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1. Home
2. Transitioning to a repo-led operating framework
TRANSITIONING TO A REPO-LED OPERATING FRAMEWORK
Discussion paper
* RELATED LINKS RELATED LINKS
* PRA statement on ILTR
* Let’s get ready to repo! - speech by Victoria Saporta
* Market Operations Guide
* Explanatory note on the STR
* ILTR - Market Notice 16 October 2024
* PRA statement on Short Term Repo (STR) facility
Published on 09 December 2024
This discussion paper, published in December 2024, seeks feedback on the Bank’s
transition to a repo-led, demand-driven operating framework, including proposals
to recalibrate the ILTR in line with its expanded role. The Bank welcomes views
from current and prospective SMF participants, the wider market and the public
with the deadline for providing feedback 31 January 2025. Comments should be
provided to RepoLedFrameworkDP@bankofengland.co.uk
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Accept cookies and load the video Vicky Saporta
* TRANSCRIPT – VICKY SAPORTA
Hello, I'm Vicki Supporter, the Executive Director for Markets here at the
Bank of England.
I'm responsible for using the Bank’s balance sheet to implement monetary and
financial stability policy.
Today we’ve published a discussion paper on a balance sheet operating
framework.
One important way that we achieve our objectives is through our supply of
central bank reserves, the safest, most liquid financial assets in the
economy, and the ultimate means of settlement in sterling.
The way we supply reserves is changing.
For years, a quantitative easing and Term Funding schemes have supplied an
abundant quantity of reserves to the banking system under a supply driven
framework, these programs are now being unwound and the reserves they
supplied are disappearing.
New ways of supplying reserves are needed and are set out in my summer
speech. Let’s get ready to repo!.
We’ve decided that moving to a demand driven, repo LED framework is best
suited to meeting our policy objectives.
This transition has already begun, and so we’re already seeing increased use
of our preparations as intended, but this is a substantial change which will
require banks and building societies to adjust how they manage the sterling
liquidity and how they interact with the Bank.
In our discussion paper, we set out how we think this new framework will
operate across the full suite of our SMF facilities and seek feedback on its
calibration, including in particular our proposals for the recalibrated ILTR.
The paper also sets out the good practice that firms should follow to ensure
they’re ready for increased facility usage in the future.
In support of this, we’re also seeking feedback on our operational
arrangements. SMF participants need to be able to access our facilities as
and when desired in a smooth and timely fashion.
We plan to finalise our new framework in the first half of the next year,
after analysing your responses.
Please do submit them by 31st January.
Thank you.
Browse content
CONTENT
* Foreword
* Summary
* The Bank’s approach to transition
* Sterling Monetary Framework facilities in transition
* 1: The Bank’s approach to transition
* 1.1: Introduction
* 1.2: Principles for the framework
* 1.3: Policy and operational considerations
* 2: Sterling Monetary Framework facilities in transition
* 2.1: Sterling Monetary Framework facilities
* Box A: Eligible collateral
* 2.2: High-level design of the ILTR facility
* 2.3: Recalibrating the ILTR for transition to a repo-led framework
* Box B: Bank of England operations and private markets
* 3: Collateral management and operational readiness
* Box C: How to be ready to participate in Bank operations
* Box D: Use of Term Delivery By Value (TDBV) to collateralise SMF facilities
* 4: Commenting and summary of questions
* 4.1: Commenting on this discussion paper
* 4.2: Summary of questions
* 5: Annex
* 5.1: Summary of SMF lending facilities
FOREWORD
In our minds at all times is ‘why’ the Bank of England (the Bank) does what it
does – our core objectives of maintaining monetary and financial stability – and
‘how’ we use our balance sheet to achieve them. One important way we do this is
by supplying central bank reserves, which, as the ultimate means of settlement
in sterling, are the safest and most liquid financial assets in the UK economy.
The Bank’s framework for supplying reserves is in transition. Over the last
decade we have operated a supply-driven framework. In pursuit of its monetary
policy objective, Monetary Policy Committee (MPC) decisions on quantitative
easing (QE) purchases and term funding schemes (such as the Term Funding scheme
with additional incentives for Small and Medium-sized Enterprises (TFSME))
supplied abundant reserves, and, in doing so, supported the Bank’s financial
stability objective. The Bank has set out its plans to move to a demand-driven
framework as these programmes unwind.
The process of transition has now begun. The quantity of reserves has been
steadily falling due to the unwind of QE purchases and TFSME repayments, with a
small component being offset by increased use of both our Short-Term Repo (STR)
and the Indexed Long-Term Repo (ILTR) operations. We welcome this; it is
consistent with a gradual move from a supply-led framework to a demand-led one.
As set out in both Governor Andrew Bailey’s speech The importance of central
bank reserves Opens in a new window and my speech Lets get ready to repo! Opens
in a new window, we believe that going forward our objectives are best met by
supplying the stock of reserves through repo operations against a broad set of
collateral. This requires a substantial change in how banks and building
societies manage their sterling liquidity and interact with the Bank.
The primary aim of this discussion paper (DP) is to set out to market
participants how we envisage our overall demand-driven, repo-led framework for
supplying reserves will operate, and to seek feedback on its calibration as we
continue this transition.
The ILTR and STR are not the only pieces of the puzzle. These facilities are
part of a wider suite of Sterling Monetary Framework (SMF) facilities, both
bilateral and market-wide, which are all ‘open for business’. Firms should
consider usage of our facilities holistically, as such the DP seeks feedback on
our full suite of facilities.
As part of the suite of facilities, the ILTR will play a greater role than it
has in the past. The ILTR will, alongside the STR, supply the majority of the
stock of reserves to meet the system’s liquidity needs. The ILTR’s parameters
need to adapt to this evolving role, and one key purpose for this discussion
paper is to set out those revised parameters.
We are keen to receive feedback on this from our counterparties (‘SMF
participants’). In particular, we welcome your views on the recalibrated ILTR;
how you view usage of the facility relative to private market alternatives; how
you might split usage between ILTR and STR; and your collateral preferences more
generally.
Central to a successful transition is operational readiness. In addition to
views on the framework itself, we are setting out good practice that firms
should follow to ensure they are ready for greater use of our facilities,
including by considering their approach to pre-positioned collateral and
ensuring familiarity with collateral and settlement processes and systems. We
are also seeking firms’ views on potential operational barriers that could
impact the success of the new framework.
Our aim is to enable a conversation on the design and calibration of our
framework, including the factors that are likely to determine firms’ interaction
with the Bank’s facilities. This will help us ensure our framework continues to
meet our core objectives. It is our intention to engage a wide range of market
practitioners and interested parties in this dialogue, including, but not
limited to, our counterparties. The feedback will be analysed and used to
finalise our arrangements for transition, which will be announced in the first
half of 2025.
Vicky Saporta
Executive Director, Markets
SUMMARY
THE BANK’S APPROACH TO TRANSITION
The purpose of this DP is to obtain feedback – from current and prospective SMF
participants, the wider market, and the public – on the Bank’s transition to a
repo-led operating framework for supplying reserves, and in particular on the
ILTR facility. This feedback will be reviewed ahead of finalising our
arrangements for transition in the first half of 2025.
Since 2022, the MPC has been unwinding its asset purchases – a process known as
quantitative tightening (QT). Alongside that, TFSME drawings have begun to be
repaid. As a result, the level of reserves in the system is falling. In steady
state, demand for reserves by SMF participants is likely to be below current
levels of reserves supply, but higher than it was prior to the 2007–08 global
financial crisis (GFC).
The Bank has previously explained its decision to transition towards a
demand-driven framework to supply reserves. The STR facility was introduced in
2022 to maintain rate control by allowing firms to source unlimited reserves
against the highest quality (Level A) collateral, such as gilts, at Bank Rate.
The Bank also committed to review the appropriate long-term mix of assets on its
own balance sheet.footnote [1] This DP is an important milestone in this review.
A demand-driven, repo-led framework is best placed to meet the system’s evolving
reserve demand. It supports monetary control and provides an appropriate level
of reserves for financial stability purposes, and retains flexibility for the
potential expansion of the Bank’s balance sheet in stress as repo operations can
be quickly replaced by asset purchases or term funding schemes should the MPC
determine these are needed in the future. It also exposes the central bank’s
balance sheet to less financial risk, in contrast to supplying reserves through
the purchase of securities.
To avoid capacity constraints in the STR and to aid in the distribution of
reserves to the Bank’s diverse counterparties, reserves will also be supplied in
the ILTR, which lends reserves for six months at a spread above Bank Rate
against a broad range of collateral.
Broad-based participation in Bank operations is expected. But supplying a
materially higher stock of reserves through repo operations should not come at
the cost of activity in core private markets, whose resilience matters for
monetary and financial stability.
The Bank will monitor how the new framework, and the calibration of facilities,
performs against its design principles on a continuous basis.
