Published: 24.04.2019 Updated: 24.01.2023

Money market operations play an important role in the Eurosystem's monetary policy. They are used to steer the money market interest rates, manage free liquidity as well as to signal the ECB's monetary policy stance. Open market operations are usually executed by the national central banks and initiated by the ECB.

The Eurosystem can conduct four types of market operations providing euro liquidity to counterparties in exchange for eligible and clearly defined collateral securities:

  • main refinancing operations;
  • longer-term refinancing operations;
  • fine-tuning operations;
  • structural operations.

Monetary operations of the Eurosystem are usually decentralised. That means that the Board of the ECB takes decisions concerning monetary policy operations, whereas the central banks of the Eurosystem implement those decisions in practice.

Main refinancing operations are weekly liquidity-providing operations executed through fixed and variable rate tenders. Usually, the maturity of those operations is one week. At fixed rate tenders, the interest rate on the central bank money is specified in advance in accordance with the monetary policy stance. Variable rate tenders are organised based on a minimum bid rate serving as the lowest limit for the price of the central bank money. 

Longer-term refinancing operations are liquidity-providing operations conducted on a monthly basis. Usually, their maturity is 3 months and banks have the opportunity to satisfy their longer-term liquidity needs.

The Eurosystem may also conduct non-standard longer-term refinancing operations with a maturity over 3 months. These operations are aimed at providing market participants with long-term resources, but there may be also other monetary policy related goals. On 7 March 2019, the Governing Council of the ECB decided to launch new targeted longer-term refinancing operations (TLTRO-III) with a maturity of two years from September 2019 onwards on a quarterly basis until March 2021. These operations will boost lending as, under TLTRO-III, banks are entitled to borrow up to 30% of their loan portfolios.

Fine-tuning operations are conducted in specific cases to manage the liquidity situation in the market and to steer interest rates, in particular in order to smooth the effects on interest rates caused by unexpected liquidity fluctuations in the market. In addition to providing additional liquidity, fine-tuning operations can be also used to attract term deposits from credit institutions. Most fine-tuning operations are conducted on the last days of reserve maintenance periods. Fine-tuning operations are normally executed by the national central banks through quick tenders or bilateral procedures. The Governing Council of the ECB can decide, under exceptional circumstances, to have bilateral fine-tuning operations executed by the ECB.

Longer-term structural operations can be conducted when it is necessary to adjust the structural liquidity position of the Eurosystem vis-á-vis the financial sector. Issuance of debt instruments or sales and purchase of securities can be used for this purpose.

Overview of the types of open market operations used by the Eurosystem

 

Open market operations

Types of transactions

Maturity

Frequency

Procedure

 

Liquidity-providing

Liquidity-absorbing

 
 
Main refinancing operations Reverse transactions One week Weekly Standard tenders  
Longer-term refinancing operations Reverse transactions Three months Monthly Standard tenders  
Fine-tuning operations Reverse transactions Reverse transactions Non- Non-regular Quick tenders  
standardised  
Foreign exchange swaps Collection of fixed-term deposits     Bilateral Procedures  
  Foreign exchange swaps        
Structural operations Reverse transactions Issuance of debt certificates Standardised/ non-standardised Regular and non-regular Standard tenders  
Outright purchases Outright sales Non-regular Bilateral Procedures  

Standing facilities are aimed at steering the overnight money market rates and signalling the general stance of monetary policy. Two standing facilities are available to counterparties at their own initiative: the marginal lending facility (a euro loan from the respective national central bank in exchange for eligible collateral securities) or the deposit facility (an overnight euro deposit with the respective national central bank).

The standing facilities enable the counterparties to smooth the daily liquidity fluctuations. Considering the movements of the balance sheet items that are not directly affected by the monetary policy, it is impossible to provide an accurate amount of money through open market operations which would satisfy the overall minimum reserve requirements. Moreover, every working day the demand for central bank money depends on the ability of money market participants to distribute the liquidity among themselves.

The interest rate on the marginal lending facility usually provides a ceiling for the overnight market interest rate. Counterparties can use the deposit facility to make overnight deposits with national central banks. Under normal circumstances, the interest rate on the deposit facility provides a floor for the overnight market interest rate. Thus the interest rates on the standing facilities usually form a corridor for the interbank overnight rate, limiting the fluctuations.

