The UK's official holdings of international reserves comprise gold, foreign currency assets, International Monetary Fund (IMF Special Drawing Rights (SDRs), and the UK's Reserve Tranche Position (RTP) at the IMF. With the exception of the RTP, these reserves are held in a government account administered by Her Majesty's Treasury (HMT) which is known as the Exchange Equalisation Account (EEA).
The EEA was established in 1932 to provide a fund which could be used "for checking undue fluctuations in the exchange value of sterling". Any exchange rate intervention undertaken by the UK government would therefore be conducted via the EEA. The legislative underpinning for the EEA is the EEA Act 1979. This states that the EEA may also be used "to secure the conservation or disposition in the national interest of the means of making payments abroad"; and for certain purposes arising from the UK's membership of the IMF. The EEA is used to provide wholesale foreign exchange services to government departments and agencies, such as sales of foreign currency to departments with foreign currency obligations.
Bank of England's role
The Bank acts as HMT's Agent in the day-to-day management of the EEA, dealing in foreign exchange and investing the reserves within the framework of a Service Level Agreement (SLA) set annually by HMT.
The Bank also acts as HMT's Agent for foreign currency liability management, including any issuance of foreign currency debt. This allows the foreign currency part of the government's balance sheet to be managed in an integrated way by the Bank as Agent.
The annual Service Level Agreement (SLA)
The Bank manages the reserves in accordance with an annual SLA set by HMT, and published in HMT's document Management of the Official Reserves. The SLA summarises the benchmarks against which the reserves are actively managed; the investment constraints within which the Bank operates; the framework for risk control; and the arrangements for the audit of the EEA.
HMT has published Key Performance Indicators (KPIs) for the Bank's management of the EEA and performance relative to these indicators is reported in the EEA Annual Accounts and HMT's document Management of the Official Reserves.
In addition, Bank and HMT officials meet on a regular basis to discuss performance.