STERLING MONETARY FRAMEWORK FACILITIES IN TRANSITION
All elements of the Bank’s operating framework – the SMF – work together to
enable the Bank to deliver monetary and financial stability. The SMF comprises
remunerated reserves accounts provided to SMF participants, complemented by
regular market-wide operations (ILTR and STR), bilateral facilities available on
demand (Operational Standing Facilities (OSFs) and Discount Window Facility
(DWF)) and discretionary non-standing facilities (such as the Contingent Term
Repo Facility (CTRF)), which may be activated to provide additional liquidity.
Lending in all SMF repo operations generate reserves, but the Bank envisages
that the majority of the stock of reserves in normal market conditions will be
supplied across ILTR and STR. Reflecting the expanded role of the ILTR relative
to the past, the PRA have published a statement setting out that they judge
usage of the ILTR to be routine sterling liquidity management.
The Bank judges that the current auction design (variable price, variable size)
of the ILTR continues to be appropriate for meeting its monetary and financial
stability objectives. It balances sufficient predictability for firms while
being responsive to changes in demand and ensures private markets are not
disintermediated.
However, changes to ILTR parameters are needed to ensure it operates in a more
predictable and transparent way for firms seeking to manage their reserves, and
that the cost of obtaining sufficient reserves via the ILTR is consistent with
relevant market comparators. To do this, the Bank expects to increase the amount
of reserves supplied in the facility in total, make more liquidity available at
our initial pricing levels, and adjust the price of obtaining higher amounts of
reserves.
SMF participants should prepare to borrow in SMF facilities regularly and at
scale as part of normal liquidity management. This includes pre-positioning
sufficient levels of collateral with the Bank. Firms are strongly encouraged to
ensure they are operationally ready for this transition.
1: THE BANK’S APPROACH TO TRANSITION
1.1: INTRODUCTION
1. The Bank uses its balance sheet to meet its statutory objectives of monetary
and financial stability. Our main liabilities – banknotes and central bank
reserves (deposits held with us by financial institutions) – are the safest and
most liquid of all financial assets. Bank of England reserves (‘reserves’) are
the ultimate means of settlement for sterling transactions. The Bank’s sterling
market operations control the supply of reserves and play a central role in both
implementing monetary policy and contributing to financial stability. The
framework of reserves accounts and sterling market operations is referred to as
the SMF.
THE PURPOSE AND EVOLUTION OF THE BANK’S OPERATING FRAMEWORK
2. The Bank implements monetary policy by supplying reserves to participants in
the SMF: commercial banks, building societies and others.footnote [2] The terms
on which reserves are supplied to and held by SMF participants – such as the
rate paid on reserves – influences short-term market interest rates, which in
turn affects the rates at which households and businesses borrow and save in the
real economy. Anchoring short-term interest rates is the first step in the
transmission of Bank Rate to the wider economy, and hence to meeting the MPC’s
inflation target.
3. Commercial banks, building societies and other market participants need to
hold reserves to make payments to each other and insure against potential
outflows. The level of reserves held by the banking system before the GFC was
insufficient for financial stability purposes.footnote [3] There has been a
structural increase in commercial banks’ demand for reserves for precautionary
reasons since the GFC, including as a result of changes in banks’ risk
appetites; the post-crisis strengthening of prudential liquidity regulations;
and increases in the number of SMF participants with a wide range of business
models.footnote [4]
4. Since 2009, the majority of reserves have been generated as a consequence of
the MPC’s programmes: asset purchases to deliver QE and a series of term funding
schemes, most recently the TFSME launched in response to the Covid pandemic.
Reserves supply has been ‘abundant’ during this period. The excess of reserves
has pushed down on short-term market rates, but they have been aligned to Bank
Rate by the fact that SMF participants compete to borrow funds in the market
which are deposited as reserves at the Bank and are remunerated at Bank Rate.
This framework has been effective at maintaining control of market interest
rates.
5. Reserves supply is now falling due to the MPC’s decision in 2022 to unwind
its asset purchases – known as QT – and the repayment of TFSME drawings. If
supply were to fall below the sum of firms’ demand for reserves for
transactional and precautionary purposes – a level the Bank refers to as the
Preferred Minimum Range of Reserves (PMRR) – firms would bid up for reserves in
money markets, driving short-term market rates upwards. Should reserves fall
substantially below the PMRR this could also pose risks to financial stability.
An updated framework is required to ensure the Bank continues to supply an
appropriate level of reserves for monetary and financial stability.
CHART 1: BANK OF ENGLAND RESERVES SUPPLY AND BACKING ASSETS
FOOTNOTES
* Source: Bank of England.
*
* Notes: Coloured areas summarise the Bank’s main on balance sheet sterling
facilities. The gap between the sum of those facilities and reserves
primarily reflects sterling banknotes. ‘Term funding’ includes the Term
Funding Scheme (TFS) and the TFSME but excludes the Special Liquidity Scheme
and the Funding for Lending Scheme (which were funded off balance sheet). To
avoid double counting, ‘Loan to Asset Purchase Facility (APF) backing QE’
excludes lending backing the TFS while it was in the APF (pre-2019); prior to
2013 Q3, the series shows the quantity of assets financed by the creation of
central bank reserves on a settled basis. ‘Other sterling facilities’
includes Short-Term Open Market Operations, Long-Term Repos, the CTRF and the
Covid Corporate Financing Facility; it excludes the Sterling Bond Portfolio
previously used to fund the Bank.
THE PURPOSE OF THIS DP
6. The Bank has previously explained its decision to move to a demand-driven
framework to supply reserves and maintain market interest rate control as
reserves generated through MPC programmes are reduced.footnote [5] The STR
facility was added to the SMF in 2022 to respond to fluctuations in demand for
liquidity and so maintain market interest rate control as reserves fall.footnote
[6]
7. At the same time as it announced the STR, the Bank committed to reviewing the
appropriate long-term mix of assets on its own balance sheet. This DP is an
important milestone in this review. The Bank judges that the STR on its own
would be insufficient to meet expected levels of system-wide reserves demand,
since:
* the narrow collateral eligibility of the STR means that it may be unsuited to
the business models and balance sheet profiles of a large proportion of SMF
participants. In the absence of alternative sources of reserve supply, the
STR’s efficacy as a market interest rate control tool might also prove to be
too dependent on dealers’ balance sheet capacity to on-lend liquidity in
money markets; and
* furthermore, over-reliance on the one-week term of the STR poses unnecessary
operational risk both to the Bank and SMF participants that would be forced
to roll over high volumes of drawings every week.
8. This DP sets out the changes that the Bank is making to its operating
framework in transition. It engages current and prospective SMF participants,
wider market participants and other interested parties on the transition to a
demand-driven, repo-led operating framework for supplying reserves, and in
particular on the recalibration of the ILTR facility. Feedback will be reviewed
ahead of finalising our arrangements for transition in the first half of 2025.
9. The remainder of this section sets out the principles which have guided the
move to a repo-led operating framework and the key policy considerations for the
framework.
1.2: PRINCIPLES FOR THE FRAMEWORK
10. Our design of the SMF is guided by four key principles:
1. Deliver the Bank’s core statutory objectives of monetary policy and
financial stability. First and foremost, the framework must be effective at
implementing monetary policy – by controlling market interest rates and
providing flexibility to deploy other monetary tools (such as asset
purchases) where necessary – and must supply an appropriate level of
reserves for financial stability, including the flexibility to expand supply
effectively in stress.
2. Minimise risk to the Bank’s balance sheet. The Bank’s choice of operating
framework has implications for where financial risks, including interest
rate and credit risk, are distributed and managed in the financial system.
Financial risks borne by the Bank can affect the wider public sector balance
sheet. The Bank cannot avoid exposure to financial risk but should take it
on only when there is a clear policy case for doing so, and take measures to
mitigate it where possible.
3. Minimise market distortions. The Bank must limit the risk that the terms on
which it supplies reserves reduces incentives for firms to manage
appropriately their own liquidity risk, or that the Bank’s operations
disintermediate private markets. The choice of framework should deliver the
appropriate balance between liquidity provision directly through the Bank’s
facilities and indirectly through core markets, whose resilience in normal
times and in stress is critical for monetary and financial stability. In
other words, the Bank seeks a framework that supplies no more reserves than
is necessary for meeting its policy objectives.
4. Transparency and accountability. The Bank has acquired an increasing number
of responsibilities since 2009 and meeting all of its policy objectives can
lead to an increasingly complex balance sheet. A transparent operating
framework helps to ensure that the Bank continues to be accountable to the
public, Parliament and other stakeholders.footnote [7]
11. A demand-driven, repo-led framework – comprised of short and longer-term
lending operations collateralised against a broad range of assets – meets these
principles. Repo operations provide a reliable and flexible means of supplying
the standing stock of reserves and can expand and contract rapidly in response
to changes in this demand. From a monetary policy perspective, this increases
the quality of rate control in an environment in which reserves are ample but no
longer abundant. In addition, these operations can be quickly replaced by asset
purchases or term funding schemes should MPC determine these are needed in the
future.
