The Bundesbank is planning changes inthe system by which banks bid for funds in securities
repurchase pacts to improve the flexibility of its key open
market instrument, central bank officials said.
    Banking economists said the changes will shorten the tender
process to two days from three currently, enabling the
Bundesbank to offer repurchase pacts of shorter maturity if it
chooses, to steer money market liquidity more flexibly.
    The changes will probably come into force in April.
    Under the current system, banks must themselves specify at
the tender which securities they will sell to the Bundesbank
for subsequent repurchase, a time consuming business.
    Banks hold securities for this purpose in safe custody
accounts in the Landeszentralbank (LZB) regional central banks,
which are the local offices of the Bundesbank at state level.
    Some 50 billion marks of securities are held in such
accounts at the Hesse LZB, which covers the Frankfurt area.
    The change to come into force next month will allow the
Bundesbank access to these accounts to select the bonds itself,
in a process legally comparable to direct debiting.
    At present the Bundesbank generally announces a tender on
Monday, holds the tender late on Tuesday morning, announces the
result early Tuesday afternoon and allocates funds Wednesday.
    The Bundesbank generally sets repurchase pacts running 28
days. But sometimes public holidays result in longer pacts or
longer tender periods being necessary.
    For instance the Bundesbank announced a tender last Friday
to be held today (Wednesday) for crediting funds tomorrow
(Thursday). The advance announcement took into account the
carnival holiday in Duesseldorf on Monday and in Frankfurt
yesterday (Tuesday).
    Central bank officials and money market dealers said the
shortening of the tender process should be seen as purely
technical, with no direct implications for interest rates.
    "It is not a credit policy matter but a technical matter,"
said an official at the Hesse LZB.
    Bundesbank President Karl Otto Poehl said last December
that security repurchase pacts had proved a much greater
success since their introduction in their present form two
years ago, and praised their flexibility.
    The tender process changes will make the repurchase pact
instrument even more flexible, banking economists said.
    By speeding up the tender process, they will make it
possible for the Bundesbank to offer repurchase pacts for
periods of less than a month, something long sought by banks,
to respond to changing money market conditions.
    "With the help of this instrument liquidity steering will be
refined, but there won't be any effect on interest rates," said
Berliner Handels- und Frankfurter Bank economist Hermann
Remsperger.
    The Bundesbank would be able to react more quickly to money
market developments, but by steering liquidity, not interest
rates, he said.
 REUTER
