Instruction No. 02-CR/05 of June 13, 2005 on the Central Bank of Madagascar's Actions in the Money Market

INSTRUCTION NO. 02-CR/05 of June 13, 2005 on the actions of the Central Bank of Madagascar in the money market

For better regulation of central bank money, the Central Bank has decided to reconsider its interventions in the money market. The Central Bank's interventions in this market mainly comprise refinancing operations and liquidity absorption operations.

1- Two categories of refinancing operations are provided for:

• refinancing operations initiated by the Central Bank:
   repurchase agreements (repos) on Treasury Bills or other negotiable debt securities via positive call for tenders;  outright purchases of these securities;
• refinancing operations requested by banks:
   repos on securities for a duration of 2 to 10 days;  special repos on securities.

2- The Central Bank's actions aimed at absorbing liquidity are carried out:

• either via negative call for tenders;
• or in the form of outright sales of Treasury Bills or other negotiable debt securities.

I- CENTRAL BANK FINANCING TO THE BENEFIT OF BANKS The Central Bank's actions in the money market aimed at supplying liquidity are carried out either at the initiative of the Central Bank or upon request by banks. These facilities, plus interest, must be secured by Treasury Bills (BTA) or other negotiable debt securities.

A- REFINANCING AT THE INITIATIVE OF THE CENTRAL BANK The refinancing procedure may take the form of repos on Treasury Bills or other negotiable debt securities, or outright purchases of these securities in the secondary market. These two forms of financing are conducted using the call for tenders technique.

1- Repos via Call for Tenders:
1.1. Upon launching a call for tenders, the Central Bank disseminates:

• the settlement date and maturity date of the operation;
• refinancing and liquidity absorption maturities for the period covered by the call for tenders;
• the floor rate;
• the deadline date and time for receipt of bids.

1.2. Repos via call for tenders are executed based on the central bank money needs estimated by the Central Bank for the period covered. Requests for central bank money are submitted by banks at various rates they propose. These requests must indicate the reference of the securities to be pledged as collateral for the operation. Submitted bids are irrevocable.
After collating responses to the call for tenders, the Central Bank accepts requests at the expressed rates, prioritizing those submitted at the highest rate. Requests are fulfilled up to the amount of central bank money to be injected. The marginal tranche is, therefore, fulfilled at a percentage defined by the Central Bank.

1.3. Upon announcing results, the Central Bank communicates via telex/fax to each institution:

• the total amount of requests submitted;
• the range of proposed rates;
• the number of bidders;
• the total refinancing amount allocated;
• the refinancing amount granted to the bank;
• the percentage of requests fulfilled for the marginal tranche;
• the weighted average rate of fulfilled requests.

2- Outright Purchases of Securities from Banks:
The Central Bank may proceed with outright purchases of securities from banks in the secondary market.
Based on central bank money needs estimated by its departments, the Central Bank communicates to banks the day before the operation (T-1):

• the nature of the operation (purchase of securities);
• the settlement date and terms of the operation;
• the deadline date and time for receipt of responses.
  The adjudication procedures remain the same as those described for call-for-tenders repos.

B- REFINANCING AT THE REQUEST OF BANKS
1- Repos on Securities with a Duration of 2 to 10 Days:
1.1- Banks may utilize repos with value date of the day (T+0). The duration of these repos may range from 2 to 10 days, at their choice. When maturity falls on a non-business day, it is rolled over to the next following business day. 1.2- The rate for 2-to-10-day repos is set by the Central Bank at 2.5 percentage points above the policy rate. 1.3- Banks interested in this operation must submit their request by fax, following the template in Annex IV of this instruction, to the Central Bank before the daily closing of the interbank market. 1.4- The Central Bank notifies its decision by fax on the same day and proceeds with booking entries. At maturity, the amounts, plus interest, are debited to the beneficiary's account. 1.5- In case a bank utilizes this repo for 30 consecutive days while the banking system as a whole does not suffer from a liquidity shortage, the Central Bank may prohibit that institution from accessing this type of repo.

2- Special Repos on Securities
In cases where a bank fails to obtain the liquidity it needs from its peers or through the refinancing channels described above, the Central Bank may grant it a special repo with a duration of 24 hours and a rate set at 2 percentage points above the rate for 2-to-10-day repos.

II- LIQUIDITY ABSORPTION BY THE CENTRAL BANK
The Central Bank's actions in the money market aimed at absorbing liquidity are carried out either via negative calls for tenders or outright sales of Treasury Bills or other negotiable debt securities. These operations are solely at the initiative of the Central Bank.