12. From a financial stability perspective, repo operations against broad-based
collateral facilitate a liquidity upgrade and support the redistribution of
liquidity across the banking system. Provided repo operations are run on a
frequent basis and supported by adequate pre-positioned collateral, they enable
the Bank’s balance sheet to expand rapidly and at scale in response to stress.
By flexing to meet demand, repo operations minimise the risk of ‘excessive’
supply and the potential for a reduction in core market resilience.
13. Compared to the supply of the stock of reserves through purchases of
securities, such as gilts, repo operations expose the central bank balance sheet
to less financial risk. Outright gilt holdings expose the Bank to substantial
levels of interest rate risk – primarily, net interest income losses that can
arise if Bank Rate (the rate the Bank pays on reserves) rises above the yield on
gilts. This is not the case for repo operations which are indexed to Bank Rate –
and so always generate income for the Bank that matches or exceeds the rate the
Bank pays on reserves.footnote [8] Instead of interest rate risk, the Bank is
left with counterparty credit risk – the risk that a borrower defaults during
the term of the loan. This risk can be mitigated through prudent collateral
haircuts and counterparty credit risk monitoring.footnote [9]
14. This DP does not address the mix of assets to back banknotes.footnote [10]
These assets should be determined in consultation with HM Treasury, which owns
the risk and income generated by Issue Department.
1.3: POLICY AND OPERATIONAL CONSIDERATIONS
RESERVES DEMAND
15. Aggregate reserves demand in the future is uncertain and is likely to be
affected by the price and non-price terms on which the Bank supplies reserves.
For the reasons given in Section 1.1, the Bank expects the level of reserves to
be higher than it was pre-GFC. The Bank’s published survey-based estimate of the
PMRR provides an indication of the level of precautionary and transactional
demand we can expect to see in the future.footnote [11] However, the Bank will
continue to use a variety of methods to analyse the drivers of reserves demand
through transition, as well as conducting further work on the appropriate level
of reserves for monetary and financial stability in the long term.
INCREASED AND BROAD-BASED PARTICIPATION IN REPO OPERATIONS
16. The transition to a demand-driven, repo-led operating framework requires a
substantial change in how banks and building societies manage sterling liquidity
and interact with the Bank. SMF participants will need to source liquidity
directly from the Bank at much greater scale than they have before as part of
their normal liquidity management. While SMF participants have multiple ways of
sourcing liquidity, the aggregate stock of reserves required to meet system-wide
demand can only be generated by firms participating in our facilities.
17. The Bank encourages broad participation in SMF facilities since this
supports financial stability. By offering to lend reserves against a broad mix
of collateral and at a variety of terms, a wide range of firms are able to
source reserves directly from the Bank regardless of their business model and
presence in high-quality liquid asset and longer-term bank funding markets
(subject to meeting the SMF eligibility criteria).
COMMITMENT TO TRANSPARENCY AND PREDICTABILITY IN THE ILTR
18. To support participation in the ILTR, this DP marks a step change in the
level of transparency the Bank provides on the facility (Section 2.2 and 2.3).
Firms should have confidence in using the facility and in its regulatory
treatment – as set out in the PRA statement published alongside this DP.
READINESS FOR FACILITY USAGE
19. SMF participants should prioritise their readiness to borrow in SMF
facilities regularly and at scale now, while reserve supply remains relatively
abundant. This includes pre-positioning sufficient levels of collateral with the
Bank, bearing in mind the timelines needed for the Bank’s due diligence.
Participants should test facilities routinely and use them more regularly at
early stages of transition to ensure readiness to use them when needed, either
in normal market conditions or in periods of stress. The PRA statement published
alongside this DP encourages firms to test their operational readiness for
accessing the ILTR regularly.
REVIEW OF THE FRAMEWORK
20. The transition from an environment of abundant reserves to a demand-driven,
repo-led operating framework is a major change for the SMF. The Bank will
monitor how this new framework performs against its design principles on a
continuous basis.
21. In particular, widespread participation in SMF facilities should complement
rather than limit activity in core private markets, including bank funding
markets and sterling money markets (see Box B in Section 2.3). The resilience of
private markets is central to delivery of the Bank’s monetary and financial
stability objectives, including through their role in supporting the management
of liquidity by non-banks.
22. The Bank will review the effectiveness of the overall framework, including
calibration of SMF facilities, from time to time over the course of the
transition.
2: STERLING MONETARY FRAMEWORK FACILITIES IN TRANSITION
2.1: STERLING MONETARY FRAMEWORK FACILITIES
23. All elements of the SMF work together to enable the Bank to meet its
monetary and financial stability objectives. The key elements are:
* reserves accounts;
* regular market-wide repo operations;
* bilateral on-demand facilities; and
* contingent market-wide operations that can be activated at the Bank’s
discretion.
RESERVES ACCOUNTS
24. Banks and building societies, broker-dealers, central counterparties and
international central securities depositories are eligible for reserves accounts
at the Bank of England. Reserve balances are remunerated at Bank Rate, helping
to anchor short-term interest rates to the policy rate.
REGULAR MARKET-WIDE REPO OPERATIONS
25. The Bank conducts weekly lending operations, consisting of a short-term
facility against a narrow collateral set – the STR – and a longer-term facility
against broader collateral sets – the ILTR. In the future, these two facilities
will work together to supply the majority of the stock of reserves necessary for
monetary control and financial stability needs. The Bank publishes the total
aggregate usage of the STR and ILTR soon after the close of each auction but
does not publish data regarding individual transactions or counterparties.
STR FACILITY
26. The STR was introduced to ensure that short-term market interest rates
remain close to Bank Rate as reserves fall. The STR provides an unlimited
quantity of central bank reserves at Bank Rate for a one-week term against the
highest quality ‘Level A’ collateral (Box A). The facility allows for a flexible
expansion of reserve supply to maintain rate control, with the quantity of
reserves supplied likely to vary over time due to various factors, including
pressures on short-term market interest rates.
ILTR FACILITY
27. The ILTR is expected to play an increasingly central role in supplying the
stock of reserves to firms over the course of the transition. Reflecting this
expanded role relative to the past, the PRA have published a statement setting
out that they judge usage of the ILTR to be routine sterling liquidity
management. Details on the changes planned to the ILTR can be found in Section
2.3.
28. The ILTR provides reserves for a six-month term via a competitive auction,
where participants can bid for reserves against the full range of SMF eligible
collateral. The quantity of reserves provided in each auction, and the price at
which they are provided, is responsive to demand. Prices are expressed as a
spread to Bank Rate.footnote [12] There is a minimum spread for each collateral
set, but the clearing spread for each collateral set in the auction can rise
above these minimum levels. As the spreads participants are willing to pay rises
and the bid quantities increase, the size of the auction will increase and
clearing spreads will rise. If the spreads participants are willing to pay
against less liquid collateral rises, the auction will increase the proportion
of liquidity allocated to less liquid collateral.
29. SMF participants are encouraged to bid the maximum they are willing to pay
as this will maximise their likelihood of being allocated in the auction. As
illustrated in Chart 2, the ILTR’s uniform pricing design means that successful
bids will pay the same single clearing spread for each collateral set.
CHART 2: ILLUSTRATION OF UNIFORM PRICING (A) (B)
FOOTNOTES
* (a) All successful bids pay the same clearing spread.
* (b) Bids at the clearing spread must all be either fully allocated or
partially allocated.
BILATERAL FACILITIES
30. Our weekly repo operations are complemented by bilateral facilities that are
available daily, on an on-demand basis to meet firm-specific liquidity needs in
between our regularly scheduled market-wide operations, the weekly STR and ILTR.
OPERATIONAL STANDING FACILITY (OSF)
31. The OSF supports SMF participants in managing short-term unexpected shocks
or payment frictions by lending reserves or allowing reserves to be deposited at
a fixed spread to Bank Rate, on demand. The OSF also limits volatility in market
interest rates by providing an alternative source of borrowing to our weekly
operations, thereby supporting short-term rate stability. The facility allows
participants to borrow overnight reserves against high-quality liquid collateral
at 25 basis points (bps) above Bank Rate or deposit reserves at the Bank for
25bps below Bank Rate. Usage of the OSF is published on an anonymised and
aggregated basis, subject to a lag, on the third Wednesday after the subsequent
MPC meeting date.footnote [13]
DISCOUNT WINDOW FACILITY (DWF)
32. The DWF provides liquidity insurance by lending high-liquidity assets (gilts
and reserves) against the full range of SMF-eligible collateral. The DWF is
available on demand for SMF participants who anticipate, or experience, a
previously unexpected liquidity need in-between our regular market-wide
operations.
33. Provided SMF participants seeking a DWF drawing meet and are expected to
continue to meet PRA Threshold Conditionsfootnote [14] and have sufficient
eligible collateral, there is a presumption that the Bank will lend via the DWF.
A routine DWF test trade programme ensures operational preparedness by all
participants.