Table 2. Overview of the types of standing facilities used by the Eurosystem

Standing facilities Types of transactions Maturity Frequency Procedure  
Liquidity-providing Liquidity-absorbing  
 
Marginal lending facility Reverse transactions Overnight Access at the discretion of counterparties  
Deposit facility Deposits Overnight Access at the discretion of counterparties  

Reserve ratio is used to stabilise short-term money market interest rates and create (or change) a structural liquidity shortage, thereby also influencing the credit institutions' demand for the central bank money.

The Eurosystem's minimum reserve system primarily pursues monetary functions: stabilisation of the money market interest rates and enlarging a structural liquidity shortage. According to the ECB regulation, all credit institutions are required to hold a certain amount of minimum reserves with their national central banks. The credit institutions' holdings of required reserves are remunerated at the rate of the Eurosystem's main refinancing operations.

Euro area credit institutions are required to hold liquidity in the amount of 1% of their collected non-bank deposits with their national central banks. Normally, credit institutions also hold a small amount of excess reserves with their central banks, which may grow significantly in periods of financial market tensions.

Minimum reserves are one of the instruments of ECB operational framework for monetary policy, which is designed primarily to stabilize money market interest rates and to create or enlarge structural liquidity shortage.

ECB requires all credit institutions and credit unions established in the euro area to hold compulsory minimum reserves on accounts with the National Central banks (NCBs).

The reserve requirement of each individual institution is calculated by applying the corresponding ECB reserve ratio to the amount of deposits and other liabilities, included in the reserve base.

Credit institution or credit union fulfils reserve requirements if the average end-of-day balance on its reserve account with the NCB is not less than reserve requirement for the given reserve maintenance period.

The remuneration of the minimum reserve holdings is calculated, using the Eurosystem marginal rate of the main refinancing operations for the given period.

In case of non-compliance, NCB imposes penalty, which is calculated using the marginal lending facility rate of the Eurosystem and the daily average amount of the non-compliance.

Related links

The asset purchase programme (APP) was launched in March 2015, and the period of net asset purchases ended in December 2018. The APP comprised the third covered bond purchase programme, the asset-backed securities purchase programme, the public sector purchase programme and the corporate sector purchase programme. All countries participated in the expanded asset purchase programme, albeit not in all sub-programmes. The public sector purchase programme was the largest programme (and the only one) in which Latvia participated. Security purchases under this programme were allocated across countries based on the ECB's capital key.

New net purchases have been discontinued as of 2019, but principal payments from maturing securities are reinvested by the national central banks holding the particular securities. The coupon or interest payments are not reinvested. The Eurosystem members will try to distribute reinvestment amounts for the PSPP across the months, so that to enable regular and balanced market presence.

Lending of Latvijas Banka holdings purchased under the PSPP and PEPP

The securities purchased under the Public Sector Purchase Programme (PSPP) and Pandemic emergency purchase programme (PEPP) should be made available for lending in a decentralised manner. The aim of securities lending is to support bond and repo market liquidity without disrupting normal repo market activity.

Latvijas Banka makes its holdings in the PSPP and PEPP available for securities lending by participating in the strategic lending facility (ASLplus) and Automated Securities Lending (ASL) programme of Clearstream Banking Luxembourg (CBL) for purposes of mitigating settlement fails.

Currently Latvijas Banka makes the following bonds, which were bought under the PSPP and PEPP, available for securities lending via the ASLplus and ASL programme of CBL:

