Opinion of the European Monetary Institute on a consultation from the Banque de France under Article 109f (6) of the Treaty establishing the European Community and Article 5.3 of the Statute of the EMI; the consultation concerns a draft Decision of the Monetary Policy Council of the Banque de France amending the present Regulation of Money Market Interventions (“the Draft”) (CON/95/13)
Date: 1995-10-12
Institutions: European Monetary Institute
Subjects: France, bond, financial intervention, guarantee, monetary policy, money-market liquidity, national law

OPINION OF THE EUROPEAN MONETARY INSTITUTE

on  a  consultation  from  the  Banque  de  France  under  Article  109f  (6)  of  the  Treaty  establishing  the

European  Community  and  Article  5.3  of  the  Statute  of  the  EMI;  the  consultation  concerns  a  draft

Decision of the Monetary Policy Council of the Banque de France amending the present Regulation of

Money Market Interventions (“the Draft”).

CON/95/13

1

The  present  consultation  was  initiated  on  15th  August  1995  by  the  Banque  de  France,  under

Article 1.1, second indent, of Council Decision 93/717/EC of 22nd November 1993.

2

The  Draft  is  purported  to  amend  the  present  regulation  of  money  market  interventions  of  the

Banque de France, namely the regulation dated 19.7.1973 as amended in 1985, 1987, 1989 and

1993. The principal objectives of the Draft are (i) to confirm the exclusive responsibility of the

Monetary  Policy  Council  (MPC)  in  deciding  interest  rates  in  repurchase  operations  (“repos”),

short-term  secured  loans,  and  auctions  for  loans  and  repos;  (ii)  implementation  of  Law  dated

4.8.1993  authorizing  the  Banque  de  France  to  issue  interest-bearing  bonds;  (iii)  adaptation  of

money market regulations to Law dated 31.12.1993 defining the legal status of repo transactions;

(iv)  to  increase  the  maturity  term  of  loans  eligible  as  collateral;  and  (v)  suppression  of  7-years

time-limit  for  maturities  of  bonds  eligible  as  colletaral.  Other  amendments  relate  to  the

clarification  of  former  regulations  and  to  the  consistency  of  such  regulations  with  respect  to

recent legislative developments.

3

From a legal perspective, the EMI welcomes the clarification of some of the instruments used by

the  Banque  de  France  in  its  money  market  interventions.  The  Draft  explicitly  admits  reverse

repos, and clearly distinguishes between repos, collateralised loans, and discounts. The Draft is

fully consistent with the provisions of the ESCB Statute and in line with present EMI preparatory

work concerning the use of open-market operations and standing facilities by the ESCB in Stage

Three of EMU.

4

The  suppresion  of  the  seven-year  limit  for  bonds  eligible  as  collateral  has  the  effect  of

broadening  the  range  of  assets  eligible  as  collateral,  therefore  increasing  the  number  of  assets

available  for  mobilisation  and  pledging  under  the  aegis  of  the  ESCB.  The  EMI  welcomes  such

approach, fully in line with current preparatory work on this area.

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5

The  Draft  permits  Banque  de  France  to  draw  liquidity  from  the  market  by  way  of  issuing  and

selling interest-bearing bonds. The range of instruments available to decrease market liquidity is

thus  broadened,  responds  to  the  principle  of  market-orientation,  and  is  fully  in  line  with  the

criteria of the EMI. From a legal viewpoint it is highly probable that such bonds might not qualify

as eligible paper for pledging, but may nevertheless be the subject of repo agreements.

    6

The Draft broadens the eligibility of counterparties for repos, discounts, collateralised loans and

borrowings,  by  deleting  the  former  requirement  of  admittance  by  a  Governor  resolution.

Institutions admitted to the interbank market are eligible as counterparties for such transactions.

The EMI welcomes a broadening of the range of eligible counterparties.

    7

The  current  practice  of  the  MPC  determining  interest  rates  for  collateralised  loans  and  repos,

and  the  fixing  of  conditions  for  calls  for  tender  of  repos  and  collateralised  loans,  is  legally

recognised in the Draft under consideration. The present regulation vests such responsibility on

the Governor. This institutional reallocation of responsibilities is thus the explicit recognition of a

normal practice in a legal text and has no objection from the EMI. The Draft does not specify

the  governing  body  responsible  for  the  determination  of  rates  in  discount  operations;  however,

the  fixing  of  the  discount  rates  is  no  longer  relevant  for  present  monetary  policy  and,  in  the

absence  of  precision,  it  is  assumed  that  the  fixing  of  discount  rates  would  be  within  the

responsibilities of the MPC according to article 7 of the Law of August 4th 1993 on the Banque

de  France;  however,  legal  clarity  would  be  served  if  the  responsible  governing  body  was

specified in the Draft.

    8

The  Draft,  as  a  whole,  introduces  changes  in  the  present  regulation  of  money  market

interventions  which  are  consistent  with  the  main  lines  of  thought  of  the  EMI  in  its  preparatory

work  for  Stage  Three,  and  thus  merits  a  favourable  assessment.  The  range  of  possible

intervention techniques to be prepared for the ESCB might be, however, broader and might merit

in due time supplementary regulations.

    9

The  EMI  has  not  yet  finalized  the  preparatory  work  on  the  instruments  and  procedures  for

money market interventions; the present opinion is given in accordance with the present status of

preparatory work. The final framework in this area will be submitted for decision to the ECB at

the date of its establishment.

Frankfurt, 12th October 1995.