Reserves accounts are effectively sterling current accounts for SMF participants - they are among the safest assets a bank can hold and are the ultimate means of payment between banks. Whenever payments are made between the accounts of customers at different commercial banks, they are ultimately settled by transferring central bank money (reserves) between the reserves accounts of those banks.
Reserves balances can be varied freely to meet day-to-day liquidity needs, for example, to accommodate unexpected, end-of-day payment flows. In this way, reserves balances can be used as a liquidity buffer. The funds held in reserves accounts are considered "liquid assets" for the purpose of the PRA's liquidity requirements.
The Bank currently provides reserves via the assets purchased as part of Quantitative Easing, and regular Indexed Long-Term Repo operations. All reserves account balances earn Bank Rate. The current operation of the Reserves scheme is set out in more detail in the Red Book:
Red Book - The Reserves Scheme
The main SMF Documentation sets out how the scheme works. These may be amended by the Bank from time to time by Market Notices.
Market Notice: Sterling Monetary Framework
Effective 6 August 2009