Open Market Operation System Reformed, Approved by Monetary Policy Board on the 25th
More Securities Eligible for RP Transactions and Enhanced Benefits for Outstanding Institutions
The Bank of Korea will begin purchasing repurchase agreements (RPs) every Tuesday starting July 10. In addition to the regular RP sales that have been held every Thursday, the central bank will also institutionalize regular RP purchases, thereby implementing 'two-way RP transactions.' In response to recent market conditions?characterized by shrinking excess liquidity and growing demand uncertainty?the Bank of Korea aims to flexibly use both RP sales and purchases to adapt to changing circumstances.
On June 26, the Bank of Korea announced that it had reformed its open market operation system, following a resolution by the Monetary Policy Board the previous day. Regular RP sales will continue to take place every Thursday with a seven-day maturity, while regular RP purchases will be conducted separately every Tuesday with a 14-day maturity.
The range of securities eligible for RP transactions will also be expanded. To ensure a stable foundation for RP purchases, the Bank of Korea will add three types of special bank bonds?industrial finance bonds, small and medium enterprise finance bonds, and export-import finance bonds?to the list of securities eligible for RP transactions. Previously, only government bonds, government-guaranteed bonds, monetary stabilization bonds, and Korea Housing Finance Corporation mortgage-backed securities were included. The bank also plans to revise the criteria for selecting institutions eligible for RP transactions, as well as the criteria for designating outstanding and underperforming institutions, with the aim of further enhancing benefits for outstanding institutions.
Regular RP purchases will begin on July 10. However, changes to the criteria for selecting institutions eligible for RP transactions will take effect on August 1.
The Bank of Korea plans to absorb most of the excess liquidity through monetary stabilization bonds, which have longer maturities and thus a longer-lasting policy impact, while using RP transactions with shorter maturities to flexibly absorb or supply liquidity as needed.
The central bank explained that by conducting open market operations that involve both RP purchases and sales?supplying liquidity to sectors with shortages and absorbing it from sectors with surpluses?it will be possible to facilitate smooth circulation of funds and resolve imbalances in supply and demand between sectors. Institutionalizing regular liquidity supply through RP purchases is also expected to reduce the negative perception, or stigma effect, associated with obtaining funds from the central bank.
Lee Jongsung, head of the Market Operations Team at the Bank of Korea's Financial Markets Department, stated, "With this reform, we have strengthened the foundation for more flexible liquidity management in line with market conditions," adding, "This reform will help facilitate smooth fund circulation and reduce short-term interest rate volatility." He also anticipated that accumulating experience with these processes would help lay the groundwork for immediate implementation of market stabilization measures in times of emergency.
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