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Instruments

Open market operations

Open market operations enable the Eurosystem to steer short-term interest rates, manage liquidity in the market and signal the monetary policy stance. 

Open market operations are initiated by the European Central Bank (ECB), and are executed in a decentralised manner by national central banks. The ECB also decides on the instrument to be used and on the terms and conditions for its execution.

With regard to their aims, regularity and procedures, the Eurosystem’s open market operations can be divided into four categories, as follows:

 

Main refinancing operations

Purpose: to provide the bulk of refinancing to the financial sector  

Frequency: weekly

Maturity: one week 

Type: liquidity-providing

Instrument: reverse transactions 

Procedure: tenders executed by national central banks

 

Longer-term refinancing operations

Purpose: to provide counterparties with additional longer-term refinancing

Frequency: monthly 

Maturity: three months 

Type: liquidity-providing

Instrument: reverse transactions

Procedure: tenders executed by national central banks 

 

Fine-tuning operations

Purpose: to manage the liquidity situation in the market and to steer interest rates, in particular in order to smooth the effects caused by unexpected fluctuations

Frequency: non-standardised 

Maturity: non-standardised

Type: liquidity-absorbing or liquidity-providing

Instruments: reverse transactions, foreign exchange swaps or the collection of fixed-term deposits 

Procedure: tenders executed by national central banks or bilateral procedures. Under exceptional circumstances, fine-tuning bilateral operations may be executed by the ECB

 

Structural operations

Purpose: to adjust the structural position of the Eurosystem vis-à-vis the financial sector  

Frequency: non-standardised

Maturity: non-standardised

Type: liquidity-absorbing or liquidity-providing

Instruments: reverse transactions, issuance of ECB debt certificates or outright transactions

Procedure: tenders executed by national central banks

Standing facilities

Standard facilities provide and absorb overnight liquidity, signal the general stance of monetary policy and bound overnight market interest rates.

Standard facilities are managed in a decentralised manner by national central banks.

Two standing facilities are available to eligible counterparties on their own initiative, subject to their fulfilment of certain operational access conditions:

 

Marginal lending facility 

Purpose: to fulfil temporary liquidity needs 

Frequency: daily (on the counterparties’ own initiative)

Maturity: overnight

Type: liquidity-providing

Instrument: reverse transactions

Limit: no limit (apart from the requirement of mobilising sufficient collateral)

 

Deposit facility

Purpose: to absorb temporary excess liquidity 

Frequency: daily (on the counterparties’ own initiative)

Maturity: overnight

Type: liquidity-absorbing

Instrument: collection of deposits

Limit: no limit

 

Minimum reserves

The minimum reserve system of the European Central Bank (ECB) primarily pursues the aims of stabilising money market interest rates and creating or enlarging a structural liquidity shortage.

The minimum reserve system applies to credit institutions and branches established in the euro area, except those benefitting from the exemption granted by the ECB. 

The amount of minimum reserves to be held by each institution is determined by applying the reserve coefficients to the reserve base, which is the sum of a sub-set of liability items on its balance sheet.

Liabilities with a maturity up to and including two years are subject to a coefficient of 1% and the other liabilities to a coefficient of 0%.

Balance sheet data reported by institutions subject to reporting requirements (usually on a monthly basis) are used to determine the reserve base for the maintenance period starting two calendar months later.

The amount of minimum reserves to be held by each institution is considered final on the business day preceding the start of each maintenance period.

The reserve maintenance periods are published in advance by the ECB, usually for the two following years. Each maintenance period begins on the settlement day of the first main refinancing operation following the meeting of the Governing Council at which the monetary policy stance is assessed.

In order to pursue the aim of stabilising interest rates, the minimum reserve system enables institutions to make use of an averaging provision, i.e. compliance with the reserve requirements is checked through a comparison between the institutions’ average daily current account balances with the respective central bank over one maintenance period and the required reserves for the institution.

Holdings of required reserves are remunerated at the weighted average of the marginal rate of the Eurosystem’s main refinancing operations.

Reserve holdings exceeding the required minimum reserves shall be remunerated at 0% or at the deposit facility rate, whichever is lower. 

Whenever there are cases of non-compliance with the reserve requirements, a financial penalty shall be applied, using a penalty rate over the amount of the observed deficiency.