalent to retained profits)
Lessons learned in conducting monetary operations
31st October – 2nd November 2007
9
The framework change in April 2004 & new monetary instruments have enhanced operational effectiveness… interbank rates track OPR closely & affects bank’s average lending rates directly…
Source: Bank Negara Malaysia
Lessons learned in conducting monetary operations
2.00
2.50
3.00
3.50
4.00
4.50
5.00
Oct-02 Feb-03 Jun-03 Oct-03 Feb-04 May-04 Sep-04 Jan-05 May-05 Sep-05 Jan-06 May-06 Sep-06 Mar-07 Jul-07
%
2.50
3.50
4.50
5.50
6.50
7.50
%
Overnight rate (LHS) OPR (LHS) 1 Month (LHS)
3 Month Intervention Rate (LHS)
26 April 2004 Introduction of OPR
Ceiling Rate
Floor Rate
BLR (RHS)
ALR (RHS)
ALR vs Prior to 26 April 04 After 26 April 04
Overnight interbank rate -0.01 0.96
3-months intervention rate 0.03 No longer targeted
Correlation analysis on Average Lending Rate (ALR) and interbank rates
31st October – 2nd November 2007
10
Rapid development of global Islamic financial market leads to the introduction of new instruments…
New Innovation Date Details
Sukuk BNM Ijarah (SBNMI)
Feb- 2006
Sukuk issuance based on the Al-Ijarah or ‘sale and lease back’
concept.
Islamic BN Monetary Notes (BNMN-i)
Dec-2006
Issued by Bank Negara Malaysia to replace the Bank Negara
Negotiable Notes (BNNN) for purposes of managing liquidity in
the Islamic financial market.
Commodity Murabahah Programme (CMP)
Feb-2007
CMP is a cash deposit product that utilises the Crude Palm Oil based contracts as the underlying assets.
BNMN-Murabahah
Mar-2008
BNMN-Murabahah is essentially a trustee-receipt which utilises Crude Palm Oil (CPO) based contracts as
the underlying assets.
Composition of Islamic Monetary Instruments as at 4th Oct 2007
Commodity Murabahah
3%
BNMN-i & Sukuk BNM
Ijarah7%
Conventional79%
Wadiah11%
Islamic21%
Source: Bank Negara Malaysia
Lessons learned in conducting monetary operations
More information on these instruments can be obtained online at BNM’s Islamic Money Market
website at http://iimm.bnm.gov.my/
31st October – 2nd November 2007
11
OutlineOutline
• Background
• Lessons in Monetary Policy Implementation
• Using Government Bond as Monetary Operations Initial Roadblocks Development Initiatives The effectiveness of repo operations
• Recap of key points
31st October – 2nd November 2007
12
Initial roadblocks to the use of government securities for monetary operations….Small BNM holdings of government securities initially impede wider use…
BNM MGS Holdings
0
200
400
600
800
1,000
1,200
1,400
1,600
Mar02
Jun02
Sep02
Dec02
Mar03
Jun03
Sep03
Dec03
Mar04
Jun04
Sep04
Dec04
Mar05
Jun05
Sep05
Dec05
Mar06
Jun06
Sep06
Dec06
Mar07
Jun07
Amount (RM mil)
In December 2004, BNM began to purchase MGS from primary and secondary markets based on market prices.
The purchase of MGS at primary tenders will be based on the weighted average price of the tender and limited to a maximum of 10% of the issue size.
BNM also may purchase MGS from the secondary market, however subject to maximum limit of holding MGS to 10% of the total outstanding.
Source: Bank Negara Malaysia
31st October – 2nd November 2007
13
Captive market of government bonds…MGS Holdings as at June 07
Non-Residents12%
Others8%
Fin. Institutions15% BNM
1%Insurance Co.
9%
Pension Fund55%
Total : RM188.5 billion
64% of total MGS were hold by “buy-and-hold investors”
Initial roadblocks to the use of government securities for monetary operations….
