The development of financial markets has afforded DMOs the opportunity to make greater use of different financial instruments to manage government cashflows. These instruments include T-bills, repos, commercial papers and loans. This chapter outlines the advantages and limitations of such instruments, distinguishing between usage for funding and investments, and assesses the potential implications. It also discusses the risks, particularly counterparty risk, that may arise from the active use of financial instruments in cash management and explores how some countries mitigate against these.
Managing Government Cash
A Review of Practices in OECD Countries
Abstract
The use of financial instruments for cash management has become integral in many OECD countries. These instruments are financial tools that can be quickly and easily converted into cash and are typically used for raising or investing funds in the short term. On the funding side, these instruments include T-bills, cash management bills, repos, commercial papers (CPs) and loans (including money market loans, unsecured loans, and deposit taking). On the investment side, they include central bank deposits, unsecured deposits, non-domestic T-bill purchases, collateralised transactions (mostly reverse repos), and buybacks.
The use of these instruments varies depending on the local context. A combination of these instruments is typically employed to balance different considerations such as flexibility, costs, volumes, and risks. However, some countries make greater use of certain types of instruments over others due to availability and access.
Cash management teams tailor their operational frameworks based on their country’s specific circumstances. This includes direct considerations like access to the central bank’s balance sheet, the size and volatility of cash flows, risk tolerance, and the depth of the local money market. Broader factors also come into play, such as the strength and evolution of the banking sector, the country's size, economic openness, the role of the public sector, overall debt levels, debt composition, and the sovereigns credit rating.
As a result, while the range of instruments theoretically available is generally similar, there can be significant variation in terms of the mix of instruments actually deployed, the emphasis on certain instruments, and the roles and design of those instruments can vary significantly between countries.
This chapter documents the various instruments used by governments, explaining how their advantages and limitations align with specific local contexts. It first covers the main characteristics and practices concerning funding instruments, followed by investment instruments and then looks at counterparty policies. The chapter then addresses cross-cutting issues related to the implications of different instrument mixes for cash management, and concludes with an overview of the most commonly adopted models for selecting cash instruments based on each country’s context and preferences.
Funding instruments used by DMOs vary across several dimensions, including maturity, counterparties involved, currency, and trade-offs between flexibility and costs (Table 4.1). These instruments, ranging from T-bills to repos to CPs, differ in their capacity to manage cash flow fluctuations, operational ease, and access to domestic or foreign markets. While some offer deep market liquidity and predictability of access, others provide more flexibility at a higher cost or with more operational complexity. Each of these instruments is analysed in detail in this chapter.
Source: Based on the OECD Ad Hoc Group on Cash Management Survey (2024).
4.2.1. Issuance of treasury bills
The issuance of T-bills, also known as treasury certificates, is the most common source of short-term funding for DMOs. A T-bill is a short-term obligation with a maturity of a maximum of one year, denominated in the home currency and bearing no interest but issued below par and redeemed at par (in a positive yield environment). Issuance is generally done through regular auctions accessible to PDs, where new bills at specific maturities are issued, and existing T-bills are “tapped”, i.e. reopened and outstanding amounts increased. The clear advantages of T-bills are the depth and liquidity of their market for banks, thanks in part to the role of market makers. This makes it possible for issuers to borrow large amounts at competitive levels. As a result, most debt agencies use the product extensively.
T-bills can be used by DMOs as part of their main funding programme, or to help address cash management needs. As a debt management tool, they help fund net borrowing needs. In this case the programme of issuance will tend to be stable and predictable (like an auction programme). Examples include Germany and Italy. As a cash management tool, T-bill issuance aims to absorb the timing mismatches of cash flows as a money market instrument. Thus, issuers calibrate the sum issued conditional on current cash needs. This practice is seen in Canada. Countries can also combine both, using a portion of T-bill issuances to fund net borrowing needs and a portion for cash management , such as in Belgium, the United Kingdom and the United States.
T-bills are generally deployed to fund net borrowing needs during periods of uncertainty and crises. In such circumstances, governments face heightened demand for safe and liquid assets, allowing them to issue more T-bills at relatively lower costs. Furthermore, the flexibility of T-bills can enable quick adjustments in the volume of the outstanding stock and the size of individual auctions, helping to manage temporary revenue shortfalls and unexpected expenditures. This happened, for instance, during the COVID-19 pandemic (OECD, 2021[1]). However, relying too heavily on short-term financing increases refinancing and interest rate risks.
It is worth noting that T-bills issued as part of a regular programme are relatively limited as a tool to help address cash management needs compared to other money market instruments, as issuances must be scheduled in advance. PDs tend to prefer a predictable, programmatic approach, with lines regularly issued in similar sizes.
As a result, T-bill issuances are predominantly used as a cash management instrument by issuers who do not require highly flexible funding tools. These are generally issuers that keep large cash buffers and/or have a deep T-bill market that can efficiently absorb changes in supply levels (e.g. the United States). On the other hand, issuers that opt to hold a smaller cash or liquidity buffers tend to rely more on other money-market instruments such as short-term repos, money-market loans, or CP for cash management. Examples of such countries are France and Germany.
There is a distinction between regularly issued T-bills and T-bills issued on an ad hoc basis (i.e. CMBs). Although both can have the same objective, which is primarily to absorb variations in cash flows, they are used in slightly different circumstances. Regular T-bill auctions are adjusted to handle projected cash flow variations. However, when there are unanticipated changes in cash flows due to forecasting errors or extraordinary events, countries may use ad hoc T-bill issuance to absorb these fluctuations.
CMBs differ from regular T-bills in several ways. First, CMBs do not follow the predictable issuance pattern of regularly issued T-bills. Second, they can have atypical tenors that are designed to align precisely with short-term cash flow movements. Therefore, CMBs are not always fungible with regularly issued T-bills due to maturity mismatches. If they are fungible, PDs might need to meet minimum bidding obligations. Third, CMBs can also have same-day settlements. Lastly, they may not always be assigned a unique bond identifier (e.g. international securities identification number (ISIN)) where they are fungible with regular T-bills, making them indistinguishable from these in market data.
As a result of these features, CMBs provide greater flexibility for DMO cash management operations. For example, DMOs can issue single or multiple-tranche CMBs to better match specific cash inflows and outflows. The maturity of CMBs can range from a few days up to 12 months, making them ideal for covering temporary cash shortfalls or providing emergency funding, with maturities tailored to the exact date of expected cash inflows. CMBs can also be issued on any business day with as little as one day’s notice.
CMBs typically trade at a higher discount than regular T-bills due to their lower liquidity, especially when they are not fungible with benchmark T-bills. Therefore, when cash needs can be met through regularly scheduled T-bill auctions, this remains the more economical option. As a result, CMBs are generally used to complement regular T-bill issuances to help address unexpected cash needs, as is the case in Canada and the United States. Box 4.1 explores the CMBs programme in Canada.
