Main purpose of the operations
Repurchase operation (or repo) is a two-leg transaction involving a sale followed by a subsequent purchase of securities over a predetermined period at an agreed price.
The repo mechanism presumes the transfer of ownership of securities, which lowers the credit risk of such transactions in comparison to deposit or secured credit operations and simplifies the resolution of conflicts related to non-performance of obligations by any party to the transaction.
As a monetary policy instrument, repos are extensively used by central banks to provide liquidity or absorb excess liquidity. Most central banks use repo auctions to manage the aggregate liquidity of the banking sector. Many central banks offer repo standing facilities.
For monetary policy purposes, the Bank of Russia executes repos to provide credit institutions with ruble liquidity. The operations involve the purchase of securities by the Bank of Russia from a credit institution and their subsequent sale on a predetermined date.
In case of a structural liquidity deficit, the Bank of Russia relies on regular weekly repo auctions as the main instrument for liquidity management. In case of a structural liquidity surplus, no main repo auctions are conducted. Under both structural liquidity deficit and structural liquidity surplus, the Bank of Russia may hold one- to six day repo fine-tuning auctions and longer-term repo auctions, also allows banks to use repo standing facilities. Since October 16, 2023 the Primary mechanism of liquidity provision includes all the specified repo operations.
Reverse repos, involving a sale of securities by the Bank of Russia to a credit institution with their subsequent purchase, were used to absorb excess liquidity in
Besides, central banks may use repos to provide liquidity to credit institutions as part of their functions other than monetary policy implementation.
For instance, The Supplementary mechanism of liquidity provision is created to support individual credit institutions experiencing liquidity shortages. Supplementary mechanism repos represent standing facilities with terms from 1 to 180 days at floating interest rate which equals the key rate plus 1.75 percentage point. The pool of securities for repo operations for the Supplementary mechanism is wider than for the Primary mechanism, while these pools are quite different.
The Bank of Russia can also provide repo operations not only for rubles, but also for foreign currency. In
Main characteristics of the operations
The Bank of Russia carries out repos only with Russian credit institutions which satisfy the following criteria:
- The credit institution has concluded a General Repo Agreement.
- The credit institution has at least one or more credit ratings assigned by national credit rating agencies ACRA (JSC) / Expert RA JSC / NCR LLC / NRA LLC, the minimum of which is at level not lower than “B-(RU)” / “ruB-” / “B-.ru” / “B-|ru|” for securities-backed loans and “BB-(RU)” / “ruBB-” / “BB-.ru” / “BB-|ru|” for loans secured by credit claims on the Russian Federation’s national rating scale (this criteria does not apply if in respect of credit institution measures are being taken to prevent bankruptcy with the participation of the Bank of Russia or the state corporation “Deposit Insurance Agency”).
- The credit institution has no overdue liabilities to the Bank of Russia on secured loans and unsecured loans, repos, transactions of purchase or sale of securities, foreign currency (including swaps) and precious metals, operations on placement of deposits by the Bank of Russia.
Conditions for repo operations
The Bank of Russia sets the following terms and conditions for repos: transaction date, repo term (term range), securities sale and subsequent purchase date and the interest rate (spread to the key rate).
The Bank of Russia’s repos are held at the organised trading of the Moscow Exchange (with clearing through the National Clearing Centre or with clearing through the National Settlement Depositary) and Saint Petersburg Currency Exchange (with clearing through the National Settlement Depositary).
Securities eligible for repos
Securities included in the Bank of Russia Lombard List with the initial haircut below 100% are eligible for Bank of Russia repos.
Securities eligible as collateral on Primary mechanism repos are bonds issued on behalf of the Russian Federation, Bank of Russia bonds, and also securities which have at least two credit ratings assigned by different credit rating agencies, while the minimum credit rating level should not be lower than “АА-(RU)” / “ruАА-” / “АА-.ru” / “AA-|ru|” according to the classification of ACRA (JSC) / Expert RA JSC / NCR LLC / NRA LLC.
Securities eligible as collateral on one-month repos and one-year repos (on auction results) are Federal Loan Bonds (OFZ) and also regional and municipal bonds which have at least two credit ratings assigned by different credit rating agencies, while the minimum credit rating level should not be lower than “АА-(RU)” / “ruАА-” / “АА-.ru” / “AA-|ru|” according to the classification of ACRA (JSC) / Expert RA JSC / NCR LLC / NRA LLC.
Securities eligible as collateral on Secondary mechanism repos are securities with at least one credit rating and the minimum credit rating level not lower than “А-(RU)” / “ruА-” / “А-.ru” / “A-|ru|” according to the classification of ACRA (JSC) / Expert RA JSC / NCR LLC / NRA LLC.
Securities issued or guaranteed by a counterparty and affiliated institutions are not eligible for repos.
Credit institutions may place bids without indicating specific issues of securities but handle a security basket for repos with settlement, clearing and collateral management through the National Settlement Depository.
Credit institutions may substitute securities in repos with clearing through the National Settlement Depository.
Haircuts and margin calls
To manage risks associated with repos, the Bank of Russia sets haircuts. The Bank of Russia sets the initial, upper and lower haircuts and calculates current haircut for repos with terms more than one day on a daily basis.
The initial haircut is applied to calculate the total value of securities that a credit institution should transfer to the Bank of Russia in the first leg of the repo. The initial haircuts depend on the type of bonds, the credit ratings of their issues (issuers). A security is not eligible for repos if its initial haircut is set at 100%.
During the whole repo term, daily revaluation of the transferred securities and recalculation of the current haircut are carried out. The upper and lower haircuts determine the acceptable ratio between the value of transferred securities and the volume of cash provided under repo. That is, if the calculated current haircut holds between the upper and the lower haircuts, there is no need for additional transfer or return of securities (additional transfer or return of cash) and no margin calls are performed.
In repos with clearing through the National Clearing Centre, if the current haircut exceeds the upper haircut, the Bank of Russia returns the excess securities, while if the current haircut falls below the lower haircut, the Bank of Russia’s counterparty has to supply additional cash.
In repos with settlement, clearing and collateral management through the National Settlement Depository, all margin calls should be settled primarily with securities, while cash should be used only if there is a lack of securities.
Moreover, repos with settlements, clearing and collateral management through the National Settlement Depository, have the following specific features: revaluation of securities is made for the whole transaction portfolio of each Bank of Russia’s counterparty, rather than for each individual deal, with the use of initial haircuts set by the Bank of Russia as of the current day’s morning.