Regulation (NAP) – Open Market Operations

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Banco Central de S.T.P (Central Bank of São Tomé and Príncipe) PROPONENTE(S): CA (Council of Administration) NAP: NORMA DE APLICACAO PERMANENTE (PERMANENT APPLICATION REGULATION) CODIGO: ECM06 ENTRADA EM VIGOR: 01/03/2015 (Effective Date) DATA DE EMISSAO: 04/09/2014 (Issue Date) N.° DOC: 018/2014 (Document No.) FL: 1/18 (Page)

ASSUNTO: OPEN MARKET OPERATIONS According to the monetary policy strategy of the Central Bank of São Tomé and Príncipe (BCSTP), the implementation of monetary policy relies on sound and balanced management of system liquidity through the administration of benchmark rates and duly regulated monetary policy instruments. In this context, it is necessary for the BCSTP to adopt a regulation governing intervention operations within the interbank market, enabling it to operationalize the absorption or lending of funds and pursue monetary policy objectives. Thus, exercising the powers attributed to it by paragraph 1 of Articles 8 and 31 of its Organic Law (Law No. 8/92), regarding the formulation and execution of monetary policy, as well as the regulation of the money market's functioning, the Central Bank of São Tomé and Príncipe determines the following:

CAPITULO I — Disposicoes Gerais (General Provisions) Artigo 1.° (Object) The present Permanent Application Regulation aims to establish the framework for Open Market Operations.

Artigo 2.° (Characterization of Open Market Operations) I. Open Market Operations are monetary policy instruments whose function is to signal the direction of monetary policy, manage liquidity in the money market, and guide short-term interest rates. II. Open Market Operations are initiated by the BCSTP and aim at the absorption and lending of funds, essentially based on auctions, under conditions announced by the Bank.

Artigo 3.° (Definitions) For the purposes of this NAP, the following are understood as: a) Leilão (Auction): Procedure through which the Central Bank lends or absorbs liquidity from the market based on proposals submitted by participating counterparties competing with each other. The most competitive proposals are fulfilled first until the total amount of liquidity to be lent or absorbed by the Central Bank is exhausted. b) Leilão de taxa fixa (Fixed-rate Auction): An auction in which the interest rate is predetermined by the Central Bank, and participating counterparties submit proposals for the amounts they wish to transact at that fixed interest rate. c) Leilão de taxa variável (Variable-rate Auction): An auction through which counterparties bid for the amount of liquidity they wish to transact with the Central Bank and the interest rates for the transactions. d) Operação de mercado aberto (Open Market Operation): A transaction executed in the financial market at the initiative of the Central Bank. e) Transacção definitiva (Definitive Transaction): A transaction in which the Central Bank purchases or sells assets in the market on a definitive basis (spot or forward). f) Operação reversível (Reversible Operation): Operations in which the BCSTP purchases or sells eligible assets, with a resale agreement or repurchase agreement, respectively, or, exceptionally, makes loans secured by eligible securities. g) Operação de reporte (Repo Operation): A reversible lending operation based on a repo agreement. h) Acordo de reporte (Repo Agreement): Purchase or sale of an eligible asset, with a promise to resell or repurchase. i) Número efectivo de dias/360 (Actual/360): Day count convention applied in interest calculation on a loan, implying that interest is calculated relative to the actual number of calendar days during which the loan is granted, based on a 360-day year. j) Títulos de BCSTP (BCSTP Securities): Securities issued by the Central Bank representing deposits of credit institutions, aimed at intervening in the money market;

Artigo 4.° (Collateral) The lending operations shall always have adequate collateral, constituted by eligible assets, in accordance with the conditions established in this NAP and the annexed contracts.

Artigo 5.° (Eligible assets to constitute collateral)

1. The following are considered eligible assets to constitute loan collateral in liquidity lending operations: a) Foreign currency deposits; b) Treasury Bills (BT); c) BCSTP Securities; d) Central Bank Certificates of Deposit; e) Others authorized by the Central Bank of São Tomé and Príncipe.
2. The securities referred to in this article may only serve as the basis for operations under this regulation when duly registered in the BCSTP's registration, settlement, and custody system, or in a financial asset registration and settlement system authorized and/or accepted by the BCSTP.
3. Securities subject to resale agreements may only serve as collateral in repurchase operations that have a settlement date equal to or prior to the resale date.

