Media Release Changes to the Reserve Bank's Dealing Arrangements and the Prime Assets Requirement (PAR)

The Reserve Bank has reviewed arrangements for its domestic market operations and PAR to take account of the forthcoming introduction of real-time gross settlement (RTGS) for high-value payments, and other prospective changes in market conditions, particularly the diminishing supply of Commonwealth Government securities. As a result, a number of changes will be made, as set out below.

1. Reserve Bank Dealing Arrangements Under RTGS

While RTGS is not due to be fully implemented until April 1998, the Reserve Bank sees merit in implementing changes to its dealing arrangements well ahead of this, to help smooth the transition. The arrangements outlined below have been decided upon after widespread consultation with market participants.

(a) Time of dealing

At present, the Bank announces the money market cash position and its dealing intentions at 9.30 am, and deals between 10.00 and 10.30 am. This schedule should remain suitable in an RTGS environment. There does not appear to be a need to deal earlier in the day, as the 9.00 am settlements for overnight clearing obligations should be much smaller when high-value payments are being settled under RTGS. In any case, liquidity for this deadline should be plentiful because banks will have access before 9.00 am to the free intra-day credit facility from the Reserve Bank (described in Media Release No. 97-08 of 6 May 1997). To the extent possible, the Bank also proposes to make payments due by it that day (e.g. Commonwealth loan interest and large value government payments) soon after RITS opens at 7.00 am each day.

The Bank's morning operations will remain the principal vehicle for achieving its cash rate target, though under RTGS they may need to be supplemented from time to time by a further round of dealing with all RITS members later in the day. This is because the system cash position published each morning will be an estimate, rather than a figure derived from overnight clearing streams as at present. As such, it will be subject to forecasting error, and the morning market operations based on this calculation may, on occasion, prove to be inadequate.

(b) End-of-day facility and Exchange Settlement Accounts

Under RTGS, it is possible that market pressures could emerge toward the end of the settlement day as banks and others with Exchange Settlement Accounts balance their liquidity positions and bid for funds to unwind intra-day repos. To avoid any disruption to market conditions, the Reserve Bank will provide holders of Exchange Settlement Accounts with an end-of-day facility under which they can generate liquidity at their discretion, at a set price.

In introducing such a facility, the Bank is seeking to strike a balance between providing a degree of certainty about the cost and availability of end-of-day funding while retaining incentives for market participants to settle among themselves without routine recourse to the facility. The facility will take the form of overnight repos at 25 basis points over the cash rate target. As the purpose of the facility is to assist end-of-day squaring of positions by providers of payments services, it will be available only to those with Exchange Settlement Accounts and limited to the period after 4.30 pm when RITS is closed to non-Exchange Settlement transactions.

The Reserve Bank has noted some concern among market participants that the current arrangement, under which it pays an interest rate 10 basis points under the cash rate target on balances in Exchange Settlement Accounts, does not provide sufficient incentive for those with surplus funds to lend back into the market. The fact that balances in those Accounts have grown strongly since this arrangement was introduced is consistent with these concerns. The Bank has therefore decided to widen, to 25 basis points, the margin below the cash rate target for balances in these Accounts.

The combination of a margin of 25 points above the target cash rate for the end-of-day repo facility and 25 points below the cash rate for balances in Exchange Settlement Accounts should promote the further development of the money market by encouraging borrowers to seek funds in the market before drawing on the end-of-day facility, while providing an incentive for those with surplus cash to lend such funds. This should also enhance market liquidity during the day by providing incentives for market participants to settle as early as possible and minimise the need to use Reserve Bank facilities.

The new provisions will take effect from 1 October 1997. Other aspects of market operations will remain unchanged. Specifically, except for the end-of-day facility, eligibility to deal with the Bank will remain open to all RITS members, and the present rediscount facility for Treasury notes within 90 days to maturity will continue to be offered as a safety-valve for the financial system more generally. Of course, the intra-day credit facility mentioned above will not become operational until RTGS begins (which, as noted, is currently scheduled for April 1998).

The arrangements will be kept under review to ensure that they are supporting the Reserve Bank's monetary policy objectives and the smooth operation of the money market.

2. Changes to PAR and to the Range of Securities in which the Reserve Bank is Prepared to Deal

Under the current PAR arrangements, banks are required to hold an amount equal to 6 per cent of their liabilities (excluding capital) in high quality, readily cashable assets, including notes and coin, balances with the Reserve Bank, and Commonwealth Government securities. These assets are held as an emergency source of liquidity for banks. Effective 23 June 1997, the ratio will be reduced to 3 per cent and the range of eligible assets will be widened to include Australian dollar-denominated securities issued by the central borrowing authorities of State and Territory Governments.

At the same time, the Reserve Bank will start to undertake repurchase agreements in these securities in the normal course of its domestic market operations. The Bank will confine its transactions in State and Territory securities to secondary markets; it will not undertake transactions in them directly with issuing authorities.

These changes have been made against a background of diminishing supply of Commonwealth Government securities and are part of a refocussing of the Reserve Bank's supervision of liquidity to put greater emphasis on banks' internal management practices. Over coming months, the Bank will be holding discussions with each bank to agree a liquidity management approach (including overall holdings of liquid assets) taking into account the bank's own methodologies and business characteristics.

These changes to PAR have no implications for monetary policy.