34. DWF drawings are initially for up to a 30-day term.footnote [15] For
longer-lived but nevertheless temporary liquidity needs, participants can apply
to roll DWF drawings. Drawings may be repaid at any point. DWF pricing varies
according to the collateral used and the size of the DWF drawing as a proportion
of the firm’s eligible liabilities.footnote [16] footnote [17] The Bank
discloses the average daily value of lending in the DWF over a calendar quarter
with a five-quarter time lag. This does not include any details at the
counterparty or transactional level.
CONTINGENT MARKET-WIDE OPERATIONS
CONTINGENT TERM REPO FACILITY (CTRF)
35. The Bank can respond flexibly to actual or prospective market-wide liquidity
events by activating the CTRF.footnote [18] The CTRF allows the Bank to provide
liquidity against all SMF-eligible collateral at any time, term and price that
the Bank chooses.
Question 1: Our framework is designed to be robust to changes in the demand for
reserves – which might be slow-moving or rapid; long-lived or short-lived. Are
there any adjustments we could make to bolster the robustness of our framework
for supplying reserves to changes in firms’ demand?
Question 2: What are the key risks to our framework's effectiveness at achieving
our stated policy aims? How should the Bank address these risks during
transition?
Question 3: How is the overall framework likely to affect private market
activity, including the structure, activity, and pricing of money markets, and
banks’ incentives to provide repo lending to NBFIs in BAU and in stress?
Question 4: What are the key factors that may affect SMF participants’ total
ILTR and STR usage over the course of the transition?
Question 5: For borrowing against Level A collateral specifically, what factors
determine whether to use central bank facilities or private market alternatives,
and if using central bank facilities, what factors determine the choice between
the STR, ILTR and OSF? How might these evolve over time?
BOX A: ELIGIBLE COLLATERAL
The collateral we accept is split into levels according to creditworthiness and
liquidity.
* Level A: assets expected to remain liquid in almost all market conditions,
such as high-quality sovereign debt trading in very deep, liquid markets.
* Level B: assets that will normally be liquid, such as sovereign debt,
supranational and the highest quality private sector debt and asset-backed
securities (ABS) or covered bonds.
* Level C: typically less liquid assets, such as lower quality ABS, and
portfolios of loans, such as residential mortgages, consumer and corporate
loans. Any securities delivered by the same entity that originated the
underlying assets (‘own name’) are also Level C.
We do not normally accept equities as collateral for our SMF facilities, but we
have put in place the technical measures to do so at our discretion, should the
need arise in the future.
2.2: HIGH-LEVEL DESIGN OF THE ILTR FACILITY
36. The ILTR will continue to operate as a variable price, variable size auction
with uniform pricing.footnote [19] The Bank has ruled out other auction designs,
judging that they present material risks to our objectives and perform worse
against the principles for the framework set out in Section 1.2. The ILTR’s
current high-level design as a variable price, variable size auction best
delivers the balance required between flexibility and responsiveness to changing
market conditions on the one hand, and sufficient predictability for SMF
participants on the other.
37. The Bank has considered and ruled out the following alternative auction
designs:
* Full allotment at a fixed price (as represented by panel A in Chart 3). This
is the design of the STR operation, which aims to control short-term rates
and provides SMF participants with full certainty of allocation. Adopting
such a design for the ILTR, which has a broader collateral set and is longer
term than the STR, however, could distort market pricing mechanisms in a
wider range of funding markets. As the price of the facility is not
responsive to demand, it could risk oversupplying reserves. This could reduce
private market activity and distort incentives for prudent liquidity
management. Furthermore, the lack of price signals in the facility might
limit the Bank’s ability to recalibrate its price appropriately over time. As
a result, changes in market conditions could lead to excessively large
variations in the quantity of reserves supplied via the ILTR.
* Fixed size with a variable price (as represented by panel B in Chart 3).
Under this design, a fixed clearing price applies until the quantity of bids
exceed the volume of reserves available in the individual auction. At that
point, the clearing price and participants' allocation are determined by the
value of the submitted bids. Under this auction design, the Bank cannot
flexibly respond to demand. This is particularly problematic given the
uncertainty regarding the level of reserves demand during transition, which
makes it challenging to calibrate a fixed size auction for each set of
eligible collateral. Overall, this design could risk over-supplying or
under-supplying reserves to the system, as well as exposing SMF participants
to significant price volatility and unpredictability of allocation.
CHART 3: HIGH-LEVEL AUCTION DESIGNS CONSIDERED BY THE BANK (A)
FOOTNOTES
* (a) D denotes different demand curves. E denotes the equilibrium auction
result, where corresponding clearing prices and quantities are found.
38. The Bank judges that the ILTR’s current variable price, variable size design
provides a balanced ‘middle road’ that mitigates the challenges that these other
designs pose. This design balances providing sufficient predictability for SMF
participants, while reducing risks of oversupply and potential market
distortion. There is a fixed quantity of reserves supplied at a fixed minimum
price. Beyond that, the Bank’s supply curve slopes upwards and the size and
clearing price of the auction is determined by demand seen in the auction (as
represented by panel C in Chart 3). This means the price and size of the auction
is responsive to the price SMF participants are willing to pay for liquidity and
the amount of liquidity demanded. The upward sloping part of the curve requires
a higher clearing price for larger quantities of reserves to be supplied. This
reduces the risk of the Bank disintermediating private markets or having
excessive influence on bank funding costs.
39. The Bank recognises that a variable price, variable size auction is more
complex than a fixed price or fixed size auction. The Bank judges that this
complexity is necessary to achieve greater predictability of allocation for SMF
participants relative to fixed size auctions, with reduced risk of oversupplying
reserves and having excessive influence on wider market funding costs relative
to fixed price, full allotment auctions.
40. While this high-level design will be retained, the Bank is committing to
several changes to the ILTR to ensure it can deliver on its objective to supply
the appropriate level of reserves. First, it will be recalibrated – increasing
the amount available in total and at minimum prices and lowering prices for
supplying greater quantities. Second, both the recalibration of the ILTR, and a
step-change in the Bank’s transparency about how the auction will work, will
improve the predictability and usability of the facility for SMF participants.
The next section outlines the planned changes in more detail.
2.3: RECALIBRATING THE ILTR FOR TRANSITION TO A REPO-LED FRAMEWORK
41. The following features of the ILTR will remain the same:
* Uniform pricing: the auction will continue to be conducted as a uniform price
auction – each successful bidder pays the same single clearing spread for
each collateral set. This means SMF participants should bid the maximum they
are willing to pay.
* Minimum prices: minimum bid spreads will remain at 0bps, 5bps and 15bps over
Bank Rate for Level A, B and C collateral, respectively.footnote [20]
* Term: the lending term will remain six months. We intend for the facility to
be used for liquidity rather than term funding.
* Frequency: the ILTR will continue to be offered as a weekly auction.footnote
[21]
42. However, the following changes will be made to the calibration of the ILTR
to ensure it is appropriate for transition to a repo-led framework. We
anticipate that these changes will be implemented in 2025 Q2.
1. An increase in the total amount of reserves available in the ILTR. The total
quantity of reserves available in each auction will increase by at least
20%. The current maximum auction size is £25 billion. The Bank is proposing
to raise this to at least £30 billion, which would mean the maximum stock
available in the ILTR would rise to at least £720 billion.footnote [22] The
Bank’s current judgement is that this amount will be sufficient to supply an
appropriate stock of reserves in normal market conditions, as well as
provide a significant buffer in case of additional liquidity needs in
stress. The CTRF can also be activated at the Bank’s discretion in response
to a prospective or actual market-wide stress to provide additional reserves
at a fixed price if needed.
2. An increase in the quantity of reserves available at fixed minimum spreads.
The Bank will improve predictability of allocation for SMF participants
during the early stages of transition by increasing the quantity supplied at
minimum spreads by 40%–100%, to £7 billion–£10 billion per auction. This is
up from £5 billion today. This would increase the stock of reserves
available at minimum spreads from £120 billion today to £168 billion–£240
billion.footnote [23] This increase in the quantity available at minimum
spreads takes into account the need to provide participants with more
opportunities to improve their familiarity with the auction dynamics in a
low-risk way while the majority of reserves continue to be supplied by asset
purchases under QE. The exact amount to be supplied at minimum spreads will
be confirmed next year before any changes are implemented.
3. A gentler upward sloping supply curve to help ensure that clearing spreads
rise only gradually for quantities above what is available at minimum
spreads. Clearing spreads will rise above minima when demand for reserves
exceeds the fixed amount available at minimum spreads. At this point, we
will introduce a shallower upward sloping supply curve than is currently the
case. This will mean that clearing spreads will rise more gradually for a
given increase in demand. The Bank expects that clearing spreads will rise
above minimum spreads as the transition progresses. SMF participants should
ensure they are familiar with how to bid in the ILTR early in the
transition. The Bank intends that the overall calibration of our facilities
for transition – including the STR – will result in a provision of reserves
in line with the system’s estimated needs at prices consistent with relevant
market comparators. When supplying this quantity, we expect the price for
drawing against Level C collateral in the ILTR to eventually range from
between 20bps and 40bps above Bank Rate, and more cheaply when drawn against
more liquid collateral. This range is calibrated against historic pricing
for market instruments that are comparable to the ILTR as set out in Table 1
in Box B.