Artigo 6.° (Access conditions)

1. Participating institutions meeting the following cumulative requirements may access open market operations: a) They are subject to the minimum cash reserve regime established by the Central Bank of São Tomé and Príncipe; b) They apply for access to these facilities and subscribe to the relevant contractual documents.
2. The Central Bank of São Tomé and Príncipe may at any time refuse access to a participating institution based on prudential grounds or in the event of serious or persistent non-compliance with its obligations, particularly those related to the interbank clearing system.

Artigo 7.° (Type of Operations) Open market operations are distinguished by their objective and regularity into three types: a) Regular operations; b) Occasional very short-term operations; c) Occasional extended-term operations.

Artigo 8.° (Regular Operations)

1. Regular operations are primarily liquidity absorption or lending operations, mainly carried out as reversible operations, and may also take the form of BCSTP Securities issuance in case of liquidity absorption.
2. Regular operations carried out as reversible operations are conducted through standard auctions.

Artigo 9.° (Occasional Short-Term Operations)

1. These are targeted regularization, absorption, or lending operations, aimed at managing the market's liquidity situation and guiding interest rates, especially to neutralize their effects from temporary liquidity fluctuations.
2. They are essentially carried out through reversible operations, and may take the form of BCSTP Securities issuance in case of liquidity absorption.
3. They are executed, whenever necessary, according to specific objectives to be achieved at each moment, through bilateral procedures or auctions, generally in the form of reversible operations.

Artigo 10.° (Occasional Extended-Term Operations)

1. They are carried out with the objective of altering the system's structural liquidity situation, through BCSTP Securities issuance for absorption, or in cases of liquidity lending, in the form of reversible or definitive operations.
2. In these operations, which may or may not have regular maturity, standard auctions or bilateral procedures are used, whether conducted through reversible operations or definitive transactions.

Artigo 11.° (Execution Modalities of Operations) The BCSTP has the following types of instruments for carrying out Open Market operations: Reversible Operations, Definitive Transactions, and BCSTP Securities Issuance.

Artigo 12.° (Reversible Operations)

1. In reversible operations, the BCSTP purchases or sells eligible assets with a resale or repurchase agreement, respectively, or, exceptionally, makes loans secured by eligible assets.
2. Liquidity lending or absorption operations taking the form of purchase or sale of eligible assets with a resale or repurchase agreement are governed, in particular, by the Master Agreement for Repo Operations annexed to this NAP and forming an integral part thereof.
3. The difference between the repurchase price and the purchase price in a repurchase agreement corresponds to the interest of the operation.
4. Liquidity lending operations that exceptionally take the form of loans secured by eligible assets must comply with this NAP.
5. The interest on a reversible operation in the form of loans secured by eligible assets is determined by applying the interest rate to the operation amount for its respective term.
6. Reversible operations are, as a rule, conducted through standard auctions, but may also be conducted through bilateral procedures.

Artigo 13.° (Definitive Transactions)

1. In definitive transactions, the BCSTP purchases or sells eligible assets in the market on a definitive basis.
2. Definitive transactions are, as a rule, conducted through bilateral procedures or auctions.

Artigo 14.° (BCSTP Securities)

1. BCSTP Securities are book-entry securities, the interest rates of which may be fixed by the BCSTP or determined in an auction.
2. Participating institutions may be invited to subscribe to absorption securities issued by the BCSTP.
3. These securities are tradable only among participating institutions in the MMI (Interbank Money Market).

CAPITULO II - PROCEDIMENTOS RELATIVOS AS OPERACOES (CHAPTER II - PROCEDURES RELATIVE TO OPERATIONS) Artigo 15.° (Bilateral procedures relative to open market operations)

1. Bilateral procedures in this NAP are broadly understood as any actions where operations with participating institutions are proposed and executed without auctions, through direct contacts with one or a small number of participating institutions.
2. Through direct contacts, operations may be conducted in the form of definitive transactions and reversible operations.
3. Operations executed through bilateral procedures are, as a rule, not previously announced.

Artigo 16.° (Auctions)

1. Regarding standard auctions, they are completed within a maximum period of 48 hours, counted from the announcement of the auction to the certification of placement results.
2. The BCSTP may decide to adjust the timing in individual operations, if deemed appropriate.

