The MAS Standing Facility, launched on 1 June 2006, serves as a safety valve for the banking system and complements Money Market Operations (MMO). By allowing Primary Dealers (PDs) in Singapore to initiate SGD deposit or borrowing transactions with MAS on an overnight and interest-paying basis, the standing facility allows MAS to match base money supply and demand. This reduces intra-day volatility in overnight interest rates.
Unlike most central banks that operate interest rate-based monetary policies, MAS did not have an interest rate target to base the Standing Facility. As a result the MAS Standing Facility derived a market reference rate from the weighted average rate of successful bids for S$500 million of overnight clean borrowing conducted daily during MMO. The borrowing rate for PDs is 50 basis points above, while the deposit rate is 50 basis points below the reference rate.
The MAS Standing Facility has significantly reduced the volatility of inter-bank overnight interest rates. The effectiveness of the standing facility is illustrated by chart 12, which graphs the difference between the highest and lowest interest rate paid for overnight funds within each day. This spread measure of intra-day interest rate volatility decreased markedly after t
he introduction of the MAS Standing Facility.