Operational Notice: Establishment of Securities Lending Facility for Treasury Bonds

30 September 2004

Op Notice No. 18/2004

On 27 August 2004 the Australian Office of Financial Management (AOFM) announced it would establish a lending facility for Australian Government Treasury Bonds (see Operational Notice 14/2004). This facility has now been established.

The facility allows bond market participants to borrow bonds when they are not readily available from other sources in the market. It is intended to enhance the efficiency of the Treasury Bond market by improving the capacity of intermediaries to make two-way prices, particularly for bonds that become ‘tight’ in the repurchase market.

The facility is operated by the Reserve Bank of Australia (RBA) on behalf of the AOFM and operates through repurchase agreements between the RBA and market participants.

There is a fee for use of the facility which is reflected in the pricing of the repurchase agreements between the RBA and market participants. This fee is set at a level designed to avoid undermining the existing securities lending
arrangements between market participants. Net proceeds from the operation of facility will be remitted by the RBA to the Australian Government.

The decision to establish the facility follows consultation with the RBA and financial market participants. Stock lending facilities are operated by State Government borrowing authorities and many overseas sovereign borrowers.

Further details concerning the facility are attached.

Enquiries:

Gerald Dodgson
Head of Treasury Services

Telephone: +61 2 6263 1141


ATTACHMENT

AOFM SECURITIES LENDING FACILITY – OPERATIONAL DETAILS

Securities Available to be Borrowed

The securities available from the facility are any fixed coupon Treasury Bonds currently on public issue. The bonds will be provided from the investment portfolio managed by the Australian Office of Financial Management (AOFM). The Treasury Bonds in this portfolio currently total around $5 billion (face value).

Securities within this portfolio can be converted to other stocks as required to meet specific demand. Subject to any securities lending transactions that may already be in place, lending in respect of a specific Treasury Bond can
total an amount up to the aggregate face value of all the Treasury Bonds held in the portfolio. Securities held as collateral will not be on lent.

While every reasonable attempt will be made to meet all requests to borrow Treasury Bonds through the facility, there is no commitment to fulfil all requests.

Collateral

Counterparties borrowing Treasury Bonds through the facility must provide collateral in the form of other Commonwealth Government Securities i.e. Treasury Bonds, Treasury Indexed Bonds and Treasury Notes.

Counterparties can request to substitute one or more lines of collateral securities for others over the term of a securities lending transaction.

Role of Reserve of Bank of Australia (RBA)

The RBA operates the facility on behalf of the AOFM. The RBA contracts as principal, vis a vis a counterparty, in securities lending transactions undertaken through the facility.

Requests to access the facility should be directed to the RBA’s Domestic Markets Desk on +61 2 9551 8321. Market participants wishing to access the facility should notify the RBA by 3:00 pm on the day they wish to take delivery
of securities. Approaches after this time will be dealt with on a ‘best endeavours’ basis.

Eligible Counterparties

Any member of the Reserve Bank Information and Transfer System (RITS) which has treasury operations located in Australia and is able to execute and settle transactions with the RBA through the Austraclear System is an eligible counterparty.

Transaction Type

Each securities lending transaction will be completed using a cash matched repurchase agreement and reverse repurchase agreement. The RBA will pay cash to the counterparty to purchase the collateral securities under a reverse repurchase agreement, and the loaned Treasury Bonds will be sold to the counterparty, in exchange for cash, under a repurchase agreement.

Counterparties should note that by entering a repurchase agreement with the RBA into the Austraclear System, the counterparty is agreeing to be bound by the terms of The Bond Market Association/International Securities Market Association (TBMA/ISMA) Master Repurchase Agreement, as amended for Australia by Exhibit A of the RITS Regulations.

Settlement Period and Term

All repurchase transactions undertaken through the facility are for same-day settlement on any day which is not a public holiday in Sydney and for an open term. An open repurchase transaction is automatically rolled on the same terms at 11:00 am each business day unless either the RBA or the counterparty advise otherwise prior to this time. The maturity date can be the same day the advice is received.

Initial Margin

A margin ratio is applied to the collateral securities purchased by the RBA. This is done in accordance with the rules applying to reciprocal purchase transactions in the RITS Regulations and Conditions of Operation. At present, this ratio is 102 per cent.

Margin Calls

Margin calls are conducted in accordance with the rules applying to reciprocal purchase agreements as defined in the RITS Regulations and Conditions of Operation. When deciding to make a margin call, the RBA will take into account its overall position with a counterparty.

In the normal course, margin payments made by either the RBA, or the counterparty, will be met by a free of cash transfer of the required collateral securities in Austraclear.

Minimum Transaction Size

The minimum amount of a specific line of Treasury Bonds that can be borrowed through the facility is $5 million (face value).

Interest Rates

The interest rate payable to a counterparty on cash borrowed by the RBA under a repurchase agreement in loaned Treasury Bonds will be the RBA cash rate target less a margin determined by the AOFM. This margin is currently 300 basis points. The margin may be changed from time to time, although it is expected that changes in the margin will be infrequent.

The interest rate payable by a counterparty on cash lent by the RBA under reverse repurchase agreement against the collateral securities will be the RBA cash rate target.

Reporting

Details regarding Treasury Bonds on loan to counterparties at the end of each day are updated each business day on the RBA’s electronic news service pages (Reuters – RBA28; Telerate – 1588; Bloomberg – RBA9).

Historical data on Treasury Bonds lent via the facility is available on the AOFM website.

Last updated: 5 March 2014