The Bank of Ghana today launched a set of guidelines that it is intended to facilitate the short-term trading of government securities between dealers as well as investors.
Governor of the central bank, Dr. Ernest Addison speaking at the launch of the Global Master Repurchase (repo) Agreement (GMRA)-based Guidelines for repo trading on the Ghanaian market and the Ghana Fixed Income Market (GFIM) said this will help deepen Ghana’s capital market.
Typically, a repurchase agreement (repo) is a form of short-term borrowing for dealers in government securities. In the case of repo, a dealer sells government securities to investors, usually on an overnight basis, and buys them back the following day at a slightly higher price.
Dr. Addison explained that the introduction of the guidelines will deepen the financial markets in Ghana through the promotion of a more vibrant and liquid secondary bonds market.
A key feature of adopting the GMRA, the Governor explained, is the transfer of title to collateral securities from the seller to the buyer.
“The title transfer under GMRA will reduce credit and liquidity risk as it allows the buyer to make use of the collateral during the tenor of the transaction but return the same or equivalent securities at maturity. This will boost secondary trading and price discovery of bonds and offer a cheaper and increased source of short-term funding.
The guidelines also specify a wider array of eligible collateral securities and would promote a more liquid repo market. The eligible participants have also been expanded to cover not only banks but SDIs, securities dealers, corporates and high net worth individuals,” the governor explained.
As of August 2019, data from the central bank showed that the stock of repos and reverse repos outstanding between the Bank of Ghana and the commercial banks in Ghana was equivalent to US$350 million.
And the governor stated that when properly structured, repos will serve as effective vehicles for the monetary policy transmission process and as well as a vehicle through which the central bank can act more swiftly as a lender of last resort during periods of market stress.
“It is our conviction that these guidelines will provide a clear legal framework and an enhanced credit risk management for participants in this market and translate to a deeper and more liquid primary and secondary local currency bond markets,” the governor added.