Unlike regular T-bills, which are more of a straightforward funding instrument, cash management bills (CMBs) are more of a fine-tuning tool generally used to target the low point of cash balances, thus reducing the need to carry unused cash balances for a prolonged period. As these operations are not regularly scheduled and can be settled on a same-day basis if needed, they can be used to pre-fund projected cash outflows which aren’t forecast. This flexibility allows treasury managers to incorporate the most up-to-date cash flow information before deciding if additional funding is needed.
The term of CMBs can be up to 3 months (i.e. shorter than regular T-bills) but are normally much shorter (e.g. 1-2 weeks) and often mature once sufficient balances have been built up. They can also be fungible (i.e. share the same maturity/ISIN as an existing T-bill) or non-fungible (i.e. do not share the same maturity/ISIN as an existing T-bill), with fungible CMBs requiring the government’s PDs to meet their minimum bidding obligations. Typically, the treasury managers will factor 2-3 CMB issuances into their forecast per month.
Multi-tranche CMBs
Multi-tranche CMBs is an available tool that has yet to be deployed. This tool is like the regular CMB in that it would be used as a fine-tuning instrument to target periods of low cash balances. However, it allows for multiple CMBs to be issued at the same time (e.g. up to three tranches), all with different maturity dates. These CMBs could also be fungible, non-fungible, or mixed, depending on when the cash is needed.
The benefit of multi-tranche CMBs over regular CMBs is that they are better able to smooth government cash balances as they allow for a significant portion of funding to be raised on the day it is needed instead of it being raised in advance, thus lowering the amount of advance build-up in government balances. To manage large government maturities and government cash balance fluctuations, the treasury managers would aim to issue the multi-tranche CMBs as close as possible to a large maturity such that its settlement occurs on the same day as the bond maturity. They would then structure the remaining maturity dates of the various tranches (e.g. up to three tranches) to offset large government inflow days, either due to a bond issue or a large tax receipt day. An additional benefit of the above arrangement is lower financing cost as the level of surplus cash balances is reduced both before and after a large bond maturity.
More details on Canada’s cash management policies can be found in Annex 4.A.
4.2.2. Repo transactions
Repo transactions are a way for a sovereign to secure funding by taking a loan and posting collateral. In a repo trade, the cash borrower (or security provider) sells a security to a cash lender (or security receiver) at one price and commits to repurchase the same or another part of the same asset at an agreed-upon price on a future date. If the cash borrower defaults during the life of the repo, the cash lender (as the new owner) can sell the security to a third party to offset the loss. The security, therefore, acts as collateral and mitigates the credit risk that the cash lender is exposed to from the cash borrower. These transactions are used for cash management operations in 16 OECD countries, of which 15 are in Europe and the other is Canada.1
Sovereigns that use repo transactions as a source of funding generally provide only their own issued securities as collateral to their counterparty. A portfolio of own-issued securities can result from different kinds of transactions, such as the buyback of bonds with a limited time to maturity (e.g. Belgium), the buying over of bonds from other government agencies (e.g. Belgium), securities retained in an auction (e.g. Germany retains 25% at auctions), ad hoc issues of new tranches of government bonds, the temporary creation and cancellation of securities specifically for use in repo transactions, or the ability to lend out securities held by the central bank (e.g. France, Italy, United Kingdom).
Repo transactions can be bilateral, tri-party2 (typically only used by sovereigns for reverse-repos) or through a CCP, which is usually the case for trades executed on the electronic market. Concluding bilateral or tri-party transactions requires an agreement to be signed by the seller and buyer, with the GMRA (Global Master Repurchase Agreement) from the International Capital Market Association (ICMA) as a market standard. However, other possibilities exist as well, such as the EMA (European Master Agreement) or other local agreements. Using a CCP does not require a GMRA or other agreement to be signed, as the buyer and seller enter separate contracts with the CCP.
Repos allow DMOs to manage temporary liquidity needs efficiently, due to their flexibility in terms of maturity and quick arrangement and settlement of operations. Unlike the issuance of debt securities, repo contracts have a maturity that is precisely adaptable to the duration of the funding need. Their maturities typically range from overnight up to a month. As repo transactions are not limited to a scheduled calendar but take place either over the counter or on an electronic market, they can be a near-instant funding source if the market is liquid enough.
Therefore, repos are generally a funding instrument for issuers that do not keep large cash buffers and have access to a deep local repo market. A deep and liquid local repo market can allow issuers to safely borrow large amounts of cash, even overnight, making a large cash buffer unnecessary if market access is uninterrupted. However, reliance on the daily use of repos rather than on a sizeable cash buffer implies confidence on the part of the issuer that they will not lose market access even in a crisis.
More broadly, repos are used to fine-tune liquidity levels rather than replace other tools or the cash buffer entirely. Their flexibility, particularly the ability to raise funds quickly and in a customised manner, allows DMOs to adjust cash positions as needed rapidly. However, repos generally complement other instruments in a broader cash management strategy rather than acting as a primary tool for long-term liquidity management.
Due to these advantages and for wider market development, several central banks and DMOs across the OECD have sought to bolster repo market liquidity through their own security lending facilities (lending collateral into the market). As of the end of 2023, 23 DMOs in the OECD were operating repo lending facilities, with a further 9 considering introducing them (OECD, 2024[2]). Repo facilities managed at the DMO level can provide liquidity even for off-the-run securities and those not purchased by the central bank, thereby rendering markets more resilient to shocks. For example, Germany will do a market repo on request to support market liquidity when a bond trades special (Box 4.2) whilst the United Kingdom has a standing repo facility, which market makers can call on so as to be assured of being able to access and deliver any gilt at any time, albeit at a price and subject to any limits and other requirements set out in the applicable Terms & Conditions (UK DMO, 2025[3]).
Germany’s repo activities serve two primary objectives: short-term refinancing for cash management and enhancing market liquidity by supplying German government securities. While both objectives are important, the priority lies in supporting the market by offering additional securities, even when there is no immediate need to raise funds. This approach is particularly relevant during periods when the European System of Central Banks is a key market participant, and certain securities become scarce because there is a lower free float/higher ECB holding.
The German government securities offered in repo transactions are part of the “Special Segment.” This segment is characterised by pricing based on the demand for specific securities. It contrasts with the “General Collateral Segment” (GCS), where the goal is to invest cash collateralised by securities from the same issuer, without focusing on individual securities. In the GCS, the issuer and its credit rating are the determining factors, rather than the security identification number.
Securities in the Special Segment typically trade at a premium compared to those in the GCS, reflecting their relative scarcity. By offering additional securities through repos, Germany increases the circulating volume of these securities, improving market liquidity. This, in turn, positively impacts the issuer’s refinancing costs by reducing them.
When Germany conducts repos in the Special Segment without requiring cash, the surplus cash is reinvested through reverse repos, accepting collateral from issuers with high credit ratings. These transactions are conducted in the GCS at prevailing market rates, generating financial benefits for the German taxpayer.
If cash is needed, repos in the Special Segment offer the most economically attractive short-term financing option for the Federal Government.
