THE ECONOMICS OF MONEY,BANKING, AND FINANCIAL MARKETS 476

444

PA R T V

Central Banking and the Conduct of Monetary Policy

Today
Securities
Buys

Sells

Bank of
Canada

Primay
Dealer

Pays

Receives
Cash

Next Day
Securities
Sells

Buys

Bank of
Canada

Primay
Dealer

Receives

Buys
Pays
Cash + Interest

F I G U R E 17- 6

The Mechanics of a Special PRA Operation

Note: In a special PRA (SPRA), the Bank of Canada buys securities from a primary dealer in exchange
for cash and the primary dealer agrees to buy the securities back (repurchase them) the next day at
the original price plus interest, regardless of what happens in the market. In that arrangement, the
primary dealer gets an overnight collateralized loan and the Bank of Canada gets some interest.

Hence, repos, also known as special Purchase and Resale Agreements
(SPRAs), relieve undesired upward pressure on the overnight interest rate.

SRAs

If on the other hand overnight funds are traded at a rate below the target rate of
3.75%, then the Bank of Canada enters into SRAs, in which the Bank sells government securities and the buyer agrees to sell them back to the Bank one business
day later. The balance sheets of the Bank of Canada and the direct clearers now
look like this:

Bank of Canada

Assets

Primary Dealers

Liabilities
Settlement
balances
SRAs

Assets
*$100
+$100

Settlement
balances
Government
securities

Liabilities
*$100
+$100