Eligible paper

3 Key Takeaways

• Quality Standards: Eligible paper must meet predefined quality standards, including creditworthiness, maturity, and marketability, to qualify for inclusion in central bank operations.
• Market Liquidity: Eligible paper instruments are typically highly liquid, actively traded in the money markets, and readily acceptable as collateral for short-term funding.
• Monetary Policy Tool: Central banks use eligible paper as key instruments in conducting monetary policy operations, such as open market operations, to influence money market conditions, interest rates, and liquidity levels.

What is Eligible Paper?

Eligible paper refers to a category of short-term debt instruments that meet specific eligibility criteria established by central banks, financial regulators, or monetary authorities. These instruments are typically issued by creditworthy entities, such as governments, financial institutions, or corporations, and are actively traded in the money markets. Eligible paper plays a crucial role in supporting liquidity management, monetary policy implementation, and financial stability.

Importance of Eligible Paper

• Monetary Policy Transmission: Eligible paper serves as key instruments in the transmission of monetary policy, allowing central banks to influence short-term interest rates, money market liquidity, and credit conditions through open market operations and liquidity facilities.
• Market Liquidity: Eligible paper instruments enhance market liquidity by providing investors with highly liquid, low-risk investment options, facilitating efficient price discovery and trading activity in the money markets.
• Financial Stability: Eligible paper contributes to financial stability by supporting the functioning of money markets, enabling banks and financial institutions to manage their liquidity needs, fund short-term obligations, and mitigate funding risks.

Characteristics of Eligible Paper

• Credit Quality: Eligible paper instruments are typically of high credit quality, with minimal credit risk and strong issuer creditworthiness, ensuring investor confidence and market acceptance.
• Short-Term Maturity: Eligible paper generally has short-term maturity profiles, with original maturities ranging from overnight to one year, allowing for effective liquidity management and rollover of funds.
• Marketability: Eligible paper instruments are actively traded in the money markets, with established secondary markets and transparent pricing mechanisms, enhancing their liquidity and tradability.
• Acceptability as Collateral: Eligible paper is often accepted as collateral for short-term funding transactions, repo agreements, and central bank operations, providing counterparties with secured lending and borrowing options.

Examples of Eligible Paper

Treasury Bills

Treasury bills (T-bills) issued by governments are considered eligible paper, as they represent short-term debt obligations backed by the full faith and credit of the issuing government and are actively traded in the money markets.

Commercial Paper

Commercial paper issued by creditworthy corporations is eligible for inclusion in central bank operations, as it represents unsecured short-term promissory notes issued to raise funds for working capital and operational expenses.

Bankers’ Acceptances

Bankers’ acceptances (BAs) are short-term financial instruments issued by banks, backed by the bank’s credit and guarantee of payment, making them eligible for participation in central bank liquidity facilities and money market transactions.

Real-World Application

Open Market Operations

Central banks conduct open market operations, such as buying and selling eligible paper, to adjust money market liquidity, manage short-term interest rates, and implement monetary policy objectives, such as price stability and financial stability.

Repo Transactions

Financial institutions engage in repurchase agreement (repo) transactions using eligible paper as collateral, allowing them to borrow funds overnight or for short periods by pledging high-quality securities to secure financing.

Liquidity Facilities

Central banks provide liquidity facilities to banks and financial institutions, accepting eligible paper as collateral in exchange for short-term loans or liquidity injections to support market functioning and mitigate funding stress.

Eligible paper plays a vital role in the functioning of money markets, monetary policy operations, and liquidity management, serving as key instruments for central banks, financial institutions, and investors. By meeting predefined quality standards and criteria, eligible paper instruments contribute to market liquidity, financial stability, and the efficient allocation of capital in the global financial system.