The Bank of Korea has decided to regularize its repurchase agreement (RP) buying, which had been conducted unorthodoxly until now, and to add special bank bonds as target securities. This is part of a reform of the open market operation system, taking into account the trend of decreasing liquidity absorption.
On the 26th, the Monetary Policy Committee of the Bank of Korea approved a reform plan for the open market operation system with this content the previous day (25th). Accordingly, apart from the current regular RP sales (every Thursday with a 7-day maturity), regular RP buying will be conducted on Tuesdays with a 14-day maturity. The implementation date is scheduled for next month on the 10th.
However, the RP buying in the week including the monetary policy direction (MPD) decision meeting and the week prior will adjust bidding dates and maturities to coincide with the MPD dates, similar to current RP sales. RP buying in the week before the MPD is conducted in line with the following week's meeting date, and for the week in which the MPD is held, the RP buying maturity will be adjusted to the regular bidding date in the week after next and conducted on the day of the MPD.
In the case of regular RP sales, the method will remain the same as currently with a fixed bidding rate at the benchmark rate, while for regular RP buying, a multi-rate system will be applied with the minimum bidding rate set above the benchmark rate. In addition, the regular bidding date for the currency stability account will be changed from Tuesday to Thursday, structuring liquidity supply (RP buying) on Tuesday and liquidity absorption (currency stability account deposits and RP sales) on Thursday.
The Bank of Korea's shift to a system that concurrently absorbs and supplies liquidity through the RP transaction system is due to the decreasing need for liquidity absorption in the short-term money market following a reduction in the current account surplus. As the current account surplus diminishes, the inflow of foreign currency into the domestic market decreases, leading to reduced liquidity.
A Bank of Korea official noted, "The potential for a decrease in the current account surplus has increased since the mid-2010s, and with the rise in overseas securities investment by residents, liquidity supply through the overseas sector is on a downward trend." They added, "Conversely, as the economy scales up, the demand for liquidity is expanding, alongside uncertainty in liquidity demand due to the emergence of new payment methods and advancements in financial digitalization."
The Bank of Korea stated that the likelihood of excessive liquidity supply due to regular RP buying is low. Kim Dae-hee, the head of the Bank of Korea's open market department, said, "The purpose of open market operations is to ensure that short-term market interest rates do not deviate significantly from the benchmark rate," adding, "If the Bank of Korea excessively supplies liquidity beyond market demand, it conflicts with the purpose of open market operations."
The securities for RP trading will also be expanded. The Bank of Korea has decided to include three special bank bonds—industrial finance bonds, small and medium enterprise finance bonds, and export-import finance bonds—to secure a stable foundation for RP buying. The current target securities include government bonds, government-guaranteed bonds, currency stabilization securities, and Korea Housing Finance Corporation (HF) mortgage-backed securities.
However, until the end of August this year, the Korea Housing Finance Corporation (HF) issued mortgage-backed securities (MBS) included in the Bank of Korea's securities trading (RP, simple trading) will be excluded from simple trading target securities according to the sunset schedule. However, it will be included continuously as RP trading target securities.
Regarding the reform of the open market operation system, the Bank of Korea added, "We will expand the foundation for more flexible liquidity control to facilitate smooth capital circulation and mitigate volatility in short-term market interest rates," saying, "This will also help create a basis for immediate market stabilization measures during emergencies."