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New Bond Lending Facility

14 July 2005

New Bond Lending Facility

The Reserve Bank of New Zealand today announced that, as from 18 July 2005, it will operate a bond lending facility.

By providing liquidity to the government securities market through this facility, it is expected that the Bank will be able to alleviate the occasional pressure that arises in the New Zealand inter-bank payments and settlement system. The decision to offer this facility reflects the Bank's statutory objective to promote the soundness and efficiency of the financial system.

Over recent months the Bank has observed growing pressure on the collateral that is available to the banking system (i.e., government securities) for settlement purposes. This pressure reflects a combination of a relatively static volume of government securities and rising demand for them (in part for prudential and settlement purposes). The May 2005 Financial Stability Report highlighted that the Bank was considering ways to address this issue.

The bond lending facility will be available on a daily basis to counterparties who have signed an Inter-day Master Repurchase Agreement. Securities for the facility will be sourced from the Bank's New Zealand government bond portfolio. Bonds will be available for borrowing from the Bank at a margin that will be set so as to ensure that, in normal circumstances, market participants will trade amongst themselves.

For more information on the operational details, please refer to the latest copy of the Bank's Operating Rules and Guidelines, which can be found at http://www.rbnz.govt.nz/finmarkets/liquiditymanagement/0145254.html.

ENDS

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