4.2.3. Issuance of commercial paper
CP is typically an auxiliary source of flexible short-term funding. Like a T-bill, CP is a short-term obligation without a coupon with a maturity of a maximum of one year. However, issuance of CP takes place “on tap”, which allows the issuer to raise funds from investors at short notice when faced with a specific need, without being limited to a predefined calendar or schedule.
CP can be issued in foreign currencies (often in USD), making it a useful tool to access better funding conditions and limit risk. Foreign currency CP markets can be deeper and more liquid than the issuer’s domestic market, allowing it to raise relatively large amounts of cash at short notice even when domestic money markets are closed and/or less liquid. It also allows the issuer to diversify its investor base and spread funding risk. Issuers normally put FX swaps in place to hedge against currency risk when using foreign currency CP.
CP, as a primary funding instrument, has limitations. There may be no CP issuance for several months if a government is long of cash. This irregular issuance pattern can cause investors to become less engaged with CP operations. Moreover, liquidity in CPs is limited, partly due to these instruments often being held to maturity by the end investors. This can jeopardise CP’s viability as a funding instrument in periods of market stress.
CP issuance also has practical limitations in terms of operational viability and access. On the operational side, there is a delay between the issue and receipt of the funds (standard settlement is T+2) since the titles must be created and delivered, which requires operational follow-up. On the access side, a key element that must be considered is the minimum rating required by CP investors (often A3/A- or equivalent). These minimum thresholds can mean certain issuers cannot access the market. Although CP has some similar characteristics to CMBs, it typically has a longer settlement time, and cannot be fungible with ‘regular’ T-bills.
Ireland provides an example of a country that uses CP as part of its cash management programme (Box 4.3). Belgium has also used CP in a wide range of currencies, but mainly in EUR, USD and GBP to help fund cash deficits (i.e. bond redemptions). Other examples of countries that use CP in cash management are Hungary and New Zealand.
Ireland issues CP under a Global Note Programme. There are legal costs in setting it up, but once in place, it lasts for several years with only minor updates. Ireland’s CP is issued under English Law, which can be attractive to investors as it is widely understood.
CP is issued by reverse inquiry. Ireland’s DMO (the NTMA) maintains a screen on which indicative yields are quoted. The investor approaches the issuer via one of the dealers on the programme. Approaches can also be made to see if the NTMA would quote at a specific maturity (to a specific date) or in a specific currency. CP issued in a non-domestic currency is immediately hedged into the domestic currency to “lock in” the issued rate in domestic terms and to avoid currency risk. In quoting screen prices in non-domestic currency, the NTMA has an automated process to calculate the equivalent yield at which they will be issuing in the domestic currency once the transaction is hedged. In practice, there can be a short exposure window between the execution of the CP and the execution of the hedge.
Ireland has found CP to be very flexible compared to T-bills. There is no secondary market, and purchasers tend to hold CP to maturity. As demand is driven by reverse inquiry, dealers are not required to absorb issuance. CP is issued without much publication, and by adopting the pricing for different periods, flows can be attracted to maturities that suit the issuer.
The amount outstanding can also be easily increased or decreased, depending on requirements, unlike T-bills, where there is a need to hold regular auctions. CP offers an excellent alternative if there is a limited funding need (so a regular T-bill issuance programme cannot be maintained). Also, if significant short-term cashflows exist, CP addresses these more easily than T-bills.
Lastly, it is worth noting that the customer base has proven to be different from that of existing treasury bondholders, offering diversification and expansion of funding sources. The NTMA has had experience with investors initially purchasing CP and moving on to treasury bonds subsequently.
4.2.4. Money market loans, unsecured loans, and deposit-taking
These short-term loans consist of the exchange of a principal amount plus the interest on the maturity day of the transaction, without any collateral or issuance of a security. Sovereign issuers generally use this type of funding over very short term periods, from overnight up to a few days.
The types of counterparties for these transactions can be very diverse, but when used by a sovereign they mostly occur with another sovereign, or with another public sector entity. Possible counterparties therefore include subnational authorities, SOEs, public sector institutions (in countries where the TSA does not encompass all public entities) and other DMOs. However, taking money market loans from financial institutions such as commercial banks, pension funds, or money-market funds can also be a possibility for some DMOs, albeit rarer. For example, to cover late shortfalls, Belgium can take an unsecured loan from its PDs or other euro area DMOs.
The key advantages of these money market transactions are their simplicity and flexibility, though this comes at a price. The terms of the loan must be agreed upon only by the two parties, who can interact directly by telephone or via a platform or chat system. This makes it possible to issue the required amount on demand and receive the funds that day. However, the counterparty providing the loan takes on a higher credit risk because of the lack of collateral or security, which can impact pricing.
This mechanism for taking in deposits can also form part of a service DMOs offer to other parts of the public sector, sometimes referred to as central treasury services (CTS). This involves the DMO taking deposits from other public sector bodies, sometimes at favourable rates and short notice, and even when the central cashbook is long (i.e. the DMO doesn’t strictly need the cash). Portugal offers an example of this type of arrangement (Box 4.4).
The legal framework of Portugal's Treasury requires central government entities to have bank accounts with the DMO to centralise revenues and expenditures. Other public entities, such as social security funds or local authorities, can choose to hold bank accounts with the DMO, commercial banks or a combination of both.
The DMO offers bank-like services to public entities, including remuneration for short-, medium- and long-term deposits. Short-term deposits are offered with fixed rates, can range from seven days to one year, and early mobilisation is allowed at par, subject to the loss of part of the accrued interest. Medium- to long-term deposits are also offered at fixed rates but must have maturities identical to the maturities of Portuguese government bonds, with early redemptions possible but subject to market risk.
The interest rate for these deposits is determined based on prevailing market conditions and liquidity needs. Price discrimination is permitted, which allows the DMO to offer better rates for larger, longer or more stable deposits.
Furthermore, price discrimination can be applied to adjust deposit interest rates to entities not required to hold accounts at the DMO. This flexibility has proven to be particularly beneficial during periods of liquidity needs, enabling the DMO to attract deposits from public entities at more favourable rates than could be obtained using other short-term funding instruments.
While public entities, especially those outside the scope of central government, can play an important role in providing liquidity to the state, they can also increase liquidity risks. In the absence of a legal requirement for entities to maintain deposits at the state treasury, the DMO can also face competition from bank deposits. ‘
DMOs utilise a variety of instruments to invest surplus cash, aiming to manage liquidity securely, diversify risk, and maximise returns (Table 4.2). The most commonly used instruments among OECD countries include central bank deposits, which offer security and reliability, followed by unsecured deposits, which provide more flexibility but carry slightly higher risk. Collateralised transactions, such as reverse repos, are also frequently employed to mitigate counterparty risk while offering access to liquidity. DMOs can also buy back their own securities.