31st October – 2nd November 2007
14
OutlineOutline
• Lessons in Monetary Policy Implementation
• Using Government Bond as Monetary Operations Initial Roadblocks Development Initiatives The effectiveness of repo operations
• Recap of key points
31st October – 2nd November 2007
15
Introduction of ISCAP to enable borrowing and lending of securities…
Institutional Securities Custodian Programme (ISCAP) was introduced in October 2004 to facilitate lending of debt securities by buy-and-hold investors
BNM act as a catalyst to free the captive holdings of MGS by institutional investors to market participants through its repo operations
Greater use of repo for sterilisation of surplus liquidity is facilitated through collateral availability from ISCAP
Regulated short-selling in MGS introduced in October 2005 as ISCAP facilitates sufficient availability of MGS to market participants for short-covering via securities borrowing and lending
Institutional Lenders / FIs
Lend securities
FundsCollateral via repo
Interbank Institutions
Securities lending fees
Guarantee
Development initiatives
More information on the ISCAP and Regulated Short-Selling of MGS may be obtained online at BNM’s Bond Infohub website at
http://bondinfo.bnm.gov.my/
31st October – 2nd November 2007
16
OutlineOutline
• Lessons in Monetary Policy Implementation
• Using Government Bond as Monetary Operations Initial Roadblocks Development Initiatives The effectiveness of repo operations
• Recap of key points
31st October – 2nd November 2007
17
OUTSTANDING MONETARY INSTRUMENTS (JAN 2004 TO EARLY OCT 2007)
-
40
80
120
160
200
240
280
320
Jan-04 May-04 Sep-04 Jan-05 May-05 Sep-05 Jan-06 May-06 Sep-06 Jan-07 May-07 Sep-07
MYR billion
Feb 2004, Introduction of cash driven repo
Apr 2004, Benchmark Repo for Principal dealers
May 2007, Reverse Inquiry Repo
Direct Borrowings
Others
BNM Securities
Repo
Oct 2004, Introduction of ISCAP
Oct 2005, BNM allows Regulated Short-selling
Sterilisation of excess liquidity via repo… more effective, and enhances repo and debt market development
Effectiveness of repo operations
31st October – 2nd November 2007
18
3.00
3.50
4.00
4.50
5.00
5.50
6.00
6.50
0 1 2 3 4 5 6 7 8 9 10Tenure (year)
Yield %
Trading Yield YTM
Total: 75 tradesAverage deviation from yield curve =13bps
3.00
3.50
4.00
4.50
5.00
5.50
6.00
6.50
0 1 2 3 4 5 6 7 8 9 10
Tenure (year)
Yield %
Traded Yield YTM
Total: 664 tradesAverage deviation from yield curve = 2bps
Repo operations facilitate the smoothening of the yield curve…more bond trades at larger number of points along the government securities yield curve…
Effectiveness of repo operations
Market snapshot of MGS trades from 16 Feb to 29 Feb 2000 Market snapshot of MGS trades from 16 Feb to 28 Feb 2007
31st October – 2nd November 2007
19
Daily R epo Volume by B NM
0
500
1,000
1,500
2,000
2,500
J an-07 Fe b-07 Mar-07 A pr-07 May-07 J un-07 J ul-07 A ug -07 S e p-07 Oc t-07
A m ount (RM m illion)
C as h driven repo S ecurities driven repo
BNM as a catalyst to encourage market to actively use repo as alternative funding instruments…
On average, cash driven repo volume are triple the size of securities driven repo mainly due to current surplus liquidity in the market
Cash-driven repo are conducted mainly for managing liquidity
Securities-driven repo supply the market with current benchmarks MGS to market participants mainly for securities lending and regulated short-selling activities.
Effectiveness of repo operations
Source: Bank Negara Malaysia
31st October – 2nd November 2007
20
Sterilisation costs is lower via repo….
Repo Cost Savings
-
500
1,000
1,500
2,000
2,500
03-Jan 05-Feb 09-Mar 16-Apr 17-May 11-Jun 09-Jul 03-Aug 03-Sep 02-Oct
Amount (RM '000)
0
100
200
300
400Spread (Bps)
Cost Savings (LHS) Spread (RHS)
Source: Bank Negara Malaysia
On average cost savings for cash driven and securities driven repo are around 3 bps to 50 bps respectively.
Main reasons for relatively lower borrowing rate via repo are :-
Lower risk due to collateral
Demand for specific securities ie: recently issued benchmark securities for secondary trading
The ability for repo buyers to short sell the MGS during the repo period for fund raising
Note: Spread = 1-month interbank money market rate – 1-month repo rate
Effectiveness of repo operations
31st October – 2nd November 2007
21
OutlineOutline
• Lessons in Monetary Policy Implementation
• Using Government Bond as Monetary Operations Initial Roadblocks Development Initiatives The effectiveness of repo operations
• Recap of key points
31st October – 2nd November 2007
22
Recap of key points Earlier impediments to effective sterilisation operations may be overcome through
proactive legislative changes of central bank law
New monetary instruments were necessary due to the transformative changes in the
domestic financial system especially growth of the debt securities market and
international capital inflows
Development initiatives such as increasing the purchase of MGS for BNM own holdings
and the introduction of ISCAP helped to increase the use of government bond for
monetary operations.
Increased repo operations and the issuance of BNMNs have enhanced the monetary
policy implementation process by :-
widening the impact of monetary policy actions to the repo and short-term debt
securities market, in addition to the money market originally
reduces monetary policy costs relative to direct borrowings without affecting the
signalling role of the Overnight Policy Rate (OPR) target
developed the market in repo & short-term debt securities