Money Market Reform
What is Money Market Reform?
On 7 May 2004, the Bank issued a consultative paper reviewing the objectives and broad framework for its reformed operations in the sterling money markets. On 22 July 2004, the Bank announced the results of this review, and in particular that it will initiate a new system based on averaging of voluntary reserves remunerated at the Bank’s official Bank rate, with a narrow rate ‘corridor’ formed by standing deposit and lending facilities on the final day of the maintenance period.
The purpose of the Bank’s operations in the sterling money markets is to implement the Monetary Policy Committee’s (MPC) interest-rate decisions while meeting the liquidity needs, and so contributing to the stability, of the banking system as a whole. In its May consultative paper the Bank set out its objectives as:
- Objective 1: Overnight market interest rates to be in line with the MPC’s official Bank rate, so that there is a flat money market yield curve, consistent with the official policy rate, out to the next MPC decision date, with very limited day-to-day or intra-day volatility in market interest rates at maturities out to that horizon.
- Objective 2: An efficient, safe and flexible framework for banking system liquidity management – both in competitive money markets and, where appropriate, using central bank money – in routine and stressed or otherwise extraordinary conditions.
- Objective 3: A simple, straightforward and transparent operational framework.
- Objective 4: Competitive and fair sterling money markets.
In its July announcement, the Bank announced that the reformed framework would have the following features:
- A wide range of banks and building societies may choose a target level of positive balances (voluntary reserves) that they will undertake to hold with the Bank on average over a maintenance period lasting from one scheduled MPC announcement date to another.
- These reserves will be remunerated at the MPC’s official Bank rate (with ceilings on the amount each bank/building society can hold).
- Separately, there will be standing lending and deposit facilities, available on demand to a wide range of banks and building societies. The rates on these standing facilities will be the MPC’s official Bank rate +/-25 basis points on the final day of the maintenance period, and will be at a wider spread to the official Bank rate on all other days.
- The Bank will conduct weekly open market operations at a maturity of one week at the MPC’s official Bank rate. As a matter of routine, the Bank will undertake an overnight fine-tuning open market operation on the final day of the maintenance period, also at the MPC’s official Bank rate.
On 4 April 2005 the Bank published a paper setting out the final details of the reformed framework. The Bank currently envisages that the reformed system is likely to be introduced in the period between March and June 2006.
A number of technical changes to the current framework were introduced on 14 March 2005 with the aim of further stabilising overnight market interest rates ahead of the launch of the fully-reformed scheme.
On 23 August the Bank published a consultative paper setting out proposals for managing the transition to the reformed system and, in particular, for introducing the repo lending at longer maturities.
On 31 October 2005 the Bank published the final Documentation
for participants in the reformed framework. The Documentation
consists of the Eligibility Criteria for becoming a participant,
the Terms and Conditions and the Operating Procedures. The draft
Documentation had previously been published in July and has
not changed substantially. The Application Form and Questionnaire
for participants and a Pro Forma Admission Letter was also published
on the 31 October 2005.
Key Resources
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The Framework for the Bank of England's
Operations in the Sterling Money Markets (the 'Red Book') May 2006 Download PDF (241k) |
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Reform of the Bank of England's Operations
in the Sterling Money Markets A paper on the new framework by the Bank of England April 2005 Download PDF (284k) |
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Managing the Central Bank's Balance Sheet: Where Monetary Policy meets Financial Stability A lecture by PMW Tucker, Executive Director and member of the Monetary Policy Committee, 28 July 2004 Download PDF (395k) |
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Reform of the Bank of England's Operations in
the Sterling Money Markets: Transitional Arrangements August 2005 Download PDF (127K) |