Once the tolerated risk exposure is determined, there are two main liquidity constraints which are decisive and shared by most DMOs: cash balance volatility and market access. Apart from debt issuance activity, a sovereign issuer relies heavily on the cash flow profile generated by the central government’s operational activity, with expenditure and revenue dates that don’t always match.3 Furthermore, the public issuer's market access is a significant constraint for cash management, as the amounts issued may be influenced by market demand, and issuance dates may be affected, particularly for large supply events. The policy of building individual lines up in size to become highly liquid benchmarks is also a significant factor, often leading to only a few suitable dates for redemptions.4
Note: Survey answers from 32 OECD countries.
Source: Based on the OECD Counterparty Risk in Cash Management Survey (2023).
4.3.1. Central bank deposits
The majority of DMOs use central bank deposits, and they may be the main or, in some cases, the only investing instrument, depending on the regulatory context and remuneration offered. These deposits provide maximum security for cash management, so they are the instrument of choice if the regulatory framework does not cap them, and cash managers can earn competitive returns on them.
However, the low return offered on central bank deposits in many countries in recent years, especially in Europe, or even the absence of remuneration when the deposit is a legal requirement due to regulatory frameworks, can be a drawback. Where there may be more preferential rates on offer by investing cash surpluses using available market-facing tools, there is also an opportunity cost associated with central bank deposits.
The limitations imposed on making central bank deposits thus play an important role and may be the most critical factor in shaping issuers’ cash management operations. In countries where cash managers have unrestricted access to these deposits at a competitive rate, there tend also to be straightforward cash management frameworks with large or at least moderate cash buffers, such as in Brazil, Iceland, Israel and the United States.
Conversely, in circumstances where there is limited restriction on placing deposits with the central bank and/or where deposits are remunerated at below market rates, there is typically a need for more market facing approaches to manage liquidity, as in euro area countries, Sweden and the United Kingdom. An example of a cash management system that has evolved due to the central bank deposit policy is Italy, explored in Annex 4.B.
Another key advantage of central bank deposits is that they can help integrate large-scale public operator accounts through cash centralisation. These deposits allow the integration of all banking services, such as standard payment methods, currency exchange, and auction and syndication platforms, into a single account. This is especially practical when the central bank handles the government's operational flows as its fiscal agent.
The COVID-19 pandemic highlighted the role of central bank deposits as a secure option during periods of heightened uncertainty. At the onset of the pandemic, OECD governments overborrowed as a precautionary measure to safeguard against uncertain tax revenues and expenditures caused by lockdowns. The excess cash was largely deposited with central banks, sharply increasing TSA balances from Q1 2020 (Figure 4.1.). As economies emerged from lockdowns, cash flows became more predictable, and market uncertainty declined, prompting issuers to revert to pre-pandemic practices. These deposits fell to more stable and targeted levels, reflecting liquidity policies.
The post-pandemic period also highlights a notable shift in liquidity policy, especially among euro area countries. Cash balances held as central bank deposits have stabilised at levels below pre-pandemic norms. This reflects changes in the funding environment, where the ECB decided to remunerate these deposits at rates below market levels (European Union, 2019[4]). As a result, DMOs have been encouraged to reduce their reliance on central bank deposits and invest surplus liquidity in market instruments offering higher returns. This change reflects the adjustment of cash management to conjunctural factors, in this case, the funding environment.
Note: Data as of Q3-24 for the US, Nov-24 for Euro area countries, Dec-24 for CAN and JPN
Source: Bank of Canada, Bank of Japan, European Central Bank, Federal Reserve.
4.3.2. Purchase of own and other issuers’ T-bills and bonds
As discussed in Chapter 3, debt buybacks offer various benefits such as smoothing the redemption profile, reducing borrowing costs, and improving market liquidity. About half of OECD countries perform buyback operations regularly. However, these operations can be costly, particularly when executed on a large scale.
From an investment perspective, buybacks can be especially useful when the use of other instruments is constrained by investment limits. Such limits, which are in place in at least 10 OECD and accession candidate countries,5 may apply to specific transactions (e.g. unsecured deals, the taking certain types of collateral), individual counterparties (e.g. exposure limits based on credit ratings), or the total amount(s) invested. In these cases, surplus cash can be directed toward buyback operations. Buybacks also provide an alternative use of surplus cash when market conditions for short-term investments are unfavourable.
A key limitation to repurchasing securities is the availability of bonds in the market and the limited choice of maturities, which are tied to fixed redemption dates. Additionally, buybacks may only sometimes offer good value for money, as bonds can sometimes trade at a premium right up to redemption.
If market conditions for repurchasing domestic securities are unfavourable, DMOs can consider purchasing securities from other sovereigns, as this presents limited credit risk. Ireland, for example, can invest surplus liquidity in sovereign securities issued in other countries.
4.3.3. Reverse repo transactions
In reverse repo transactions, sovereigns receive collateral in exchange for their surplus cash. This is the opposite of the transaction where sovereigns use repos to borrow money. Here, sovereigns lend money, typically accepting a limited range of securities as collateral, such as their own issued securities or, in the euro area, those of certain other sovereign issuers, for security and liquidity reasons. Nearly all euro area countries make frequent use of these operations for cash or debt management through their repo facilities.
Some countries, including France, Hungary, and Portugal, exclusively conduct bilateral reverse repos, while Belgium and Germany can use both bilateral and tri-party reverse repos. Reverse repo operations often impose strict conditions to limit credit risk, such as requiring government bonds as collateral or adhering to specific collateral agreements, as in France, where repos are traded under the FBF (“Fédération Bancaire Française”) framework (Box 4.5 explores France’s case in detail).
Other countries opt for tri-party reverse repos to avoid the operational complexities of bilateral transactions, such as managing securities flows, margin calls, and collateral baskets. Tri-party reverse repos, managed by a third-party agent, remove these burdens from the DMO (e.g. Finland primarily uses tri-party for reverse repos, whereas the Netherlands uses a CCP for this).
4.3.4. Unsecured loans and deposits
Providing unsecured loans or deposits exposes the DMO to credit risk, which is why these investments are subject to strict risk frameworks. Internal regulations limit the duration of short tenors and the number of eligible counterparties to very “safe” ones, such as other domestic public institutions, other DMOs, and financial institutions that meet specific criteria. It is rarer for DMOs to provide loans to than to take deposits from financial institutions such as commercial banks, pension funds, or money-market funds.
The criteria employed to determine eligibility generally concern the counterparty’s creditworthiness. Issuers mainly rely on credit ratings established by agencies. For example, Belgium requires a minimum rating for deposits, but its in-house teams often employ additional criteria. These can include capitalisation and prudential indicators, institutional factors (usually euro area membership), or exposure to macroeconomic shocks. Admitted private counterparties are typically PDs and selected domestic commercial banks, although some issuers also admit institutions such as pension funds and CCPs. They will lend unsecured out to a week with commercial counterparties, but perhaps longer with other sovereigns (e.g. within a currency union) depending on the credit rating.