Artigo 17.° (Auction Modalities)

1. The BCSTP conducts auctions in the amount auction (fixed rate) or variable rate modality, according to the prescribed objectives;
2. In an amount auction, the interest rate is predetermined by the BCSTP, and counterparties in the auction submit proposals for the amounts they wish to transact at that fixed interest rate.
3. In a variable-rate auction, counterparties bid for the amounts and interest rates at which they wish to conduct transactions with the BCSTP.

Artigo 18.° (Auction Phases) Auctions are conducted according to the following six operational phases: a) Phase 1. Announcement of the auction by the BCSTP via electronic platform or letter to participating institutions; b) Phase 2. Submission of proposals by participating institutions via electronic platform or letter; c) Phase 3. Compilation of proposals in the Market and Liquidity Management Directorate; d) Phase 4. Auction results - Announcement of placement results via electronic platform or letter; e) Phase 5. Settlement of operations.

Artigo 19.° (Submission and approval of proposals)

1. Liquidity absorption and lending operations carried out by the BCSTP are based on proposals submitted by banking institutions, via the electronic platform or a letter addressed to the Market and Liquidity Management Directorate.
2. Each proposal must indicate the liquidity amount the institution wishes to transact and its corresponding interest rate.
3. In proposals, interest rates shall be expressed up to the hundredth of a percentage point, and amounts must satisfy the minimum amounts announced by the Central Bank.
4. When operations are announced in the interest rate auction modality, with or without fixed amount, institutions may submit up to 6 proposals, which are subject to the following rules: a) In absorption operations, proposals are fulfilled starting from those with lower rates, successively, until the amount proposed by the BCSTP is met or the rate limit considered by the Bank for executing operations is reached; b) In lending operations, proposals are fulfilled starting from those with higher rates, successively, until the amount proposed by the BCSTP is met or the rate limit considered by the Bank for executing operations is reached; c) The amount to be transacted at the last rate satisfying the requirements of clause a) shall, when necessary, be prorated in proportion to the amounts proposed at that rate.
5. Treasury Bill sales shall be realized at the discounted value of the securities, according to the formula in Annex II.
6. The BCSTP's purchase with a resale agreement of Treasury Bills and BCSTP Securities is made at the present value of the security, calculated according to the formula in Annex III.
7. The execution of liquidity absorption or lending operations by the BCSTP presupposes the transfer of ownership of the securities subject to transaction, giving rise to the issuance/substitution of CERTIFICATES OF OWNERSHIP or their collection by the Bank, depending on the operation performed.
8. Proposals are annulled if they: a) Are submitted after the deadline indicated in the announcement; b) Do not meet the maximum and/or minimum amounts fixed; c) Have values lower than the minimum or higher than the maximum accepted for interest rate / price; d) Are incomplete and do not respect other conditions established by the BCSTP.
9. The decision to annul a proposal is communicated by the BCSTP to the participating institution before the announcement of the placement results.

Artigo 20.° (Announcement of auction results) The BCSTP will communicate to each proposing institution, via the electronic platform or by letter, the auction results, including: a) The reimbursement value and the net discount amount relating to securities purchased and/or sold to the institution and the group of institutions; b) The weighted average interest rate of transactions performed, whenever the operation rate is determined in an auction system; and c) Other information it deems appropriate to transmit to the market.

Artigo 21.° (Settlement of operations)

1. The financial settlement of open market operations is carried out through the accounts of participating institutions with the BCSTP.
2. The financial settlement of liquidity lending operations, as well as the reimbursement of liquidity absorption operations, may only be made after confirming the final transfer to the BCSTP of the underlying assets for the operations.
3. At the time of financial settlement of liquidity lending operations, conducted through auctions or bilateral procedures, participating institutions have the duty to ensure that the collateral value is sufficient to cover the total funds allocated to them.
4. If a participating institution does not have sufficient funds for operation settlement, the collateral will be invoked.
5. At the time of financial settlement of liquidity absorption operations, conducted through auctions or bilateral procedures, the delivery by the BCSTP of collateral assets will only occur after the transfer of funds from participating institutions to the BCSTP.
6. At the time of financial settlement of liquidity absorption operations, conducted through auctions or bilateral procedures, participating institutions have the duty to transfer funds corresponding in value to the total assets allocated to them.
7. Open market operations based on bilateral procedures are, as a rule, settled on the transaction date, but may, for operational reasons, be settled at a later date, particularly in the case of operations conducted in the form of definitive transactions.

