Money Market Reform
Frequently asked questions
Note that the answers given below summarise the key points in response to a question. If further clarification or detail is required, please contact a member of the programme team.
- When will the new system be launched?
- What is the deadline for applying to participate in the reformed system?
- Can an institution join the reformed system after it has been launched?
- What legal and operational documentation is available for the new framework?
- Who should I contact at the Bank if I have queries?
- I am interested in participating in the new framework. How do I begin the process?
- Will there be any impact on the collateral markets from the introduction of the reformed system?
- Who is eligible to participate in the new framework?
- Can more than one entity within a group participate in the new framework?
- Can the new facilities be accessed from an
office or branch outside the UK?
Reserves
- What is the role of the Letter of Intent for reserves?
- When should I start talking to SWIFT about establishing connectivity for the Enquiry Link Service to be used to manage reserve accounts?
- Are there any limits on the day-to-day balances that can be held on a reserve account?
- How much flexibility will the +/-1% range on reserves targets provide on the final day of the maintenance period?
- How is interest on reserves calculated if the MPC rate changes during a maintenance period?
- How is interest on reserve accounts to be paid?
- Are there any limits on changing reserves targets?
- How much notice is required to change my reserves target?
- Will statements be available for reserve accounts?
- Would the Bank provide a service to run
a reserve account on behalf of an institution if it did
not wish to connect to SWIFT?
Open Market Operations and Standing Facilities
- Are there any limits on the use of the Standing Facilities?
- What collateral can be used in support of
open market operations and standing facilities?
General
Eligibility
Answers
- Q: When will
the new system be launched?
A: The Bank currently envisages that the reformed system is likely to be introduced in the period between March and June 2006. This range will be updated and progressively narrowed in the light of further information on the Bank's and the banking system's preparations. - Q: What is
the deadline for applying to participate in the reformed system?
A: There will be a period of around three months leading up to the introduction of the new system during which the Bank will not accept new applications to participate. The start date of this period will be published as part of the detailed implementation timetable. For those institutions wishing to participate in the reserve scheme, additional operational deadlines are relevant (for more detail see the reserves section of this page or the document on
Enquiry
Link lead times (15k). - Q: Can an institution
join the reformed system after it has been launched?
A: Yes. There will be a three month period after the launch of the reformed system during which new participants will not be admitted, but it will be possible to join once that period has ended. - Q: What legal
and operational documentation is available for the new framework?
A: The Bank published in July a
draft
of the documentation for participants (753k) covering
legal terms and conditions and the Operating Procedures. The
Bank has asked that participants' front office, back office
and legal staff review it and offer any comments to the Bank.
The final versions will be published later this year. - Q: Whom should
I contact at the Bank if I have queries?
A: In the first instance, queries can be addressed to members of the Money Market Reform programme team. Contact details are available on the Bank of England website and in the document'Contact
with participants in the Bank's reformed operations in the
sterling money markets' (37k). For queries about operational
and implementation aspects, specific contact details for each
facility are also available from these sources. - Q: I am interested
in participating in the new framework. How do I begin the
process?
A: If you have not contacted the Bank already regarding participation, you should contact a member of the programme team (see above for contact details). The Bank can then guide you as to the necessary next steps to take forward your application. For reserve accounts in particular, the preparations can take time, and so you should contact the Bank as soon as possible to get this process underway. - Q: Will there be any impact on the
collateral markets from the introduction of the reformed system?
A: The introduction of reserve accounts will increase the amount of funds the Bank needs to provide to the banking system, in order for reserve scheme members to be able to meet their chosen reserve targets. As a result, the size of the Bank's open market operations will increase and more collateral will need to be provided to the Bank in those operations. Limiting the size of this increase , settlement banks will be able to use their reserves to finance intra-day payments flows in RTGS, reducing the need for them to undertake intra-day repos with the Bank to generate intra-day liquidity. This should free up collateral for use in the open market operations. The Bank accepts a wide range of collateral, including euro-denominated government securities, which should help to ease any pressure on collateral in, for example, the gilt repo market . Further, the Bank is planning to introduce longer-term repo lending (6 to 12 months) at market rates as part of its open market operations, spreading the Bank's provision of funds over a wider range of maturities.Eligibility
- Q: Who is
eligible to participate in the new framework?
A: The new facilities will be available to all banks and building societies required (under the Bank of England Act 1998) to place Cash Ratio Deposits (CRDs) at the Bank. CHAPS or CREST sterling settlement account holders will be members of the reserve scheme automatically. In addition to those eligible for the reserve scheme, the Bank will accept as counterparties in its open market operations other banks, building societies and securities dealers that are active intermediaries in the sterling money markets - all subject to standards of prudence and risk. Participants in any of the facilities will be required to have the operational capability to participate; to act in a way consistent with the Bank's objective of competitive and fair sterling money markets; and to contribute to the Bank's market intelligence work. - Q: Will more
than one entity within a group be able to participate in the
new framework?
