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Asset Allocation

In accordance with the Service Level Agreement (SLA), the Bank manages the official reserves so as to maintain their liquidity and security and, subject to that, so as to maximize the return from holding them. The Bank and HMT agree in the SLA a series of benchmarks for the assets in which the reserves are invested. This is essentially the high-level asset allocation decision.

In order to determine the benchmark asset allocation for the EEA, the Bank employs an asset allocation model that explicitly trades off liquidity and return: the model determines an asset mix that maximises expected return for given levels of expected liquidation costs.

The Bank and HMT also agree a benchmark for the currency allocation of the reserves. This takes into account past patterns of risk and return, as well as other macroeconomic factors such as trade flows and the currencies likely to be required in any intervention. This benchmark is disclosed in the EEA Annual Accounts and is currently 40% US dollars, 40% euro and 20% yen.

HMT may decide, on advice from the Bank, to hold assets, or to set a currency allocation for the reserves, that differ from these benchmarks. These are described as Strategy Positions. The EEA Annual Accounts disclose whether any Strategy Positions were taken during the financial year.

In addition, the Bank's portfolio managers are permitted, within limits, to take positions relative to the benchmarks in order to generate returns. This is described as 'active management'.

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