4.3.5. Other instruments
Other instruments, such as deposits with money market funds and CP are rarely used, but when they are, they are used to transact with corporations rather than banks. They present greater credit risk and are not authorised in all regulatory frameworks. They sometimes offer a more attractive yield than the interbank market rate in exchange for a slightly longer maturity. These markets can be deep and provide certain flexibilities, such as size and tenure.
Context
In July 2022, ECB key rates returned to positive territory, with the Deposit Facility Rate standing at 3.5% as of September 2024. In addition, the ECB initiated passive QT. However, this tightening did not proportionally increase the remuneration on state deposits, which was fixed in May 2023 at ESTR minus 20 bps with the aim of minimising the risk of negative effects on the functioning of the market and ensuring the proper transmission of monetary policy. This created a significant divergence between the returns on deposits and money market investments.
As a result, the French DMO decided to invest the cash surplus almost completely in money markets, rather than partially, as per previous policy. This corresponds to a twin objective of limiting the overnight cash balance as much as possible and avoiding a negative balance in order to meet the government’s financial commitments, especially as EU law prohibits the use of central bank overdraft facilities by national governments. In practice, this translates into two operational objectives: leaving a minimum balance (safety cushion) overnight on the TSA, and getting the best possible return on the invested surplus, of at least ESTR.
The large size and volatility of the public funds to invest make these objectives difficult to achieve. The French DMO uses a TSA that centralises almost all public funds from the central, state, and local governments, amounting to EUR 165 billion, with average daily cash flows of around EUR 32 billion. This system allows public entities’ inflows and outflows to partially offset each other so that debt issuance can be optimised. Still, it also requires a complex framework and IT system to handle, on average, 34 000 operations a day, while the large number of depositors causes volatility that makes forecasting difficult. As a result, the DMOs conducts daily short-term investing and borrowing, the latter largely in loans from euro area DMOs and repo transactions.
More precisely, in order to achieve the near-zero cash balance objective, a forecast for the next day is produced every evening, and inflows and outflows are monitored in real-time throughout the day. As a result of this reliable forecasting and its use of diverse short-term investments, since May 2023, the French Treasury has reached a cash balance at the central bank overnight of around EUR 70-80 million euros, while the amount of cash instruments it holds has ranged between EUR 50 and 80 billion.
Investment framework
Given this relatively large liquidity cushion, a diversity of investment instruments is used and cash is invested in the market mainly through calls for tenders, to enhance competition, and both secured lending and unsecured lending are used. Maturities in the secured market are up to weeks 2, 3 or 4 weeks; in the unsecured market, they are up to a few days to minimise risks. All secured transactions are biparty reverse repos, but for unsecured transactions, there is a wide variety of options, including interbank loans and deposits and lending from other euro-area DMOs or EU institutions and agencies, as well as buybacks of papers maturing within the year and purchases of bills from other public institutions.
The main counterparties are PDs, Eurozone DMOs, and EU institutions. The counterparties for repo/reverse repo transactions are restricted to banks participating in the primary dealership programme and some specific banks. Similarly, in the case of interbank loans and deposits, the counterparties include only a select few other banks. The post-market and risk unit monitors specific information such as the credit ratings, credit default swap (CDS) pricing, financial data, and prudential ratios of counterparty banks, which are scored according to an internal model; and settlement dates, maturities, and amounts for settlement and counterparty limits.
When investing surplus cash, DMOs utilise a wide range of counterparties to optimise returns and manage risk (Table 4.3). PDs and other banks are the most common counterparties, reflecting their close ties to DMOs' primary market operations. Supranational institutions and other EU DMOs are also widely used in Europe, benefiting from a single currency market and generally good credit. Domestic financial institutions and government bodies are less frequently utilised but provide additional flexibility in specific cases.
As a general rule, DMOs apply stricter credit standards to counterparties they lend to than those they borrow from. They are also far more cautious about lending on an unsecured basis while showing more flexibility when borrowing. An example of a counterparty risk policy is shown in Box 4.6.
Note: Central banks are not recorded here as a counterparty.
Source: Based on the OECD Ad Hoc Group on Cash Management Survey (2024) and the OECD Counterparty Risk in Cash Management Survey (2023).
4.4.1. Public vs. private sector
All countries hold at least a portion of their surplus cash in the public sector. Cash invested in the public sector mostly consists of deposits with the central bank, which, for some countries with large cash buffers like Ireland or the United States, can hold the majority, if not all, of the government’s cash. However, cash held in the public sector can also take the form of purchases of domestic or foreign government securities, or of lending to domestic, foreign, or supranational public sector institutions, such as other DMOs. The latter is particularly common in the euro area, as they share the same currency.
Most issuers also opt to channel surplus cash to the private sector, particularly through reverse repos, especially when access to central bank deposits is limited or they are remunerated below market rates. Due to DMOs' high level of risk aversion, reverse repos are typically the preferred investment tool in the private sector, as they are secured transactions. Issuers usually engage in bilateral and occasionally tri-party reverse repos with PDs and commercial banks, though the use of CCPs is also common. While issuers may also place cash in unsecured deposits or money market instruments with financial institutions, this is less frequent, covering only very short-term operations and with highly solvent counterparties.
4.4.2. Domestic vs. foreign counterparties
The choice of instrument is the primary driver of geographic diversification among counterparties. For example, there is no foreign equivalents to placing deposits with the central bank, leading to a domestic bias in countries that rely heavily on them. The same holds for public sector lending, as issuers typically extend loans only to domestic public institutions or subnational authorities, with exceptions like other DMOs or supranational institutions.
In the euro area, geographic diversification tends to be higher, as countries sharing the same currency and system are more likely to lend to one another, whether DMO to DMO, or to other euro area institutions including supranationals.
Domestic bias is also influenced by counterparty and collateral selection criteria. Counterparties for certain transactions, like repos or reverse repos, are often limited to PDs or eligible banks, which are more likely to be domestic. Similarly, issuers that accept only their own securities as collateral reinforce a domestic focus. However, the reverse can also occur: the Netherlands, for instance, uses centrally cleared reverse repos with an ECB level 1 collateral requirement, which fosters greater geographic diversification.6
Another factor driving geographic diversification is the size of domestic markets. Smaller issuers, like Belgium, may struggle to invest surplus cash domestically due to a relatively small banking sector, forcing them to look abroad to foreign commercial banks or sovereigns as counterparties. In contrast, larger issuers with larger banking markets often rely more on domestic institutions, although they may still pursue geographic diversification for advantages like better returns, as seen with Italy’s investments in Central Europe, or when domestic markets are closed, and foreign ones remain open.
4.4.3. Counterparty credit risk management
Counterparty credit risk is typically evaluated by dedicated units or committees, based on ratings provided by the main credit rating agencies or based on DMOs’ own evaluations of financial soundness.
Counterparty selection criteria are designed to ensure transaction partners' financial stability and reliability. The primary criterion is creditworthiness, often obtained through credit rating agencies’ assessments. Higher credit ratings allow for higher counterparty limits. In addition, CDS spreads can also be monitored to assess risk (e.g. Austria). Other considerations include counterparties’ financial reports/statements, regulatory compliance, financial soundness and size of balance sheet. Beyond those, the rating of the country in which it is based can also be a factor.