ISIN Issuer name Maturity date Coupon rate

EU000A1G0BN7

European Financial Stability Facility

19.02.2024

2.125

XS1515245089

European Investment Bank

15.03.2024

0

XS0290050524

European Investment Bank

15.04.2024

4.125

XS1063399536

Central government: Latvia

30.04.2024

2.875

EU000A1G0BQ0

European Financial Stability Facility

27.06.2024

1.75

XS1881014374

European Investment Bank

15.07.2024

0.2

XS1247736793

European Investment Bank

13.09.2024

0.875

XS1575991358

European Investment Bank

14.10.2024

0.25

XS1207449684

European Investment Bank

15.04.2025

0.125

EU000A1G0DE2

European Financial Stability Facility

28.04.2025

0.2

EU000A3K4DJ5

European Union

04.07.2025

0.8

XS1850111789

European Investment Bank

16.07.2025

0.375

XS0807336077

European Investment Bank

15.09.2025

2.75

XS1295778275

Central government: Latvia

23.09.2025

1.375

XS0427291751

European Investment Bank

15.10.2025

4.5

EU000A284451

European Union

04.11.2025

0

XS1509006208

European Investment Bank

13.03.2026

0

XS1394055872

European Investment Bank

14.04.2026

0.375

XS1501554874

Central government: Latvia

07.10.2026

0.375

XS1978552237

European Investment Bank

15.10.2026

0.1

EU000A3K4DA4

European Union

26.10.2026

0.25

DE0001345908

European Investment Bank

05.11.2026

0

XS1107718279

European Investment Bank

13.11.2026

1.25

XS1555331617

European Investment Bank

15.01.2027

0.5

XS0755873253

European Investment Bank

15.04.2027

3.5

XS2168048564

European Investment Bank

17.06.2027

0

XS2446841657

European Investment Bank

15.09.2027

0.375

XS2419364653

European Investment Bank

15.11.2027

0

XS1791485011

European Investment Bank

14.01.2028

0.875

XS0093667334

European Investment Bank

15.02.2028

5.625

XS1829276275

Central government: Latvia

30.05.2028

1.125

EU000A287074

European Union

02.06.2028

0

EU000A3KWCF4

European Union

04.10.2028

0

XS1938387237

European Investment Bank

22.01.2029

0.625

XS2361416915

Central government: Latvia

24.01.2029

0

EU000A3KRJQ6

European Union

04.07.2029

0

XS2439543047

European Investment Bank

15.11.2029

0.05

EU000A1G0BL1

European Financial Stability Facility

03.12.2029

2.75

XS2420426038

Central government: Latvia

23.01.2030

0.25

XS0505157965

European Investment Bank

15.04.2030

4

XS2225428809

European Investment Bank

09.09.2030

0

XS0960306578

European Investment Bank

13.09.2030

2.75

EU000A283859

European Union

04.10.2030

0

XS2283340060

European Investment Bank

14.01.2031

0

XS1183208328

European Investment Bank

14.03.2031

1

XS2317123052

Central government: Latvia

17.03.2031

0

EU000A3KSXE1

European Union

04.07.2031

0

XS2433363509

European Investment Bank

20.01.2032

0.25

EU000A1G0AJ7

European Financial Stability Facility

30.03.2032

3.875

EU000A1G1Q17

European Union

04.04.2032

3.375

XS1422953932

European Investment Bank

14.04.2032

1

EU000A3K4DD8

European Union

06.07.2032

1

XS1612977717

European Investment Bank

13.04.2033

1.125

XS0975634204

European Investment Bank

14.10.2033

3

EU000A1G0BJ5

European Financial Stability Facility

04.09.2034

3

XS2055781962

European Investment Bank

13.10.2034

0.05

XS0878008225

European Investment Bank

15.03.2035

2.625

XS2194790262

European Investment Bank

15.11.2035

0.01

EU000A3KP2Z3

European Union

22.04.2036

0.25

XS1409726731

Central government: Latvia

16.05.2036

1.375

EU000A3KM903

European Union

04.06.2036

0.2

XS1361554584

European Investment Bank

15.09.2036

1.125

EU000A3K4C42

European Union

04.02.2037

0.4

EU000A1G0AT6

European Financial Stability Facility

03.04.2037

3.375

XS0219724878

European Investment Bank

15.10.2037

4

XS1500338618

European Investment Bank

13.11.2037

0.5

XS0884635524

European Investment Bank

15.03.2040

2.75

XS2189259018

European Investment Bank

15.06.2040

0.25

EU000A283867

European Union

04.10.2040

0.1

EU000A3KT6B1

European Union

04.07.2041

0.45

XS0752034206

European Investment Bank

14.03.2042

3.625

XS1980857319

European Investment Bank

14.11.2042

1

EU000A3K4DG1

European Union

04.02.2043

1.25

EU000A1G0DB8

European Financial Stability Facility

29.07.2044

2.35

EU000A1G0DD4

European Financial Stability Facility

17.02.2045

1.2

XS1107247725

European Investment Bank

15.09.2045

1.75

EU000A3KNYG5

European Union

02.05.2046

0.45

XS1566190945

Central government: Latvia

15.02.2047

2.25

XS1505567088

European Investment Bank

13.09.2047

0.875

XS1641457277

European Investment Bank

15.11.2047

1.5

XS1753042743

European Investment Bank

16.10.2048

1.5

XS1953056253

Central government: Latvia

19.02.2049

1.875

EU000A284469

European Union

04.11.2050

0.3

XS2290963466

European Investment Bank

27.01.2051

0.05

EU000A3KTGW6

European Union

06.07.2051

0.7