What you need to know about Open Market Operations

Often, we hear that a Central Bank will conduct open market operations (OMO) on a specified date. Most people often wonder what this OMO means. Here is what you need to know about OMO.
What is OMO?
OMO is the acronym for Open Market Operation. It simply means the buying and selling of government security, which enables a central bank to control the supply of money in the banking system. A government security is a bond or any other debt instrument issued by a government authority with a promise of repayment after maturity.
In Nigeria, the Central Bank of Nigeria (CBN) uses OMO to supply or mop-up excess liquidity from the banking system.

READ ALSO: CBN wades into OMO market as buyer of last resort

Any example of OMO auction?
OMO remained the major instrument for liquidity management in the first half of 2018, and was used to moderate excess liquidity, boost tradable securities, and deepen secondary market activities.
CBN Bills at the open market amounted to N13.97 trillion in the first half of 2018 compared with N3.70 trillion, in 2017. In the same period, a total of N11.65 trillion was subscribed to while N9.74 trillion was sold respectively as against N4.59 trillion and N3.87 trillion, in the corresponding period of 2017.
Consequently, the cost of liquidity management rose to N848.32 billion, although moderated by the over 300 basis point decline in yields in the review period, compared to N577.46 billion in the corresponding period of 2017.
The tenors of the OMO auctions ranged from 73 to 365 days, at stop rates of between 10.9000 and 14.4000 per cent. In the preceding year, the tenors were between 140 and 364 days at stop rates of between 16.0000 and 18.6000 per cent.
What causes excess liquidity that warrants mop-up?
It is usually as a result of monthly disbursements to the three tiers of government by the Federation Accounts Allocation Committee (FAAC), high volume of CBN Bills maturities and the frequency of auctions.
Recent OMO auctions
OMO maturity worth N684.8bn hit the banking system last week, which resulted to money market rates trending lower to a single digit band.
Consequently, the overnight inter-bank rate, which is the interest rate at which banks lend and borrow from each other declined to 8.71 percent on Thursday from 13.08 percent on Wednesday.
Also, the Open-Buy-Back, which is a money market instrument used to raise short term capital declined to 7.79 percent on the same day from 12.00 percent the previous day.
A report by Afrinvest Securities Limited show that activity in the money market significantly increased in the week that ended the month of November, as the CBN floated a series of OMO auctions as well as the scheduled T-bills Primary Market Auction to curtail the expected boost to system liquidity from FAAC inflow (N405.6bn), coupon payment and maturing instruments.
System liquidity at the start of that week stood at N355.1 billion, lower than N637.9 billion at the close of the prior week, due to an OMO auction floated by the CBN on Monday last week. Liquidity level trended lower to N118.0 billion by Wednesday before rising to as high as N586.7 billion on Thursday following an OMO maturity of N443.8 billion which hit the system.
The CBN on Thursday conducted special OMO, which dried up funds in the baking system resulting to a jump in overnight rate to 26.08 percent on Friday from 8.71 percent on Thursday.
The Federation Account Allocation Committee (FAAC) disbursed the sum of N741.84 billion to the three tiers of government in September 2018 from the revenue generated in August 2018, according to the National Bureau of Statistics (NBS).