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What is a Special Purchase?

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  • Written By: Mary McMahon
  • Edited By: C. Wilborn
  • Last Modified Date: 17 September 2016
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    Conjecture Corporation
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A special purchase is a purchase made by the Bank of Canada as part of an open market operation which is designed to increase liquidity in the Canadian market overnight. This is done as part of a special purchase and resale agreement with a primary dealer, an entity who trades government securities in high volume. The special purchase, in addition to increasing liquidity for the primary dealer and the market by extension, also lowers overnight interest rates. The Bank of Canada makes arrangements for such deals if it appears evident that the market is trending in a direction which could benefit from lower interest rates and increased liquidity.

In a special purchase and resale agreement, the Bank buys government securities and the seller agrees to buy them back at a set price the next day. This has the effect of increasing liquidity because the Bank provides the dealer with currency. It also lowers interest rates by freeing up currency for lending. In the reverse, a sale and repurchase agreement, the Bank sells securities to a seller overnight, with the Bank buying them back in the morning.

Every day in the late morning, the Bank of Canada assesses the rate at which overnight funds are trading. If this rate is falling below the Bank's target rate, it initiates special purchase and resale agreements with primary dealers. The Bank can be involved in trade of government bonds and other types of government securities during the overnight deal.

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The Bank of Canada has been Canada's central bank since 1935. Like other central banks, it uses open market operations to keep the economy stable and to promote economic growth and economic activities. It is also involved in setting interest rates and other activities which are designed to push the economy in the direction of healthy growth. Open market operations of this nature must be performed carefully in order to avoid undue influence on the economy, which might suppress economic activities rather than promoting them.

Advertising sometimes includes the phrase "special purchase," and in this sense it does not refer to open market operations conducted by the Bank of Canada. Instead it is a trick of language which is used to satisfy laws about how sales can be advertised. A special purchase sale reflects a sale of merchandise which is of a differing quality from a retailer's normal merchandise, and offered as a much lower price.

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