4. Improved transparency. The Bank will be more transparent about its supply
preferences embedded in the ILTR. This starts with this DP. The Bank will
confirm the final ILTR parameters ahead of implementing any changes in 2025.
This change in transparency relates to the design and calibration of the
ILTR: the Bank does not intend to make any changes to its disclosures on the
results of each auction.footnote [24]
43. SMF participants should come to the ILTR auctions regularly and distribute
their demand across auctions. The aggregate stock of reserves to be supplied by
the ILTR is intended to be built over multiple auctions, ensuring that the level
of reserves in the system remains relatively stable. As the ILTR is offered
weekly and for a six-month term, each auction will supply a proportion of the
total amount needed to meet the system’s needs. In other words, the ILTR is not
calibrated to supply the entire stock of reserves demanded in a single auction.
44. The Bank is still reviewing how the total quantity of reserves supplied in
the ILTR is allocated to different collateral sets. A key feature of the ILTR is
that the provision of liquidity is flexible between collateral sets and
responsive to demand. This is particularly desirable during the transition given
uncertainty in how demand for liquidity against different collateral types may
evolve. The Bank intends to retain this flexible provision in its auctions, but
will consider whether changes should be made to the relative amount available
for each collateral set.footnote [25] The Bank is keen to hear feedback from SMF
participants on what factors will determine demand for liquidity against
different collateral sets in the ILTR; how demand might be split for liquidity
against Level A collateral between the ILTR and STR; and how these factors might
evolve over time. Responses will help inform the calibration of supply to
different collateral sets within the ILTR.
45. Chart 4 explains how the Bank envisions the combination of all of these
changes will ensure that the ILTR can meet its objectives as we move towards a
repo-led framework.footnote [26]
CHART 4: ILTR SUPPLY CURVE AT DIFFERENT LEVELS OF DEMAND
46. The Bank will review feedback on these proposals ahead of implementing
changes to the ILTR in the first half of 2025. Changes to the ILTR parameters
will be confirmed in a Market Notice to be published next year. The design of
the ILTR, combined with the proposed recalibration, is intended to make the
facility robust to changes in market conditions and to ensure that minimal
changes will be needed over the next few years as the transition progresses.
However, as with the rest of the SMF framework, the Bank will keep the
calibration under review and may periodically update the parameters of the ILTR
to ensure its terms remain robust to structural changes in market conditions.
BOX B: BANK OF ENGLAND OPERATIONS AND PRIVATE MARKETS
* The Bank’s operating framework influences a wide range of financial markets.
In order to deliver on its design principles (Section 1.2), the Bank needs to
ensure ongoing control of short-term market interest rates and an appropriate
level of reserves for financial stability without either disintermediating
short-term markets or becoming the price setter in other core private
markets.
* Part of the way the Bank achieves this balance is through pricing its
facilities appropriately relative to the closest private market
comparators.footnote [27] This should take into account the ‘all-in’ costs of
using our facilities – factoring in non-price costs such as haircuts,
operational costs, and differences in tenor, frequency, or regulatory
treatment.
* For example, to ensure the STR anchors short-term interest rates close to
Bank Rate without disintermediating private money markets, the STR is offered
for a seven-day term and only once a week. This means that it is not a
perfect substitute for most money market activity, which occurs largely
overnight.footnote [28] In addition, the ‘all-in’ cost of using the facility
is estimated to be around 5bps–10bps above Bank Rate for most firms, allowing
for significant money market activity to occur before borrowing from the STR
becomes attractive. Consistent with this, private market activity has
remained robust over 2024 (Chart A), a period which saw increased STR usage.
CHART A: STERLING MONEY MARKET STOCKS AND STR USAGE (A)
FOOTNOTES
* Sources: Bankstats, Sterling Money Market data and Bank calculations.
*
* (a) Data as of last October observation for each year. Repo comprises banks’
repo borrowing transactions that use Gilts as collateral. Overnight includes
all one-day maturity transactions.
* Beyond money markets, the ILTR could impact short-to-medium term funding
markets. The closest comparators include term retail deposits, covered bonds,
and commercial paper markets. However, these are not direct substitutes to
the ILTR. Market participants will consider several factors when making
longer-term liquidity and funding decisions, taking into account regulatory
considerations such as Net Stable Funding Ratio eligibility; diversification
of funding sources; and presence in wholesale issuance markets.
* The Bank has provided term funding schemes in the recent past, but these have
been introduced by the MPC in order to support the transmission of monetary
policy. We judge that it would not be appropriate for the Bank to be a
price-setter in short-to-medium term funding markets in normal market
conditions and without a specific policy objective. Furthermore, outside of
stress periods, it would be inappropriate for the Bank to distort banks’
proactive liquidity management through the provision of long-term funding.
* For the calibration of the ILTR to be consistent with these aims, it should
provide liquidity in normal market conditions at prices that are broadly
consistent with borrowing in alternative markets. ILTR calibration should be
robust to changing market prices and consider non-price factors of borrowing
in other markets. While there are no perfect comparators, and market prices
will vary over time – including in response to changing trends in bank
funding and liquidityfootnote [29] – Table 1 shows some comparable
instruments and their recent levels.
TABLE 1: MARKET COMPARATORS TO THE ILTR AND RECENT PRICE LEVELS (A)
Instrument
Median (spread to OIS)
Interquartile range (spread to OIS)
Six-month GC repo (b)
9bps
2–16bps
Six-month certificate of deposit
22bps
14–36bps
EUR covered bond (c)
41bps
31–55bps
One-year retail deposits
45bps
10–85bps
FOOTNOTES
* Sources: Bank of England, Bloomberg Finance L.P., Sterling Money Market data,
Bank calculations.
*
* (a) Data from January 2011 – November 2024 unless otherwise stated.
* (b) Data from August 2016 – November 2024.
* (c) Series based on constant-maturity unweighted average of secondary market
spreads for the major UK lenders’ five-year EUR covered bonds, where
available.
Question 6: What factors determine the point at which borrowing in the ILTR on a
regular basis becomes attractive relative to private market alternatives?
Question 7: How will the indicative changes to ILTR calibration (in terms of
quantity and pricing) affect SMF participants' behaviour at the start of, and
later on in, transition?
Question 8: What factors determine whether to borrow against Level A, B, or C
collateral in the ILTR? What relative amounts of Level A, B and C collateral do
you intend to draw against? How might this evolve over time?
Question 9: What factors affect SMF participants’ ability to smooth demand
across ILTR auctions?
Question 10: How effectively does the indicative ILTR recalibration balance the
need for the auction to be responsive to market conditions with sufficient
predictability of allocation for participants?
3: COLLATERAL MANAGEMENT AND OPERATIONAL READINESS
47. This section sets out the good practice required from participants to ensure
that they are prepared for the transition to a demand-led framework, including
key operational arrangements to minimise their operational risk. Participants
are encouraged to review the additional resources linked in this section for
further detail on the Bank’s operations.
48. The Bank also seeks feedback on potential barriers within our operational
arrangements that could impact the framework’s functionality. Feedback on
near-term improvements will be the most important, but the Bank also welcomes
views on longer term system changes.
BANK OF ENGLAND MARKETS OPERATIONAL GUIDE AND OPERATIONAL GUIDANCE
49. The Bank of England Market Operations Guide is an essential resource for
participants. It provides comprehensive guidance on the Bank’s operational
procedures, including collateral management and settlement processes. It also
contains links to the Bank’s SMF Operating Procedures Opens in a new window,
which help participants align their processes with the Bank’s requirements.
BOX C: HOW TO BE READY TO PARTICIPATE IN BANK OPERATIONS
* Test all facilities you are signed up to regularly to ensure you are ready to
use them, and you are familiar with both systems and settlement processes.
* Ensure multiple users maintain access to and familiarity with our electronic
trading system (Btender) and the Collateral Management Portal (CMP) to
facilitate straight through settlement and management of securities
collateral.
* Familiarise yourself with the Bank’s collateral framework, eligibility
criteria and haircuts.
* Plan ahead for collateral pre-positioning; in particular for loan pools and
securities which require time to complete the due diligence process.
* Be aware that you can choose to net cash payments in the Bank’s operations
which makes settlement more efficient.
* Refer to the operational and pre-positioning guides.
REGULAR TESTING OF FACILITIES
50. Regular testing of the Bank’s facilities is crucial for maintaining
operational readiness and helps to identify potential issues and maintain
participants’ readiness for operations. The Bank expects participants’ own risk
frameworks to mandate frequent testing. At the moment, participants are required
to test their access to SMF liquidity facilities (DWF and ILTR/STR) at least
every two years. The Bank may update its testing requirements, may request
additional tests, and will accommodate testing requests from participants where
possible.