A: Only one eligible entity from any group will be able to have access to each of the facilities. For those institutions participating in the reserve scheme and having access to the standing facilities, the same legal entity should have access to both facilities. But a different legal entity within the group to that for reserves and/or standing facilities may become a counterparty in the Bank's open market operations. - Q: Can the
new facilities be accessed from an office or branch outside
the UK?
A: Yes, offices or branches in any other EEA (European Economic Area) country can be used to access the facilities, provided they are part of the same legal entity as the eligible UK office/branch. Those offices will need to operate to the same UK timetable for their participation in the facilities. Reserves - Q: What is
the role of the Letter of Intent for reserves?
A: The Letter of Intent is an indication of an institution's firm intention to participate in the reserves scheme. Although it is not legally binding, it is the starting point of the process to participate in the reserves scheme and will trigger the Bank's preparations for that institution. - Q: When should
I start talking to SWIFT about establishing connectivity for
the Enquiry Link Service to be used to manage reserve accounts?
A: Establishing connectivity via SWIFT takes time, particularly for participants that are not existing users of SWIFT. For those institutions, it is recommended that preparations with SWIFT begin in July in order to be ready for connectivity testing in November ahead of potential January 2006 familiarisation. For those institutions that already use SWIFT, the lead time is likely to be shorter, but it is recommended that all participants in the reserve scheme speak to SWIFT as soon as possible to establish their requirements. For more detail see the document on
Enquiry
Link lead times (15k). - Q: Will there
be any upper limit on the day-to-day balances that can be
held on a reserve account?
A: No, the only limit, or ceiling, will be on the target that can be chosen by reserve scheme members for the average balance during the maintenance period as a whole. - Q: How much
flexibility will the +/-1% range on reserves targets provide
on the final day of the maintenance period?
A: The Bank will specify targets for average balances as a small range, such that if the actual average balance falls within +/-1% of the point target it will be remunerated at the MPC rate with no interest charges. This can provide a significant degree of flexibility on the final day of the maintenance period. For example, a bank that has a target for its average balance over a 28-day maintenance period of £100mn, and has held an average of £100mn after 27 days of the maintenance period, can have a balance anywhere in the range between £72 and £128 million on the final day and still be within the +/-1% range. - Q: How will
interest on reserves be calculated if the MPC rate changes
during a maintenance period?
A: In normal circumstances, the MPC rate will not change during a maintenance period because each period will run from one scheduled MPC decision date to the next. However, in the event that the MPC rate changes unexpectedly, during the maintenance period, the remuneration for that maintenance period will be calculated such that the balance held at the end of each day is remunerated at the MPC rate prevailing at the end of that day. Any interest charges for missing the target will be based on the MPC rate applying on the final day of the maintenance period. - Q: How will
interest on reserve accounts be paid?
A: Interest will be credited directly onto the reserve account on the day after the maintenance period has ended (i.e. on the first day of the subsequent maintenance period). There will not be scope for interest to be paid directly to other accounts. - Q: Will there
be any limits on changing reserves targets?
A: The target average balance can be changed from one maintenance period to the next as the reserve scheme member sees fit (provided the target does not exceed the ceiling and is set in multiples of £10mn). The Bank does not think it is necessary to impose any restriction on the size of such changes, but it does reserve the right to introduce such a limit if there are large fluctuations in the aggregate target. - Q: How much
notice will be required to change the reserves target?
A: Changes to an institution's target for the following maintenance period must be set using the Reserves screens on the Enquiry Link no later than two working days before the start of that maintenance period. If no new target is entered, the target for the following maintenance period will remain the same as that for the current period. - Q: Will statements
be available for reserve accounts?
A: There will not be an actual statement, but it will be possible to view (and print) the details of all transactions on a reserve scheme member's account via the Enquiry Link. - Q: Would the
Bank provide a service to run a reserve account on behalf
of an institution if it did not wish to connect to SWIFT?
A: No, there is no facility to do this routinely, although the Bank will be able to provide assistance in emergency situations. - Q: Will there
be there any limits on the amount of funds that can be borrowed
or deposited via the Standing Facilities?
A: There will be no limit to the amount of funds that an institution with access to the standing facilities can request to borrow from or deposit with the Bank. However, the lending facility will be collateralised under repo terms and so sufficient eligible collateral must have been received by the Bank before the funds requested will be released. - Q: What collateral
can be used in support of open market operations and standing
facilities?
A: The eligible collateral that can be used in the Bank's short-term open market operations and the standing lending facility will be the same. In summary it will be: gilts, UK government foreign currency bond issues, sterling treasury bills, Bank of England euro bills and notes, and certain sterling and euro-denominated securities issued by EEA central governments, central banks, and major international institutions where the issuing entity is rated Aa3 or higher by two of the three major ratings agencies. For more detail see the Eligible Securities pages.
General
Open Market Operations and Standing Facilities