Issuers assign varying credit limits to counterparties based on their credit/financial soundness evaluation and their financial (balance sheet) capacity. Limits might be based on a certain credit rating (from an agency or internal) depending on the investing instrument used (see Box 4.6) on Belgium’s counterparty risk framework). In addition, there is a tendency for the size and maturity limits assigned to reflect the counterparty’s creditworthiness.7 Thus, DMOs will lend more and at longer maturities to more credit-worthy counterparties. Depending on the risk tolerance, some DMOs may limit lending to counterparties below a certain credit rating to a certain tenor.
Issuers try to diversify their counterparties and transactions as much as possible, and in nearly all countries, there are counterparty limits in place. These concentration limits cap the exposure to a single counterparty to prevent over-reliance on any one entity. They can also be product-specific, applying different thresholds depending on the nature of the transaction (e.g. stricter requirements for unsecured deposits compared to secured transactions like repos). For instance, in Canada, one counterparty can’t hold more than 25% of an ISIN as collateral.
Despite these limits, if they have significant cash flows to net, DMOs will necessarily come to rely on their largest counterparties. These are typically their PDs, with whom they have the most sustained relationships and are assigned higher limits. This can result in greater concentration risk.
With regards to secured transactions, some countries directly consider the credit rating of the collateral, while others define their collateral selection based on the central bank repo eligibility or accept only their own government bonds. All issuers among the former group require investment-grade securities, and most have more stringent requirements, with the most commonly cited minimum rating being AA-. Overall, out of 20 surveyed countries, 12 issuers employ minimum ratings, 5 only accept their own government bonds, 2 accept bonds with the same rating as theirs, and 2 euro area issuers accept any ECB-eligible securities.
Context & evolution
Belgium’s cash management programme leverages a wide range of short-term funding and investment instruments. It raises funds through Treasury Certificates, ECP, repos on Belgian government bonds, and money market loans. Excess cash is invested via buybacks, money market deposits, reverse repos on Belgian government bonds, and central bank deposits.
Recent challenges have driven adjustments to the DMO’s cash management framework. On 1 May 2023, the ECB lowered its remuneration on deposits to ESTR minus 20 bps for unlimited amounts, prompting a need for alternative investment strategies.
Anticipating lower returns on central bank deposits, the DMO explored more secure alternatives, focusing on tri-party reverse repos managed by Euroclear. While bilateral reverse repos had previously been used, they came with significant operational constraints, such as managing margin calls in cash only, with no collateral switching and only using Belgian securities. Transitioning to tri-party reverse repos enabled the DMO to increase volumes by automating margin calls several times per day, allowing intraday collateral switching, and including foreign securities in the collateral basket, namely of other highly rated bonds issued by euro area sovereigns and the European Commission. While this transition has proven advantageous, it required substantial setup time with Euroclear and updates to contracts.
To invest surplus cash and smooth its redemption profile, the DMO also buys back its own bonds, generally with a residual maturity of up to 12 months (but it can be extended after prior notice to the market and dealer community), or T-bills to reduce the cash balance and debt to GDP ratio.
Counterparty risk
The DMO employs a standardised approach to managing credit lines for external counterparties, tailored by product. Counterparties must meet minimum long-term rating requirements. Any financial institution or EU sovereign with the required rating and belonging to the OECD can be allocated a credit line.
Credit line sizes are determined by a counterparty’s credit rating and financial strength. For financial institutions, lines are calculated based on the lowest rating from Moody’s, Fitch, or S&P, and their equity (Tier 1+Tier 2 capital), is capped according to rating class. Sovereign credit lines are determined by macroeconomic parameters such as GDP, long- and short-term credit ratings, and government deficits, also capped by rating class. Maturity is product-dependent and based on the counterparty’s rating.
Long-term credit risk stems from derivatives and loans to public institutions. Derivative exposure is almost fully mitigated through daily margin calls under a credit support annex (CSA), reducing overall risk to near zero. Loan risk is limited to a small number of long-term loans to Belgian public institutions, with the DMO also serving as an intermediary for European loans to Belgium’s regional governments.
Short-term credit risk primarily arises from unsecured deposits and repos. This risk is managed through a strict counterparty rating threshold, limits on deposit amounts, and short maturities (typically one week or less). The DMO also has the flexibility to reduce or suspend deposits during geopolitical shocks. Repo-related risk is low, with only uncollateralised portions deducted from credit lines. The DMO carefully spreads its risk across multiple counterparties to mitigate concentration risk in both deposits and repos.
4.4.4. Environmental, Social and Governance (ESG) criteria
For the time being, limited consideration is given to ESG criteria in the choice of cash management investing instruments or for funding. For most countries, ESG policies fall outside the scope of short-term investment decisions, and ESG criteria are thus not part of the investment framework. However, some countries do include small ESG considerations in their investment decisions: Germany prefers to accept green bonds as collateral for reverse repos, while the Netherlands considers ESG factors as part of the potential reputational risk posed by its investments.
4.5.1. Potential risks
Managing larger cash balances introduces challenges, both for the sovereign and financial markets.
One key risk arises when banks, particularly during a crisis, place large deposits with the DMO by purchasing short-term paper. This influx of liquidity can reduce interbank lending, potentially hampering the central bank’s ability to implement monetary policy.
Another concern is moral hazard: when DMOs place large unsecured deposits with credit institutions, they assume credit risk. In the event of a liquidity crisis, retrieving funds may prove difficult, and public withdrawal by the DMO could trigger market anxiety. If the institution faces a solvency crisis, the DMO might also be pressured to rescue the bank to protect its own deposits, exacerbating the moral hazard.
A similar event could happen if many DMOs place their liquidity via CCPs’ in reverse repos. This could lead to some DMOs essentially becoming liquidity providers in the reverse repo market. A decline in their surplus cash levels could then have a ripple effect on the wider reverse repo market.
Additionally, DMOs face the risk of “crowding out” other market participants, especially when borrowing large sums from domestic markets. Such activities can limit borrowing capacity and distort pricing, particularly in markets where the DMO is a relatively large player.
4.5.2. Potential solutions
DMOs can mitigate these risks through collateralised lending using highly liquid securities. These include their own securities or those of other highly rated sovereign bonds. This approach reduces credit risk when lending to financial institutions, particularly in the private sector.
Additionally, DMOs implement single counterparty exposure limits. These cap the amount of risk exposure to any institution across the different product lines, whether collateralised or unsecured. By limiting the potential risk concentration with a single entity, DMOs reduce the likelihood of significant losses in case of institutional failure.
When collateral shortages arise, often due to central bank actions like QE, DMOs can operate special repo facilities. These facilities are designed to complement central bank operations, ensuring that there is adequate collateral in the market to support liquidity, including by offering off-the-run bonds. This can minimise the risk of market disruptions caused by collateral shortages and ensures that market participants can continue their activities without significant liquidity constraints.