THE SMF COLLATERAL FRAMEWORK
51. When the Bank lends through market operations, it lends against collateral
delivered to us by SMF participants. This collateral helps to ensure that the
Bank can recover sufficient value if a participant fails to repay so as to
minimise the potential impact on its loss absorbing capital.
52. The guiding principles behind our collateral framework are that, in the
event of default, the Bank must be able confidently to take legal ownership of
the assets and be able to value and risk-manage them effectively and
efficiently. Additionally, the Bank focuses on accepting assets which are held
in sufficient quantities by a range of SMF participants.
COLLATERAL ELIGIBILITY
53. A key feature of the SMF is the broad scope of asset types that are eligible
as collateral, ensuring that a range of participants and business model types
can participate in our operations. This limits reliance on a small number of
participants to source reserves, ensures a wide distribution of reserves across
the financial system, and thereby contributes to financial stability and
monetary control.
54. Within the wide scope of assets eligible as collateral, the Bank sets
eligibility criteria to ensure that the collateral delivered poses manageable
financial risks. The collateral accepted is split into collateral levels based
on creditworthiness and liquidity (Box A). Most asset classes – all Level A
collateral and much of Level B collateral – are standardised marketable
securities, and as such the eligibility criteria are straightforward and
eligibility approval is automated. However, for raw loan portfolios and
securitisations, the Bank’s eligibility criteria are broader and allow for
greater flexibility in eligibility decision making given the greater
heterogeneity of assets. This discretion extends the time it takes to determine
collateral eligibility.
55. Pre-positioning raw loan portfolios requires due diligence to ensure
collateral is acceptable and within the Bank’s risk appetite. This includes the
Bank’s own risk assessment, ensuring legal ownership of the collateral and its
associated cash flows can be obtained, a third party data audit, and assurance
on data quality. Similarly, for securitisations we require firms to compile all
necessary deal documentation, meet transparency requirements, and in some cases
commission a legal risk review.
56. This necessary due diligence takes time to complete but ensures that the
Bank can be comfortable with the financial risks of collateral and can be more
confident in its risk assessment. As a result, the Bank can be more precise in
the haircuts applied to collateral; a corollary of which should be improved
drawing capacity for participants.
57. Participants can verify the eligibility and setup of their securities
collateral via the CMP or using the published lists on our website – for Level
A, Level B and Level C. The scope of eligible assets is kept under review. The
Bank is exploring enhancements to both internal and external eligibility
checking processes, aiming to improve efficiency for SMF participants while
adhering to its financial, legal, and operational risk appetites.
SETTING HAIRCUTS
58. The Bank sets haircuts on eligible collateral in order to protect against
falls in the value of that collateral in the event that a participant defaults.
The Bank applies consistent haircuts across all operations in the SMF. The
haircuts are designed to protect against the fundamental credit risk of the
assets, as well as the market and liquidity risk. The Bank does not plan to
change its collateral haircut framework as part of the transition to a repo-led
framework. The Bank publishes the base haircuts for Level A, Level B, and Level
C securities Opens in a new window. Haircuts for Level C loan collateral are
calculated individually for each pool of loans.footnote [30]
59. Haircuts are set so that they cover the risk of loss at all points of the
economic cycle – which also reduces any cyclicality in haircut levels. This is
particularly important since for some operations there is a greater likelihood
of lending, and in larger amounts, during periods of severe economic or
financial stress. For these reasons, haircuts are set at a level that is higher
than might apply for similar transactions between commercial banks.
COLLATERAL PRE-POSITIONING, SETTLEMENT AND POOLING
60. The Bank encourages the pre-positioning of both securities and loan
collateral. Pre-positioning ensures that assets are valued and ready for
immediate use in market operations. This expedites access to liquidity when
needed, which is particularly important during periods of stress. This approach
provides participants with a clearer understanding of their collateral valuation
and reduces the likelihood of operational issues disrupting access to the Bank’s
facilities.
61. The Bank offers three mechanisms for instructing collateral movements: SWIFT
message, emailed spreadsheet or the Bank’s CMP. The CMP provides a streamlined
way to move securities in and out of a participant’s main collateral pool and is
the quickest mechanism for delivery, so the Bank recommends its use to minimise
settlement delays. The CMP also allows participants to view their collateral
valuations, outstanding exposures and to check if a security is eligible to be
used in the SMF. By contrast, the spreadsheet instruction process involves some
manual processing and is the slowest method to provide delivery instructions.
62. Each participant’s collateral delivered to the Bank is placed into a single
pool, from which they can draw liquidity as needed. This model simplifies
collateral management for both parties by reducing the need for specific
collateral matching to individual transactions. Once pre-positioned and
accepted, collateral in the pool can be used across multiple operations without
reassignment. Additionally, it also minimises the need for collateral movements
when transactions are rolled over. More information on pooling can be found in
the SMF Operating Procedures Opens in a new window.
Collateral forward planning
63. Participants should familiarise themselves with the SMF collateral
eligibility criteria as part of their readiness preparations. The Bank
encourages forward planning to avoid operational disruptions, especially during
times of market stress. By ensuring eligible assets are available, participants
can mitigate the risk of delays or ineligibility and inform the Bank's planning
and resourcing.
64. During periods of high demand for collateral eligibility requests, the Bank
may prioritise which collateral to assess first based on factors such as
participants’ available drawing capacity, completeness of request forms,
promptness of responses, wider interest in the same collateral, and ensuring
fair resource allocation among all SMF participants. Participants are given
discretion over which assets to pre-position, and the quantity pre-positioned.
The Bank will provide feedback on asset suitability, reserving the right to deem
some assets ineligible.
Question 11: How do the SMF framework changes discussed in this paper affect
your plans for pre-positioning collateral over the coming years, including the
relative composition of Level A, B and C collateral? What factors will be most
significant in these decisions?
BOX D: USE OF TERM DELIVERY BY VALUE (TDBV) TO COLLATERALISE SMF FACILITIES
* TDBV is a basket of gilt securities held at CREST with automatic daily
adjustments to ensure that the aggregate collateral value is maintained.
Collateral substitutions are processed automatically. For some participants
this can facilitate very efficient management of collateral.
* If a participant wants to use TDBV to collateralise SMF facilities the Bank
recommends the use of TDBV free of payment delivery. This allows TDBV to be
used in the collateral pool alongside other delivered collateral and can be
used in the same way as an outright delivery. Participants are able to
instruct initiation and amendment of the TDBV size and closure via the CMP,
SWIFT or emailed spreadsheet. More details on use of TDBV for SMF facilities
can be found Section 9.8 of the SMF Operating Procedures Opens in a new
window.
* To support use of TDBV the Bank is happy to provide more information to
interested participants and arrange a test trade of the collateral settlement
process. Please note that participants need to advise the Bank in advance if
they wish to use TDBV.
NET SETTLEMENT OF CASH PAYMENTS
65. Participants can choose to net cash payments in the Bank’s operations. This
means that new and maturing business of the same operation type is completed in
one net payment. Netting cash payments generally makes for more efficient
settlement as it reduces the number of cash movements required.
66. Participants can choose to net their cash payments by checking the relevant
box on the Data Collateral Form Opens in a new window submitted to the Bank.
Preferences can be updated by submitted a new form. See the Settlement and
collateral management page for further information. Participants should ensure
that the Bank receives maturity payments by 2pm on maturity date and follow the
Standard Settlement Instructions to ensure timely and accurate settlement.
Question 12: What suggestions do you have on the current SMF operational
arrangements to enhance efficiency further? Responses could consider operational
risk, straight through processing collateral management and cash settlement or
communications with the Bank.
SYSTEMS
67. As the Bank transitions to a repo-led operating framework, it is crucial
that systems and processes are also fit for the future. The Bank is therefore
considering improvements in the long term that could be made to Bank systems, in
particular the Bank of England electronic tendering system (Btender) and the
CMP.
68. Btender is used to carry out SMF operations such as ILTR and STR auctions as
well as APF operations such as gilt sales/purchases. It would be valuable to
understand any improvements that could be made around using Btender or CMP, as
well as any areas where enhancements or new functionality could improve the user
experience. We are in an initial stage of thinking about improvements to our
systems so would welcome participants’ views during this early phase.
Question 13: We are seeking feedback on possible improvements to the Bank's
documentation to support firms’ operational engagement with the Bank. This
includes the Bank’s Market Operations Guide, operational process guides, loan
pre-positioning guide Opens in a new window, and collateral eligibility
framework. What information do you currently access and what improvements or
additions do you suggest?
Question 14: How could current systems, such as Btender or the Collateral
Management Portal (CMP), be improved to enhance participation in operations,
streamline trade settlement and facilitate position management? Please briefly
describe any additional features, adjustments or feedback that could support a
more effective user experience and operational efficiency.
We invite expressions of interest from SMF participants who would be interested
in engaging in further in-depth discussions specifically focused on potential
improvements to the Btender system and/or the CMP. Please specify which
system(s) in your response.
