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National Bank of Ukraine Upgrades Interbank FX Market Interventions

National Bank of Ukraine Upgrades Interbank FX Market Interventions

In order to improve competitiveness and transparency of hryvnia exchange rate mechanism, the National Bank of Ukraine (NBU) is to amend the approach to prioritizing FX interventions. Thus, the NBU Board revised the Foreign Exchange Intervention Strategy of the National Bank of Ukraine for 2016-2020 (hereinafter referred to as the "Strategy") detailing the NBU interbank FX market policy starting from September 2016.

The Strategy assigns the NBU to conduct FX interventions in four forms i.e. FX Auction, Single Rate Intervention, Request for Quotations and Targeted Intervention.

Until recently FX Auction interventions werea priority. However, since the approval of the Strategy, other forms of FX interventions have also proven to be effective, for example for small scale prompt interventions. Hence, the NBU Board deems feasible to cease prioritizing specific forms of interventions. Instead, feasibility of each form of intervention will be determined according to conditions on the interbank FX market.

Moreover, considering the need to minimize impact of the central bank on the exchange rate trend during FX interventions to accumulate reserves, the NBU will continue to favor forms of interventions according to which the NBU will not offer but rather accept the price offered by other FX market traders. Such FX interventions, where the NBU plays the role of a price-taker, include FX Action and Request for Quotations.

The NBU also intends to conduct FX interventions on Matching, a new platform for concluding contracts in trading information systems (Bloomberg, Thomson Reuters etc.).

The new solution provides options both for the NBU and for other market traders to enter into FX contracts instantaneously by either choosing the best anonymous quotations in the platform at a certain point or posting in the platform individual quotations that are later accepted by the counterparties.

Respectively, the NBU aims to use the Matching platform for two forms of interventions:

  • Request for Quotations (in this case the NBU is the price-taker choosing the best from prices anonymously offered by the market traders),
  • Single Rate Interventions (in this case the NBU is the price-maker anonymously offering the price on the market).

The main advantage of FX interventions through the Matching platform is anonymity. Quotations of all platform traders, as well as the NBU, are anonymous and FX contract counterparties receive information about the other counterparty only after executing the contract.

On the one hand this means that market traders are not notified in advance on FX interventions and cannot determine the NBU among other platform traders. Hence, the impact of the NBU interventions on the interest rate mechanism in the interbank FX market is being offset.

On the other hand, the new platform minimizes the risk of bias concerning the NBU interventions since in Matching the NBU selects not a counterparty, but a quotation in compliance with the intervention criteria.

The second benefit of the new platform is an unlimited number of traders. Until now the technical features of other platforms for Request for Quotations enabled the participation of only 20 banks that had the best general rating among interbank market traders in the preceding quarter. Instead, in case of interventions by Request for Quotations in Matching all banks using the platform can participate. As a result, all banks and not just a limited number of the biggest traders in the interbank market affect the exchange rate mechanism.

The third benefit of the new platform is expediency. The platform provides prompt contracts at the best exchange rate.

Thus, FX interventions in the Matching platform will ensure competitiveness, transparency and accuracy of the hryvnia exchange rate mechanism in the interbank FX market.

Along with the Matching platform the NBU intends to continue FX interventions in previously used systems where necessary. In order to provide for the use of different systems for different interventions the Procedure and Conditions of Foreign Exchange Trade (hereinafter referred to as the "Procedure") was amended.

Among other things, the Procedure provides that Request for Quotations has two variants. First variant - the way Request for Quotations was conducted previously – by requesting ask/bid prices for foreign currency in trading information systems and executing contracts with the trader offering the best price. Second variant is by selecting the best ask/bid price for foreign currency quoted by market traders in the current trading information systems and executing contracts with traders offering the best price (i.e. using the Matching platform).

Similarly, now Single Rate Intervention can be conducted not only by gathering FX ask/bid orders by market traders at the set single exchange rate followed by proportional approval of requests within the total amount of the FX intervention as conducted previously. The Procedure also details a new variant of Single Rate Intervention by quoting an FX ask/bid in the trading information system at the single exchange rate and executing contracts with traders according to first-in-first-out acceptance of the bid until the FX intervention amount runs out (i.e. using the Matching platform).

Different forms and platforms for conducting FX interventions will expand options for the NBU, on the one hand, to raise international reserves with minimum impact on the exchange rate, and on the other hand, to provide equilibrium the interbank FX market as necessary.

Respective amendments were approved by NBU Resolution No. 32 On Amendments to Some Regulatory Documents of the National Bank of Ukraine dated 29 March 2018 and NBU Board Decision No. 184-D On the Procedure of Setting Limits for the Open Foreign Currency Position for 2016-2020 dated 29 March 2018. Both instruments enter into effect on 2 April 2018.

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