CAPITULO III — INFRACCOES E SANCOES (CHAPTER III — OFFENCES AND SANCTIONS) Artigo 22.° (Offences) The following constitute offences against this NAP: a) The execution of repurchase and resale operations involving securities not referred to in paragraph 1 of Article 5 of this NAP; b) The sale of securities without the seller having ownership of the traded securities at the time; c) Trading of securities at a unit price manifestly different from that practiced in the market or, in the absence of publication informing the market price, at a price manifestly different from the prevailing nominal value; d) The creation of artificial trading conditions or manipulation of prices of securities subject to repurchase or resale operations; e) The adoption of practices that deliberately imply the submission of inaccurate information.

Artigo 23.° (Sanctions) Without prejudice to other sanctions provided in the annexed contracts, the occurrence of any non-compliance situations by participants implies the application of the following sanctions: a) The Central Bank may suspend, exclude, or limit the participation of institutions in open money market operations; b) The suspension of institutional participation in open money market operations, referred to in the previous paragraph, may extend up to 6 months depending on the severity of the offence; c) Payment of all judicial and professional fees borne by the BCSTP, related to such non-compliance situation.

CAPITULO IV — DISPOSICOES FINAIS (CHAPTER IV — FINAL PROVISIONS) Artigo 24.° (Final Provisions) Disputes and omissions arising from the application of this NAP are resolved by decision of the BCSTP.

Artigo 25.° (Revocation) All previous provisions contrary to the spirit of this NAP are hereby revoked.

Artigo 26.° (Validity) This NAP enters into force on March 1, 2015.

Central Bank of São Tomé and Príncipe, on September 4, 2014.

ANEXO I (ANNEX I) Contrato para Operacoes de Mercado Aberto (Agreement for Open Market Operations)

ANEXO II (ANNEX II) Formula a aplicar nas operacoes de compra e venda de bilhetes do tesouro, titulos do Banco Central (Formula to be applied in operations for the purchase and sale of Treasury Bills, Central Bank Securities): a) Na data de realizacao da operacao (On the operation date) VD = (VN x 36500) / (36500 + t x n) Em que: VD = valor a creditar ou a debitar na conta das instituicoes (value to be credited or debited in the institutions' accounts); VN = Valor nominal (Nominal Value); t = taxa de juros da operacao em base anual, expressa em pontos percentuais e multiplos de 1/16 (interest rate of the operation on an annual basis, expressed in percentage points and multiples of 1/16); n = prazo da operacao em dias (term of the operation in days). b) Na data de vencimento da operacao (On the maturity date of the operation) Valor de reembolso = valor nominal (Reimbursement value = Nominal Value)

ANEXO III (ANNEX III) Formula a aplicar nas operacoes de compra com acordo de revenda e venda com acordo de recompra, pelo BCSTP, de bilhetes do tesouro e titulos do BCSTP (Formula to be applied in operations for purchase with resale agreement and sale with repurchase agreement, by the BCSTP, of Treasury Bills and BCSTP Securities): a) Na data de realizacao da operacao (On the operation date) VT = [VN x 36500] / [(36500 + t(n - d)) x (36500 + t x d)] Em que: VT = valor a creditar ou a debitar na conta das instituicoes (value to be credited or debited in the institutions' accounts); VN = valor nominal (Nominal Value); t = taxa de juros da operacao, expressa em pontos percentuais e multiplos de 1/16 (interest rate of the operation, expressed in percentage points and multiples of 1/16); n = prazo vincendo dos titulos transaccionados, expresso em dias, na data de realizacao da operacao (due term of the transacted securities, expressed in days, on the operation date); d = prazo da operacao realizada com acordo de recompra ou de revenda, expresso em dias (term of the operation with repurchase or resale agreement, expressed in days) (in case of definitive purchase or sale, d=0). b) Na data de vencimento da operacao (On the maturity date of the operation) VR = (VN x 36500) / (36500 + t x n') Em que: VR = valor de reembolso (reimbursement value); VN = valor nominal (Nominal Value); t = taxa de juros da operacao, expressa em pontos percentuais e multiplos de 1/16 (interest rate of the operation, expressed in percentage points and multiples of 1/16); n' = prazo vincendo dos titulos transaccionados, expresso em dias, na data de vencimento da operacao (due term of the transacted securities, expressed in days, on the maturity date of the operation).