4: COMMENTING AND SUMMARY OF QUESTIONS
4.1: COMMENTING ON THIS DISCUSSION PAPER
The Bank welcomes feedback on the questions posed in this DP from all interested
parties.
Comments should be sent to RepoLedFrameworkDP@bankofengland.co.uk by 31 January
2025.
Responses to the questions set out in this DP will form the basis of the Bank’s
engagement with market participants and other interested parties on the design
of the SMF and the size of its balance sheet. The Bank intends to provide
further information in publications and speeches as its thinking in these areas
develops.
Please indicate in your response if you believe any of the proposals in this DP
are likely to impact persons who share protected characteristics under the
Equality Act 2010, and if so, please explain which groups and what the impact on
such groups might be.
Please see the Bank’s privacy notice here: Privacy and the Bank of England.
4.2: SUMMARY OF QUESTIONS
The Bank is seeking views from interested parties on the following issues:
THE OVERARCHING FRAMEWORK
Question 1: Our framework is designed to be robust to changes in the demand for
reserves – which might be slow-moving or rapid; long-lived or short-lived. Are
there any adjustments we could make to bolster the robustness of our framework
for supplying reserves to changes in firms’ demand?
Question 2: What are the key risks to our framework's effectiveness at achieving
our stated policy aims? How should the Bank address these risks during
transition?
Question 3: How is the overall framework likely to affect private market
activity, including the structure, activity, and pricing of money markets, and
banks’ incentives to provide repo lending to NBFIs in BAU and in stress?
SMF FACILITIES
Question 4: What are the key factors that may affect SMF participants’ total
ILTR and STR usage over the course of the transition?
Question 5: For borrowing against Level A collateral specifically, what factors
determine whether to use central bank facilities or private market alternatives,
and if using central bank facilities, what factors determine the choice between
the STR, ILTR and OSF? How might these evolve over time?
THE ILTR FACILITY
Question 6: What factors determine the point at which borrowing in the ILTR on a
regular basis becomes attractive relative to private market alternatives?
Question 7: How will the indicative changes to ILTR calibration (in terms of
quantity and pricing) affect SMF participants' behaviour at the start of, and
later on in, transition?
Question 8: What factors determine whether to borrow against Level A, B, or C
collateral in the ILTR? What relative amounts of Level A, B and C collateral do
you intend to draw against? How might this evolve over time?
Question 9: What factors affect SMF participants’ ability to smooth demand
across ILTR auctions?
Question 10: How effectively does the indicative ILTR recalibration balance the
need for the auction to be responsive to market conditions with sufficient
predictability of allocation for participants?
OPERATIONAL AND COLLATERAL
Question 11: How do the SMF framework changes discussed in this paper affect
your plans for pre-positioning collateral over the coming years, including the
relative composition of Level A, B and C collateral? What factors will be most
significant in these decisions?
Question 12: What suggestions do you have on the current SMF operational
arrangements to enhance efficiency further? Responses could consider operational
risk, straight through processing collateral management and cash settlement or
communications with the Bank.
Question 13: We are seeking feedback on possible improvements to the Bank's
documentation to support firms’ operational engagement with the Bank. This
includes the Bank’s Market Operations Guide, operational process guides, loan
pre-positioning guide Opens in a new window, and collateral eligibility
framework. What information do you currently access and what improvements or
additions do you suggest?
Question 14: How could current systems, such as Btender or the Collateral
Management Portal (CMP), be improved to enhance participation in operations,
streamline trade settlement and facilitate position management? Please briefly
describe any additional features, adjustments or feedback that could support a
more effective user experience and operational efficiency.
5: ANNEX
5.1: SUMMARY OF SMF LENDING FACILITIES
TABLE A1.A: SMF LENDING FACILITIES
Scheduled open market operations
Bilateral facilities
Facility
Short-Term Repo (STR)
Indexed Long-Term Repo (ILTR)
Operational Standing Facility (OSF)
Discount Window Facility (DWF)
Type
Market-wide lending facility.
Market-wide lending facility.
Bilateral deposit and lending facility.
Bilateral lending facility.
Frequency
Weekly (Thursday).
Weekly (Tuesday).
On-demand daily.
On-demand daily.
Term
Seven days.
Six months.
One day.
Up to 30 days
(CCPs up to five days).
Settlement
T+0.
T+2.
T+0.
T+0.
Volume
Unlimited.
Maximum size of operation subject to demand in the auction.
Size at the request of the participant (dependent on collateral value for OSF
lending).
Size at the request of the participant (dependent on collateral value).
Current pricing
Bank Rate
The minimum price against each collateral set is:
Level A: Bank Rate +0bps
Level B: Bank Rate +5bps
Level C: Bank Rate +15bps.
The clearing price for each collateral set can rise above these minimum levels
depending on auction demand.
Deposit: Bank Rate -25bps.
Lending: Bank Rate +25bps.
Drawings up to 5% of eligible liabilities (ELs) have a flat fee of Bank Rate +
25bps, 50bps and 75bps for Level A, B and C collateral, respectively. After
this, marginal pricing increases linearly relative to drawing size, up to 15% of
ELs. Pricing above that is at the Bank’s discretion.
Collateral
Level A.
Level A, B and C.
Level A.
Level A, B and C.
Asset lent/deposited
Central bank reserves (cash).
Central bank reserves (cash).
Central bank reserves (cash).
Gilts or central bank reserves (cash) at the Bank’s discretion.
FOOTNOTES
* Note: Short-term non-sterling liquidity facilities are not included in the
table above.
1. Explanatory Note: Managing the operational implications of APF unwind for
asset sales, control of short-term market interest rates and the Bank of
England’s balance sheet.
2. Bank of England Market Operations Guide: Our tools.
3. The central bank balance sheet as a policy tool: past, present and future –
speech by Andrew Bailey.
4. ‘Less is more’ or ‘Less is a bore’? Re-calibrating the role of central bank
reserves – speech by Andrew Hauser.
5. See the Bank’s August 2018 DP The Bank of England’s future balance sheet
and framework for controlling interest rates and the August 2022
announcement Explanatory Note: Managing the operational implications of APF
unwind for asset sales, control of short-term market interest rates and the
Bank of England’s balance sheet.
6. Explanatory Note: Managing the operational implications of APF unwind for
asset sales, control of short-term market interest rates and the Bank of
England’s balance sheet.
7. The Bank will continue to be accountable to Parliament in respect of the
Bank’s finances and budget in a variety of ways, including but not limited
to its Annual Report, regular public appearances by Governors and members
of Court before the Treasury Select Committee (as well as pre-appointment
hearings) and the National Audit Office value for money reviews.
8. QE at the Bank of England: a perspective on its functioning and
effectiveness.
9. The Bank capitalises its residual exposures accounting for haircuts in line
with its capital framework, see The Financial relationship between HM
Treasury and the Bank of England – Memorandum of Understanding Opens in a
new window.
10. Under the terms of the 1844 Bank Charter Act, the Bank’s balance sheet is
divided for accounting purposes into the Issue Department, covering
banknote issuance activity, and the Banking Department, which encompasses
all other activities.
11. The most recent survey estimate for 2024 Q3 produced a range of £385–£530
billion.
12. There are no restrictions on the number of bids that can be submitted, or
the quantity of liquidity that can be bid for by individual firms.
13. In practice, usage of the OSF has been low to date. Demand for borrowing in
the OSF has been low, as borrowing rates in private markets have been more
attractive than the OSF rate. Demand for depositing in the OSF has also
been low, as most SMF participants have reserve accounts where balances are
fully remunerated at Bank Rate (above the OSF deposit rate). The limited
usage of the deposit facility has primarily driven by central
counterparties (CCPs) and international central securities depositories who
are required to maintain a pre-determined target balance on their reserves
accounts and use the facility to manage excess reserves.
14. As set out in the Financial Services and Markets Act 2000 Opens in a new
window (FSMA).
15. CCPs have access to use the DWF for cash drawings for up to a five-day
term, to reflect the likely difference in liquidity needs across
institution type.
16. See Firms’ eligible liabilities Opens in a new window for definition.
17. There is a flat fee for drawings up to and including 5% of Eligible
liabilities (ELs) (Bank Rate plus 25bps, 50bps and 75bps for Level A, B and
C collateral, respectively), after which point the marginal pricing
increases linearly relative to the drawing size as a percentage of ELs, up
until 15% of ELs, to Bank Rate plus 75bps, 125bps, and 300bps to Levels A,
B and C respectively. Pricing for drawings that exceed 15% of ELs is at the
Bank’s discretion.
18. The Bank is also expanding its toolkit to include the Contingent Non-Bank
Financial Institutions (NBFI) Repo Facility (CNRF). The facility can be
activated at the Bank’s discretion to address episodes of severe
dysfunction in the UK sovereign debt (gilt) market in particular, arising
from system-wide shocks that temporarily increase non-banks’ demand for
liquidity, when that demand is outside the reach of the Bank’s existing SMF
facilities.
