Regulatory Alerts2021-12-03
Instruction No. 005-DOM/2021 of December 3, 2021 implementing Law No. 2019-009 of January 22, 2020 governing repurchase operations
The Central Bank of Madagascar issued Instruction No. 005-DOM/2021 to implement Law No. 2019-009 governing repurchase operations on the financial market. The directive establishes eligible collateral securities, including negotiable debt securities, placement certificates, and treasury bills, while specifying haircut rates based on remaining maturity for monetary policy operations. It further mandates specific accounting treatments for transferors and transferees, delegates collateral selection and haircut determination for interbank bilateral trades to individual banks, and provides a standardized mathematical annex for calculating pledged security values.
CENTRAL BANK OF MADAGASCAR
DIRECTORATE OF MONETARY OPERATIONS
INSTRUCTION No. 005-DOM/2021 implementing Law No. 2019-009 of January 22, 2020 governing repurchase operations
The Governor of the Central Bank of Madagascar,
Having regard to Law No. 2016-004 of July 29, 2016, supplemented by Law No. 2016-057 of February 2, 2017, establishing the Statutes of the Central Bank of Madagascar;
Having regard to Law No. 2019-009 of January 22, 2020, governing repurchase operations on the financial market;
Having regard to Decree No. 2019-2069 of November 6, 2019, repealing the provisions of Decree No. 2014-1684 of October 29, 2014 on the appointment of the Governor of the Central Bank of Madagascar and appointing the Governor of the Central Bank of Madagascar;
DECIDES
Article 1: Purpose
This Instruction is issued in application of Articles 3, 11, and 12 of Law No. 2019-009 of January 22, 2020, governing repurchase operations.
Article 2: Eligible Securities
For the application of Article 3 of Law No. 2019-009 of January 22, 2020, governing repurchase operations, the eligible securities collateralizing repurchase operations of the Central Bank of Madagascar are:
- Negotiable Debt Securities (TCN);
- Placement Certificates (CDP) issued by the Central Bank of Madagascar;
- Securities issued by the Public Treasury: Treasury Bills by Auction (BTA) and Fihary Treasury Bills (BTF).
Article 3: Haircuts
Within the framework of the Central Bank of Madagascar's monetary policy operations, the haircuts applied to securities pledged in repurchase transactions are determined based on their remaining maturity.
The haircuts to be applied for each eligible security are described in the table below:
| Securities | Maturity < 6 months | 6 months < Maturity ≤ 12 months | Maturity > 1 year |
|---|---|---|---|
| BTA | 2,5% | 5,0% | |
| BTF | 2,5% | 5,0% | 10,0% |
| TCN | 2,5% | 5,0% | |
| CDP | 2,5% | 5,0% | 10,0% |
On the settlement date of a repurchase transaction, the value of a pledged security is determined according to the calculation method presented in the Annex.
Article 4: Accounting Treatment
For the application of Article 11 of Law No. 2019-009 of January 22, 2020, governing repurchase operations, a repurchase transaction results for the transferor, on the one hand, in the retention of pledged securities as assets on its balance sheet and, on the other hand, in the recording on the liabilities side of its balance sheet of the amount of its debt vis-à-vis the transferee.
The securities and the debt are itemized under a specific line item in the transferor's accounting. Furthermore, the amount of securities, broken down by type, appears in the documents attached to the annual accounts.
Securities received under a repurchase agreement are not recorded on the transferee's balance sheet. The transferee records the amount of its claim against the transferor as an asset on its balance sheet.
When the transferee pledges securities that it has itself received under a repurchase agreement, it records the amount of its debt to the new transferee on the liabilities side of its balance sheet.
The amounts representing the claims and debts referred to in this article are itemized in the transferee's accounting.
Article 5: Transaction Security for Interbank Transactions
For the application of Article 12 of Law No. 2019-009 of January 22, 2020, governing repurchase operations, the decision to provide collateral rests with each participant for interbank transactions.
The choice of eligible securities, as well as the haircuts for bilateral operations, are left to the discretion of the banks.
Article 6: Miscellaneous and Final Provisions
The Annex forms an integral part of this Instruction.
This Instruction enters into force as of... 03 DEC. 2021
Antananarivo, on The Governor Henri Edmond RABARIJOHN
ANNEX
Calculation of the Value of a Pledged Security
The nominal value of a security (V) to be pledged in a repurchase transaction is obtained from the following formula: $V_E = (V + INE) * (1 - d) \ge N * (1 + \frac{p}{360} * i)$
Where: VE : Value at maturity of the pledged security V : nominal value of the pledged security INE : Net interest received at maturity N : Nominal amount of the loan p : Loan duration (in days) i : Loan interest rate d : Haircut
Net interest received at maturity (INE) is calculated as follows: For BTA: INE = 0 since interest is prepaid
For BTF: INE = V * [(1 + t)^m - 1] * (1 - IRCM)
Where: IRCM : Current rate of the Tax on Income from Movable Capital t : BTF rate at issuance m : Original maturity of the BTF
For CDP/TCN: INE = V * [(1 + t)^nbj/360 - 1]
Where: t : CDP/TCN rate at issuance nbj : Original maturity of the CDP/TCN (in days)
Thus, the nominal value (V) of the security to be pledged is determined from the following formulas:
For BTA: $V = N * \frac{(1 + \frac{p}{360} * i)}{(1 - d)}$
For BTF: $V = N * \frac{(1 + \frac{p}{360} * i)}{[1 + (1 - IRCM) * ((1 + t)^m - 1)] * (1 - d)}$
It should be noted that: $\frac{(1 + \frac{p}{360} * i)}{[1 + (1 - IRCM) * ((1 + t)^m - 1)] * (1 - d)} < 1$ therefore V<N