Mon | Nov 19, 2018

BOJ cancels repo auction for unusual reason

Published:Friday | November 2, 2018 | 12:00 AM
Bank of Jamaica Senior Deputy Governor John Robinson.

The central bank took the unusual step on Monday to cancel a repo auction for which it got three bids for the $500 million on offer.

It's not the first time that the weekly auction has been stayed, but the other times were different - there were no bids for the Bank of Jamaica to gavel.

For the October 29 auction, the central bank told the Financial Gleaner that it was faced with an unusual event in which the bidders advised the BOJ that they had made a mistake on the applications.

They "called and said what they put down was a mistake; and it was really outside of the norm in terms of what they were asking," said Senior Deputy Governor John Robinson, who declined to say what the bidders had offered, but sought to explain what was particularly worrisome.

"It's like the normal bid for something would be three per cent, but they put on a number which was really unrealistic. It was really outside of anything that's going on in the market," he said.

Robinson later clarified that all three repurchase bids came from a single financial institution.

Under the repo auctions conducted on Mondays, bids are submitted by email to an inbox set up by BOJ for the purpose, and applicants are given several phones lines to contact to verify receipt of their bids. For this week, that call was to report that errors were made.

"It was a mistake. The three per cent would be for borrowing for two weeks. They explained that what they had put down was a mistake and we recognised that it must have been a mistake, so we cancelled those bids," Robinson said.

The action taken was mutually agreed with the bidder, he said.

Since the summer of 2015, the BOJ has been conducting weekly repo auctions to provide liquidity to deposit-taking institutions on 14-day lending cycles. Through the auctions, the institutions make an offer on the interest rates they are prepared to pay on the funds borrowed from the BOJ.

Each bidder is allowed to submit up to three bids in each auction, backed by collateral, but the central bank reserves the right to reject any bid without explanation - a warning encapsulated in Item 12 on the term sheet issued to eligible applicants.

BOJ also determines a minimum interest rate for eligibility in the auction and says bids submitted below that would be deemed ineligible for participation. Bids submitted for the January 22 auction this year were rejected on that basis, according to a release on the BOJ website.

In the last auction held October 22, three bids were submitted, ranging between 3.25 per cent and 3.27 per cent, for the $5 billion on offer. The offer was fully subscribed at an average rate of 3.26 per cent.

Robinson insists that the cancellation of this week's auction would not have affected the financial houses, saying they have other borrowing windows to deal with liquidity.

"We had put up $500 million for auction. Normally, nobody takes it up because the overnight market is quite liquid, so it doesn't leave them without options. As you know, the market is very liquid, so even though we continue to offer [repos], there are very few takers and very rarely do you have bids," he said.

"So this wouldn't be a blip in the market. We still have a standing facility, so anybody who runs short can get money at five per cent overnight; so it's not a disruption," said the central banker.

The next auction is scheduled for Monday, November 5.

mcpherse.thompson@gleanerjm.com