19. See the Bank of England Quarterly Bulletin 2015 Q2 Opens in a new window
and the Index Long-Term Repo process guide Opens in a new window for more
detail on how the ILTR works. The process guide will be updated in due
course to reflect the changes to the ILTR’s calibration.
20. The previously announced 3bps increase to minimum bid spreads for Level A
collateral will no longer be taking place.
21. Confirmation of weekly frequency for Indexed Long-Term Repo Operations –
Market Notice 16 October 2024.
22. The maximum stock available assumes 24 ILTR auctions in a six-month period,
with each one reaching the maximum auction size.
23. Assuming 24 auctions in a six-month period.
24. Aggregate results of each auction will continue to be published. This
includes the total bids, amounts allocated and clearing spread split by
collateral set. The Bank will not disclose individual bids or counterparty
information, in line with the current approach.
25. There is currently £5 billion (bn) of reserves available at fixed minimum
spreads. Up to £2.5bn (50%) can be allocated to bids against less liquid
collateral sets (Levels B and C). Of that £2.5bn, £2bn can be allocated to
bids against Level C. However, in the absence of Level C bids, the full
£2.5bn can be allocated to bids against Level B. Similarly, in the absence
of bids against Level B and C, the full £5bn can be allocated to bids
against Level A. If demand rises and there is an increase in the relative
demand for less liquid collateral, a larger proportion of the auction is
made available to these less liquid collateral sets. With the planned
increase in quantities of reserves available at fixed minimum spreads and
in total, the Bank is reviewing whether changes should be made to the
relative amounts available for each collateral set at minimum spreads, or
to the responsiveness of auction outcomes to changes in relative demand.
26. This illustrates the ILTR supply curve for the total quantity of reserves.
A separate set of supply curves determines how the total quantity of
reserves is split between collateral sets.
27. The terms on which reserves are held by SMF participants also impacts
private market activity. By remunerating reserves at Bank Rate, the Bank
disincentivises SMF participants from lending overnight at rates below Bank
Rate. This is a core element of how the Bank delivers short-term market
interest rate control.
28. Borrowing transaction volumes in repo and unsecured sterling markets are
mostly in overnight tenors. However, the stock of term borrowing for both
repo and unsecured is larger than overnight.
29. See Financial Stability Report – December 2023.
30. The 2014 Quarterly Bulletin article provides more information on how
haircuts are set.
FOOTNOTE [30]
The 2014 Quarterly Bulletin article provides more information on how haircuts
are set.
Close
FOOTNOTE [29]
See Financial Stability Report – December 2023.
Close
FOOTNOTE [28]
Borrowing transaction volumes in repo and unsecured sterling markets are mostly
in overnight tenors. However, the stock of term borrowing for both repo and
unsecured is larger than overnight.
Close
FOOTNOTE [27]
The terms on which reserves are held by SMF participants also impacts private
market activity. By remunerating reserves at Bank Rate, the Bank disincentivises
SMF participants from lending overnight at rates below Bank Rate. This is a core
element of how the Bank delivers short-term market interest rate control.
Close
FOOTNOTE [26]
This illustrates the ILTR supply curve for the total quantity of reserves. A
separate set of supply curves determines how the total quantity of reserves is
split between collateral sets.
Close
FOOTNOTE [25]
There is currently £5 billion (bn) of reserves available at fixed minimum
spreads. Up to £2.5bn (50%) can be allocated to bids against less liquid
collateral sets (Levels B and C). Of that £2.5bn, £2bn can be allocated to bids
against Level C. However, in the absence of Level C bids, the full £2.5bn can be
allocated to bids against Level B. Similarly, in the absence of bids against
Level B and C, the full £5bn can be allocated to bids against Level A. If demand
rises and there is an increase in the relative demand for less liquid
collateral, a larger proportion of the auction is made available to these less
liquid collateral sets. With the planned increase in quantities of reserves
available at fixed minimum spreads and in total, the Bank is reviewing whether
changes should be made to the relative amounts available for each collateral set
at minimum spreads, or to the responsiveness of auction outcomes to changes in
relative demand.
Close
FOOTNOTE [24]
Aggregate results of each auction will continue to be published. This includes
the total bids, amounts allocated and clearing spread split by collateral set.
The Bank will not disclose individual bids or counterparty information, in line
with the current approach.
Close
FOOTNOTE [23]
Assuming 24 auctions in a six-month period.
Close
FOOTNOTE [22]
The maximum stock available assumes 24 ILTR auctions in a six-month period, with
each one reaching the maximum auction size.
Close
FOOTNOTE [21]
Confirmation of weekly frequency for Indexed Long-Term Repo Operations – Market
Notice 16 October 2024.
Close
FOOTNOTE [20]
The previously announced 3bps increase to minimum bid spreads for Level A
collateral will no longer be taking place.
Close
FOOTNOTE [19]
See the Bank of England Quarterly Bulletin 2015 Q2 Opens in a new window and the
Index Long-Term Repo process guide Opens in a new window for more detail on how
the ILTR works. The process guide will be updated in due course to reflect the
changes to the ILTR’s calibration.
Close
FOOTNOTE [18]
The Bank is also expanding its toolkit to include the Contingent Non-Bank
Financial Institutions (NBFI) Repo Facility (CNRF). The facility can be
activated at the Bank’s discretion to address episodes of severe dysfunction in
the UK sovereign debt (gilt) market in particular, arising from system-wide
shocks that temporarily increase non-banks’ demand for liquidity, when that
demand is outside the reach of the Bank’s existing SMF facilities.
Close
FOOTNOTE [17]
There is a flat fee for drawings up to and including 5% of Eligible liabilities
(ELs) (Bank Rate plus 25bps, 50bps and 75bps for Level A, B and C collateral,
respectively), after which point the marginal pricing increases linearly
relative to the drawing size as a percentage of ELs, up until 15% of ELs, to
Bank Rate plus 75bps, 125bps, and 300bps to Levels A, B and C respectively.
Pricing for drawings that exceed 15% of ELs is at the Bank’s discretion.
Close
FOOTNOTE [16]
See Firms’ eligible liabilities Opens in a new window for definition.
Close
FOOTNOTE [15]
CCPs have access to use the DWF for cash drawings for up to a five-day term, to
reflect the likely difference in liquidity needs across institution type.
Close
FOOTNOTE [14]
As set out in the Financial Services and Markets Act 2000 Opens in a new window
(FSMA).
Close
FOOTNOTE [13]
In practice, usage of the OSF has been low to date. Demand for borrowing in the
OSF has been low, as borrowing rates in private markets have been more
attractive than the OSF rate. Demand for depositing in the OSF has also been
low, as most SMF participants have reserve accounts where balances are fully
remunerated at Bank Rate (above the OSF deposit rate). The limited usage of the
deposit facility has primarily driven by central counterparties (CCPs) and
international central securities depositories who are required to maintain a
pre-determined target balance on their reserves accounts and use the facility to
manage excess reserves.
Close
FOOTNOTE [12]
There are no restrictions on the number of bids that can be submitted, or the
quantity of liquidity that can be bid for by individual firms.
Close
FOOTNOTE [11]
The most recent survey estimate for 2024 Q3 produced a range of £385–£530
billion.
Close
FOOTNOTE [10]
Under the terms of the 1844 Bank Charter Act, the Bank’s balance sheet is
divided for accounting purposes into the Issue Department, covering banknote
issuance activity, and the Banking Department, which encompasses all other
activities.
Close
FOOTNOTE [9]
The Bank capitalises its residual exposures accounting for haircuts in line with
its capital framework, see The Financial relationship between HM Treasury and
the Bank of England – Memorandum of Understanding Opens in a new window.
Close
FOOTNOTE [8]
QE at the Bank of England: a perspective on its functioning and effectiveness.
Close
FOOTNOTE [7]
The Bank will continue to be accountable to Parliament in respect of the Bank’s
finances and budget in a variety of ways, including but not limited to its
Annual Report, regular public appearances by Governors and members of Court
before the Treasury Select Committee (as well as pre-appointment hearings) and
the National Audit Office value for money reviews.
Close
FOOTNOTE [6]
Explanatory Note: Managing the operational implications of APF unwind for asset
sales, control of short-term market interest rates and the Bank of England’s
balance sheet.
Close
FOOTNOTE [5]
See the Bank’s August 2018 DP The Bank of England’s future balance sheet and
framework for controlling interest rates and the August 2022 announcement
Explanatory Note: Managing the operational implications of APF unwind for asset
sales, control of short-term market interest rates and the Bank of England’s
balance sheet.
Close
FOOTNOTE [4]
‘Less is more’ or ‘Less is a bore’? Re-calibrating the role of central bank
reserves – speech by Andrew Hauser.
Close
FOOTNOTE [3]
The central bank balance sheet as a policy tool: past, present and future –
speech by Andrew Bailey.
Close
FOOTNOTE [2]
Bank of England Market Operations Guide: Our tools.
Close
FOOTNOTE [1]
Explanatory Note: Managing the operational implications of APF unwind for asset
sales, control of short-term market interest rates and the Bank of England’s
balance sheet.
Close
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