The development of financial markets for both funding and investing purposes has afforded many cash managers the opportunity to enlarge their toolkits. The potential advantages include greater flexibility and cost-effectiveness. The country practices examined in this chapter draw attention to the importance of evaluating the suitability of different instruments for different situations and conditions, as well as establishing a policy framework against various risks that may arise.
Limits on the level of deposits that can be placed with the central bank, and the remuneration offered on these deposits can significantly influence cash management practices. When DMOs have unrestricted access to these deposits offering market rates, they tend to adopt a more passive approach to cash management, relying less on market-facing tools and maintaining larger cash buffers (Figure 4.2). In contrast, countries, particularly in Europe, where deposits are limited and/or where the remuneration is below market rates, maintain much lower or even negligible liquidity buffers, and adopt a more active, market-based approach, making greater use of shorter-term money market instruments.
Note: This figure represents a general illustration of the impact of cash buffer size, and level of market access on the instrument mix. Actual instrument mixes chosen will also depend on other factors covered in this chapter and will also be constantly changing as the circumstances facing the cash manager change.
Source: OECD Ad Hoc Group on Cash Management Survey (2024)
DMOs that use the central bank as the main repository for liquidity often conduct very few active cash management operations. Conversely, DMOs with limited access to central bank deposits, or where the remuneration is set below policy rate, may choose to rely more on market-facing tools, developing more advanced cash management frameworks. These DMOs use a variety of investment instruments to manage liquidity, typically accessing their domestic money markets on a daily basis.
With regards to short-term funding requirements, T-bills are commonly used for known liquidity needs, while short-term variations are more easily managed using repos, CPs, and secured deposits. Risk appetite, market access, and domestic market depth also shape cash management practices. Countries whose money markets are deep and liquid and where the DMO can be confident of continued access typically maintain lower cash buffers. These countries often implement more sophisticated cash management strategies to optimise their liquidity and net their cash flows efficiently.
References
[7] Bank of Canada (2024), “Introduction of one-month treasury bill”, BoC Website, https://www.bankofcanada.ca/2024/04/introduction-one-month-treasury-bill/.
[5] Bank of Canada (2016), “Terms and conditions governing the morning auction of receiver general cash balances”, BoC Website, https://www.bankofcanada.ca/wp-content/uploads/2014/03/terms_conditions_280116.pdf.
[6] ECB (2025), Eligible assets, https://www.ecb.europa.eu/mopo/coll/assets/html/list-MID.en.html.
[4] European Union (2019), Guideline (EU) 2019/671 of the European Central Bank of 9 April 2019 on domestic asset and liability management operations by the national central banks (recast) (ECB/2019/7), https://eur-lex.europa.eu/eli/guideline/2019/671/oj/eng.
[2] OECD (2024), OECD Global Debt Report 2024, OECD, https://www.oecd.org/en/publications/global-debt-report-2024_91844ea2-en/full-report/component-7.html#section-d1e3351-50c8aca875.
[1] OECD (2021), OECD Sovereign Borrowing Outlook 2021, OECD Publishing, Paris, https://doi.org/10.1787/48828791-en.
[3] UK DMO (2025), Standing Repo, https://www.dmo.gov.uk/responsibilities/standing-repo/.
Canada uses two market-based tools to raise short-term funding to meet its expected cash outflows: T-bill and CMB issuance. T-bill issuance is the primary tool used to raise cash ahead of outflows and manage large fluctuations in cash balances. Regular terms of 3-, 6- and 12-month issuance are auctioned bi-weekly with T+1 settlement.8 To help limit the potential mismatch in cash flows, issuance and maturity redemption dates always fall on the same day, and previously issued 6- and 12-month T-bills are reopened as a 3-month once they roll down the curve. Given their bi-weekly issuance pattern and the desire to be regular and predictable in terms of issuance size (i.e. avoiding large increases or decreases in issuance size), pre-funding cash outflows using T-bills may occur multiple weeks in advance depending on the expected payment size and timing.
As T-bills are a relatively inflexible funding instrument, Canada also relies on CMBs to supplement its bi-weekly T-bill issuance. CMBs are typically quite short in term, often 1-2 weeks in maturity, and are not regularly scheduled, providing treasury managers with flexibility to determine the size, settlement date and term of the issuance that best fits their cash needs. 9 Given their flexibility, CMBs are typically used as a fine-tuning instrument to target the low point of forecasted cash balances and often mature once sufficient balances have been raised, thus reducing the need to carry unnecessary cash for a prolonged period. The flexibility of their scheduling and the fact these operations can be settled on a same-day basis also allows treasury managers to incorporate the most up-to-date information into their forecast before deciding if additional funding is required.
Canada does not conduct daily funding operations and does not use cash management tools such as CP issuance or repos to fund daily outflows. Canada’s approach to funding cash outflows is relatively passive, allowing its cash buffer to absorb most day-to-day fluctuations while using bi-weekly T-bill issuance and ad hoc CMBs to ensure sufficient cash is raised to meet forecasted outflows. This approach differs from many European countries, which take a more active approach, undertaking daily transactions to fund cash balances to maintain liquidity targets and/or smooth the profile of projected net government flows.
For this relatively passive funding approach to be successful, Canada maintains a large cash/asset buffer to ensure sufficient funds are always available to meet expected cash outflows. Its prudential liquidity plan (PLP), implemented in 2013, stipulates the government should hold liquid financial assets to safeguard its ability to meet payment obligations in situations where normal access to funding markets may be disrupted or delayed. The objective of this policy is for the government's overall liquidity levels to normally cover at least one month, or 23 business days, of net projected cash flows, including coupon payments and debt refinancing needs. The financial assets that make up Canada’s cash buffer can be grouped into two categories: domestic cash deposits held at the central bank and financial institutions and FX assets. In addition to the PLP, Canada maintains an internal cash buffer to manage against large and unexpected cash outflows on a day-to-day basis. This buffer helps ensure the government always has sufficient cash to fund normal payment-related activities without drawing on the demand deposit or issuing an unplanned CMB.
Although Canada’s daily funding activities are relatively passive, it maintains an active approach to investing its excess cash balances. Through a competitive multi-price auction process, Canada invests a portion of its excess cash balances each morning with its eligible counterparties (Bank of Canada, 2016[5]). This exchange is fully collateralised and is conducted under a tri-party repo agreement. Given the length of time that can be needed to pre-fund cash outflows using T-bills, the morning auctions allows Canada to earn a competitive market-driven rate on its excess balances.
The Italian DMO’s cash management framework has evolved significantly since 2011. Previously it was focused on investing liquidity overnight in the unsecured market, but it has transitioned to a more complex strategy that incorporates both unsecured and secured transactions, including longer tenors. This transition was on hold until the COVID-19 pandemic due to changes in financial markets and the global monetary environment, with several national central banks implementing non-conventional monetary frameworks (such as QE) and challenges posed by negative interest rates.
