1.INTRODUCTIONIn the Governor's address at the seventy-seventh Ordinary General Meeting of Shareholders of the South African Reserve Bank on 26 August 1997 it was stated that recent developments in the financial markets have revealed a need for greater flexibility in the market for short-term funds. Under the current monetary policy operational procedures short-term interest rates often do not respond immediately to changes in the overall liquidity position of banks. Correct signals are not always emitted, even at times when money market shortages increase to very high levels. Market interest rates accordingly do not tell the authorities enough about changes in underlying market conditions because they do not always truly reflect the market's perception of liquidity conditions. Easy access to Reserve Bank accommodation at a fixed Bank rate contributes to this rigidity of rates in the money market. It also has a negative effect on the development of interbank trading in surplus funds, and discourages active trading in Treasury bills and short-dated government bonds.The liberalised and globalised financial system with larger and more volatile capital movements between countries in which South African financial institutions now have to operate, requires more effective and timeous monetary policy operational procedures. Changes to the existing procedures will be facilitated considerably by the introduction of the new interbank settlement arrangements in terms of a revised National Payment System to be introduced on 9 March 1998. As from 1 April 1998, the Bank's function as funding agent of the government will probably also be replaced by private-sector securities dealers to be appointed by the Department of Finance. The usefulness of the Tax and Loan Accounts as an instrument of monetary policy will also decline with more efficient management of public-sector cash flows. The Reserve Bank will have to concentrate more on the trading of short-term securities in its operations in managing the overall liquidity position of the banking sector. Against this background, proposals are made in this Discussion Paper for new monetary policy operational procedures of the Reserve Bank in order to eliminate the observed weaknesses of the present system. Suggestions made in this paper are preliminary views presented for discussion purposes to the banking community and other interested parties. The Bank will welcome any comments and participation in the preparation of the new system. The current monetary policy operational procedures are described briefly in section 2 of this paper. Section 3 concentrates on the main changes in the monetary policy operational procedures of other countries that have recently been introduced to cope with similar circumstances arising from the liberalisation and globalisation of financial systems, and to improve the efficiency of central bank operations in the new environment. This is followed by a fairly detailed discussion in section 4 of the proposed new monetary policy operational procedures to be introduced by the Reserve Bank, before a few concluding remarks are made in the final section. Technical details about the proposed procedures to be followed with repurchase transactions are provided in the Annexure. 2.            CURRENT OPERATIONAL PROCEDURESIn line with monetary policies applied in most countries with relatively developed financial markets, the South African monetary policy is firmly directed towards the overall objective of creating and maintaining a stable financial environment. For central bankers this means an inflation rate that will have no significant effect on the decisions of the participants in the economy. In the case of South Africa, it is regarded as imperative to reduce inflation to a level that will be more or less in line with the average rate of inflation in the economies of our major trading partners. The achievement of a sustained environment of financial stability is a prerequisite for the broader macroeconomic objective of economic growth, employment creation and redistrib