Atty. Jun De Zuñiga
“Secondary market” is a technical term commonly associated with the purchase and sale of government securities. The market is called “secondary” because the transactions occur subsequent to the original issue of the securities in the “primary” market. In the time span of a security, the original issuance occurs only once and all transactions subsequent thereto are conducted in the secondary market. As defined, “secondary market” refers to exchanges and over-the-counter markets where securities are bought and sold subsequent to original issuance, which took place in the primary market (Barron’s Dictionary of Finance and Investment Terms).
Central banks buy and sell securities in the secondary market for the attainment of its policy objectives, and for the promotion of maximum employment and stable prices within the economy. When central banks purchase securities, they inject liquidity into the system and thereby give the economy more fuel to stimulate economic activity. This stance is described as an “easing” or “expansionary” policy which may be called for in times of slower employment growth or a potential economic downturn (Laura Hopper, www.stlouisfed.org). On the other hand, when central banks sell the securities, they soak up the liquidity in the market. Policymakers call this as “tightening” or “contractionary” monetary policy – tapping the brakes to slow down the car and restrain spending when price stability is at risk due to higher-than-desired inflation (ibid.).
Central banks conduct their purchase and sale securities transactions through their “open market operations”. Transactions may be executed through outright purchases or sales but can also be done through repurchase agreements. Most central banks are not allowed to lend money without requiring suitable assets as collaterals. In repurchase agreements, the underlying securities serve as collaterals, thereby complying with the security requirement.
What is peculiar in these open market operations is that central banks do not buy in the primary market, but deal only in the secondary market. This is because central banks, especially those vested with financial autonomy, generally are not allowed to grant credit to the government. An outright purchase of securities from the Treasury is tantamount to a grant of credit to the government; whereas if central banks purchase from security holders, these are transactions between them with the securities only serving as underlying instruments. Central banks are not also mandated to conduct their open market operations on a daily basis. It need not be done on a given day when the central bank judges that the system has the appropriate amount of liquidity.
In the Philippines, the open market operations of the Bangko Sentral ng Pilipinas (BSP) more or less follow the above-described pattern. While the BSP does not purchase its securities directly from the Bureau of Treasury, its Charter nonetheless authorizes the BSP to conduct its open market operations through the purchase and sale of government securities in the secondary market. Said Charter in fact explicitly declares as eligible securities the following: “(a) evidences of indebtedness issued directly by the Government of the Philippines or by political subdivisions; and (b) evidences of indebtedness issued by government instrumentalities and fully guaranteed by the Government”, subject only to the conditions that the securities are freely negotiable, regularly serviced and available to the general public (Section 91, R.A. No. 7653, as amended by R.A. No. 11211). It may also be noted that the law does not provide a cap to such purchases by the BSP. What the law simply requires is that such purchase and sale transactions must be done in accordance with its objective of attaining price stability (Section 90, ibid.).
The above comments are the personal views of the writer. His email address is [email protected]