Four principles underlie the criteria for acting as a counterparty in the Bank's sterling money market operations:
- Participation in the Bank's operations is largely voluntary.
- The Bank's facilities are widely available to the banking sector.
- Liquidity insurance operations are available to the banking sector only.
- There is a presumption that all banks and building societies that meet the PRA threshold conditions for authorisation may sign up for the SMF and would have full access to borrow in SMF facilities against eligible collateral.
These are set out in more detail in the Red Book:
An institution must satisfy the following general criteria to apply to participate in any of the Bank's SMF Facilities.
- It must be required to report Eligible Liabilities to the Bank; or (for Open Market Operations comprising short-term repo, fine-tuning operations and Outright Purchase Transactions only) be an active intermediary in the sterling money markets.
- It must have the operational capability to participate in and efficiently to settle transactions with the Bank.
- It must act in a way consistent with the Bank's objective of achieving fair and competitive sterling markets.
- It must contribute to the Bank's market intelligence work in support of its functions as a monetary authority.
- There must be no objection to the institution's admission to or participation in the SMF from the Prudential Regulatory Authority or from any other relevant UK or overseas regulatory body.
- It needs to satisfy the Bank that the legal documentation underpinning its operations with them is, and remains at all times, fully valid and robust in all relevant jurisdictions.
- None of the Events of Default (as defined in the Bank's legal Documentation) have occurred.
- Where an institution is part of a group but is not the primary entity in the group, it must provide the Bank with a guarantee from the primary entity, in a form acceptable to the Bank.
- Institutions participating in the Reserves Account facility must also be participants in Operational Standing Facilities.
- Institutions participating in the Extended Long Term Repo facility must be Discount Window Facility participants.
The Bank may, in its absolute discretion, waive, add to or vary any or all of the eligibility requirements. For full details please see the Eligibility Criteria listed in the SMF Documentation.
The diagram below shows how access to the different facilities are related. Click image to enlarge.
Group access to the Sterling Monetary Framework
All legal entities within a group which meet the Eligibility Criteria may apply for access to the Discount Window Facility.
For the Reserves Account facility, Operational Standing Facilities and Open Market Operations, the Bank will normally limit the number of its counterparties within any one group. But
- the Bank will be willing to grant more than one entity access where members of the group are subject to the Banking Reform Bill’s ring-fencing rules; and
- generally, it will also be willing to grant more than one entity access where there are other regulatory or legal barriers to the movement of liquidity or collateral intra-group.
But the Bank does not wish to encourage complex legal structures and will seek assurance that multiple access does not unnecessarily complicate the group’s use of the SMF or the Bank’s risk management, and is appropriate given the relative scale and independence of the legal entities concerned.
Each legal entity which applies for access must meet all SMF Eligibility Criteria.
To apply to become a participant it is necessary to complete an Application.