However, facing liquidity risk exacerbated by the pandemic and episodes of scarcity of collateral, especially government bonds in the secondary market, the Italian DMO launched a repo facility in May 2021 to address both issues. A ministerial decree issued in January 2022 (Decree of the Minister of Economy and Finance no. 1416 of 10 January 2022, hereafter “the Decree”) empowered the Italian DMO to use repos and reverse repos for cash management purposes. The Decree also empowered the DMO to carry out, with selected counterparties, unsecured bilateral transactions that were previously limited to overnight deposits to be concluded via auctions. As a result, the Italian DMO has moved from a setup characterised by very limited operations to using a broader range of market facing tools.
The Italian Treasury uses the repo facility with two strategic objectives:
Increasing the remuneration for holding excess liquidity through reverse repos.
Reducing the stock of short-term government bonds outstanding, especially T-bills, with more flexible funding instruments such as repos. Repos are possible thanks to the ad hoc issuance of tranches of outstanding bonds that were initially established with a portfolio of 15 government bonds dedicated solely to repo operations.
All the repo and reverse repo operations are traded on the interdealer electronic platform MTS Repo, where daily trades exceed several billion euros, making it the reference repo market for Italian government bonds. All transactions are executed with the CCP in order to minimise counterparty risks. The Bank of Italy executes all back-office operations.
In recent years, the treasury has increased its market presence, expanding its portfolio to 50 government bonds. Almost all tranches have a nominal value of EUR 1 billion. Over time, repo volumes have risen significantly, due to short- and very short-term operations, further expanding the collateral provided to the market, especially those more requested or squeezed.
At the same time, the relevance of reverse repo adopted to invest excess liquidity into the market has increased massively. These transactions allowed the treasury to invest, including the unsecured repo operations, 75% of the excess liquidity on average in 2024, compared to 57% in 2023 and 21% in 2022. These operations provided a consistently better return compared to the ECB remuneration on government deposits.
Following the entry into force of the Decree, the number and volume of money market transactions performed by the treasury rose significantly as the new instruments facilitated the flow of cash and securities with the treasury’s counterparties. Accordingly, the Italian DMO reviewed the risk control framework for cash management activities, aiming at 1) introducing operational limits that would consider the effective risk of the transactions, 2) limiting the acceptable collateral to high-quality securities, 3) limiting the tenor of some operations; and 4) strengthening the criteria for the selection of counterparties.
Short-term repos and reverse repos concluded through the facility make up most of the operations carried out by the Italian Treasury for cash management purposes: these transactions are subject to very limited counterparty risk and, therefore, are only subject to an "overall" limit. In particular, repos are limited by the amount of the securities portfolio available for lending (currently EUR 52 billion),10 while the overall limit on reverse repos is applied only on transactions which are not cleared through a CCP.
All other bilateral transactions that are either unsecured or not settled through a CCP are subject to specific limits regarding:
Investment transactions: the combined amount of investment transactions (i.e. the sum of deposits and reverse repos).
Collateral: acceptable collateral which is limited to government bonds issued by euro area countries with an “investment grade” rating or by EU supranational institutions. In practice, most of the transactions are collateralised by Italian government bonds.
Duration: tenor of the operations which depend on the kind of transaction and whether they are cleared or not.
Eligible counterparties: for uncollateralised deposits and bilateral repo/reverse repo (see hereafter).
Currently, the following categories of entities are qualified as counterparties to the treasury for money market activities:
Specialists in government bonds (PDs) as well as counterparties belonging to their banking group..
The European Commission and the institutions or public bodies that manage the liquidity of the Member States of the EU.
The additional counterparties, selected by the treasury according to the criteria of financial soundness established by the Decree. Such counterparties are publicly listed.
For PDs, the credit limit is determined based on the rating. Following a review of the Decree, the “long-term rating” has been replaced by the short-term rating issued by a recognised rating agency. This is to consider the very short tenor of money market operations.
Non-PD counterparties, besides having the investment grade short-term rating, are asked to comply with all the minimum capital requirements established by the banking regulation, i.e. the solvency ratios (Total capital ratio, Tier 1 capital ratio, Common equity tier 1 capital ratio), the leverage ratio, the liquidity coverage ratio and the net stable funding ratio both at individual and at a consolidated level. Following the review of the Decree, such ratios will be constantly monitored. Credit limits will be set and adjusted, comparing the capital and liquidity ratios of each counterparty with the Italian banking system averages that are published quarterly by the Bol.
Since the issuance of the Decree, the number of counterparties active for money market operations has grown significantly, and the group is now made up of 32 members.
Overall, the cash management strategy resulted in significant savings from the positive differential between the reverse repo rate and the repo rate, the higher efficiency of T-bill policy issuances, greater flexibility in smoothing cash balance volatility leading to more efficient cash management, and a dynamic reduction of the inefficiency of unnecessary cash surpluses.
Recently, a new legal framework regulating the Italian Treasury’s money market operations allowed government bonds and debt securities issued by EU countries or the EU itself to be used as collateral for repo operations traded bilaterally or through a CCP. This change will allow the Italian DMO to expand and complement its existing money market instruments.
← 1. According to answers from 32 countries in the OECD Counterparty Risk in Cash Management Survey (2023). The survey covers funding and investing aspects of cash management.
← 2. In which post-trade processing is outsourced to an agent.
← 3. Belgium, France, and the Netherlands, for example, rely heavily on/have confidence in the accuracy and detail of their cash forecasts.
← 4. 32 OECD DMOs cited this as a measure to support secondary market liquidity in 2023 (OECD, 2024[2]).
← 5. These are Australia, Bulgaria, Estonia, France, Greece, Latvia, Lithuania, the Netherlands, Slovakia and Slovenia, according to the OECD Counterparty Risk in Cash Management Survey (2023).
← 6. Germany also has access to this tool but given the depth of its repo market and its status as the risk free benchmark borrower in the euro area, it does not lead to greater geographic diversification (depending on the relevant circumstances at any time, mostly Bunds will be taken as collateral).
← 7. For instance, in Portugal, investments in the highest rated entities of 1 year and 1 billion euros are accepted, but those limits fall proportionally with ratings.
← 8. Announced in the federal 2024 Budget, Canada introduced a temporary 1-month T-bill program for one year beginning May 2024. The objective of the one-month T-bill is to support the Canadian money market’s orderly transition away from Bankers’ Acceptances. The one-month T-bill will act as a partial substitute for investors of one-month BAs while private sector one-month investment alternatives are expanded and/or introduced (Bank of Canada, 2024[7]).
← 9. CMBs can also be fungible (i.e. share the same maturity / ISIN as an existing T-bill) or non-fungible (i.e. do not share the same maturity / ISIN as an existing T-bill), with fungible CMBs requiring the government’s PDs to meet their minimum bidding obligations.
← 10. As of January 2025. Any changes to the portfolio are published on the MEF’s website; Repurchase Agreement (REPO) - MEF Department of Treasury.