1- Negative Calls for Tenders:
1.1. Upon launching a negative call for tenders, the Central Bank disseminates the following information:

• the settlement date and maturity date of the operation;
• liquidity absorption and refinancing maturities that must occur during the period covered by the call for tenders;
• the deadline date and time for receipt of bids.

1.2. Negative calls for tenders are executed based on the central bank money surpluses estimated by the Central Bank for the covered period. Offers of central bank money are submitted by banks at various rates they propose.
After collating responses, the Central Bank accepts offers at the expressed rates, prioritizing those submitted at the lowest rate. Offers are accepted up to the amount of central bank money to be absorbed. The marginal tranche is, consequently, fulfilled at a percentage defined by the Central Bank.

1.3. Upon announcing results, the Central Bank communicates via telex/fax to each bank:

• the total amount of offers received;
• the range of proposed rates;
• the number of bidders;
• the total amount of liquidity absorption;
• the amount of liquidity absorption fulfilled to the bank;
• the percentage of offers fulfilled for the marginal tranche;
• the weighted average rate of fulfilled offers.

2- Outright Sales of Securities to Banks
The Central Bank may proceed with the sale of securities from its portfolio in the secondary market.
Based on central bank money surpluses estimated by its departments, the Central Bank communicates to banks the day before the operation (T-1):

• the nature of the operation (sale of securities);
• the settlement date and terms of the operation;
• the exhaustive list of securities offered for sale, with their characteristics (nature, reference, nominal amount, acquisition rate by the Central Bank).
  The adjudication techniques provided for negative calls for tenders are valid for this action of the Central Bank.

III- COMMON PROVISIONS
III-1. For Calls for Tenders
Operations via calls for tenders proceed as follows:

• The Central Bank announces by fax to banks the launch of a call for tenders.
• Banks' responses must reach it by fax the following day before 11:00 a.m., following the templates in Annexes I and III of this instruction.
• At maturity, each bank's respective account is debited or credited by the Central Bank with the amount plus interest, as applicable.
• The Central Bank reserves the right to reject offers it deems unacceptable in terms of conditions (amount, rate, ...).

III-2. For Outright Purchases or Sales of Securities Banks interested in these operations must submit their response by fax to the Central Bank (Credit Department), following the template in Annex II of this instruction, no later than 10:00 a.m. on the settlement day.

III-3. For Calls for Tenders, Purchases, and Sales of Securities

• The Central Bank communicates results by fax on the same day or at the latest the following morning. The respective accounts of banks whose proposals are accepted are, as applicable, credited or debited by the Central Bank on the settlement day.
  This instruction takes effect as of June 13, 2005.
  The GOVERNOR,

Gaston RAVELOJAONA

A N N E X E - I
SUBMISSIONS FOR POSITIVE CALL FOR TENDERS

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Launch of the ___________________
N°
OF ORDER
PLEDGED SUBMISSION
Amount
(in Ar)
Rate
Proposed
(with two decimals)
Nature and
Reference
Acquisition Rate Maturity
Nominal Amount
(in Ar)
TOTAL... minimum pledge amount: Ar _____________________________, At ______________________, on ________________ (Signatures and bank seal)

Nom de la banque : [Bank Name:]
A N N E X E - II
SUBMISSIONS FOR POSITIVE CALL FOR TENDERS
SALE or PURCHASE OF SECURITIES BY THE CENTRAL BANK (1) ___________________ Launch of the ___________________ N° OF ORDER SECURITIES RATE PROPOSED Nature and PROPOSES reference Acquisition Rate Maturity Nominal Amount (in Ar)
TOTAL ....................................................
At ______________________, on ________________ (Signatures and bank seal) (1) Strike out whichever is not applicable.

Nom de la banque : [Bank Name:]
A N N E X E - III
SUBMISSIONS FOR NEGATIVE CALL FOR TENDERS

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Launch of the ___________________
N°
OF ORDER Amount (in Ar) Rate Proposed (with two decimals) TOTAL ...
At ______________________, on ________________ (Signatures and bank seal)

Nom de la banque : [Bank Name:]
A N N E X E - IV
REQUEST FOR REPO
2 - 10 Days / Special (1)

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Launch of the ___________________
Repo Request
WE BORROW
Amount (in Ar) Duration
(in days)
Date of Rate in figures in words settlement maturity COLLATERAL:
minimum collateral amount: Ar _____________________,- Nature Reference Rate of acquisition Maturity Nominal Amount in words in figures At ______________________, on ________________ (Signatures and bank seal) (1) Strike out whichever is not applicable.