Minutes
Time: 10.30am – 12pm 3 March 2021 | Location: Teleconference
Item 1 – Bank of England welcome
1. The Chair thanked members of the Committee for their time and welcomed Sumita Ghosh and Arjun Popat from the Bank who were in attendance to lead the Meeting Varied People Event item on the agenda.
2. The Committee had no comments to raise on the minutes from December’s meeting which had been posted on the Bank’s website.
Item 2 – Discussion on market conditions
3. The Bank introduced the discussion on market conditions. It was noted that since the previous MMC meeting in December 2020, while Covid cases had remained high, the economic outlook had improved. For the UK, the removal of the tail risk of a UK/EU “no-deal” Brexit outcome, as well as the relative strength of the UK’s vaccine rollout, had added further to the positive sentiment. In global markets, core fixed income yield curves had risen and steepened significantly over recent weeks, while market-based measures of inflation expectations were also higher, in particular in US markets. The reflation theme had also been reflected in other asset classes, for example some commodities had recently reached multi-year highs.
4. The Committee discussed the recent increase in yields, in particular how this had played out in the gilt market. It was noted that given the increased observed price volatility, there had been an associated focus on market functioning. It was commented that while some measures of market liquidity had slightly worsened in recent days, on the whole market functioning had remained generally orderly, albeit with some pockets of illiquidity. For example bid/ask spreads had widened, although they were nowhere near the levels they reached in March 2020. The speed of the moves in fixed income had come as a surprise to some members: some commented that the market volatility may have been exacerbated by differing expectations about the value and potential use of negative rates prior to the sell-off; and others noted that prior to the move higher in yields some market participants had expected global central banks to push back against any increase in bond yields, and were therefore particularly long of government bonds. Therefore when yields moved higher unopposed this led to widespread stop-outs of long positioning, driving further upward pressure. Members of the Committee agreed that there was increased focus on the level of yields globally, and there would be significant interest in any associated reflections from central banks.
5. The Committee discussed market functioning over year-end. It was noted that overnight money market rates fell by a greater amount than in previous years, which had been a function of the greater volume of reserves in the system as well as a function of money market funds investing larger proportions of their cash at shorter tenors. In the secured market specifically, it was commented that year-end cross-currency dynamics had incentivised inflows into sterling repo, further driving down secured rates.
6. Since year end, headline rates had stabilised however a number of gilts at the short end of the curve had continued to trade special in the repo market. It was noted by some members that this had been driven by the lower availability of collateral in the sub-10 year space, where the APF holds a relatively large share of the free float.
7. The market impacts of negative rate expectations were discussed. It was noted that market rates moving negative late in 2020 had been driven mainly by year-end dynamics, as opposed to a market anticipation of an imminent negative Bank Rate. Members thought that the deployment of negative policy rates in the UK was now materially less likely following comments made around the February MPC meeting. The short rates curve had no longer priced in any cuts to Bank Rate, and was in fact now beginning to price in hikes.
Item 3 – Impact of withdrawal from the EU
8. It was broadly agreed that since January, the implementation of the new UK/EU trade deal had had no material impact on sterling markets, which continued to benefit from the liquidity provided by central banks.
9. That said, there had been several marginal impacts which were highlighted. It was noted that as a result of the lack of financial services equivalence being granted to the UK, EU domiciled funds were no longer able to place deposits with UK banks or UK subsidiaries of foreign banks. This had impacted a relatively small proportion of the overall unsecured deposit market, however. In addition, it was commented that there was now a requirement on EU domiciled funds for higher haircuts for reverse repo trades with UK counterparties, whereby the collateral was government debt and of greater than 5 years maturity, although due to the low rate environment more broadly this was not viewed to have had a large impact on participants.
10. Additionally, it was noted that UK collateral was no longer eligible at the ECB which had led some participants to exit their positions in these names, although this supply had been easily absorbed in the secondary market. More generally, demand for UK assets had remained evident from the high coverage on recent UK banks’ bond issues.
11. In general it was agreed that the transition of money markets through this period had proceeded in a fairly benign manner.
Item 4 – SMMD update and SMMH survey results
12. The Bank provided a summary of the recent trends in the Sterling Money Market Daily (SMMD) dataset. The SONIA rate had remained marginally lower since the new year, while volumes within the unsecured overnight deposit market had also remained somewhat lower than in H2 2020. This was believed to be at least partially due to the UK’s withdrawal from the EU. Other Committee members agreed that EU regulation was a factor in the reduction in volumes, as well as a focus from foreign banks’ regulators on their risk-weighted assets.
13. The Bank also discussed key themes that emerged from the responses to the Sterling Money Markets Half-yearly survey (SMMH). Responses had indicated that most measures of market functioning were observed to have recovered to their pre-Covid levels. Banks’ reliance on commercial paper for funding, while low to begin with, was reported to have decreased. Secured market functioning was perceived to be mostly improved compared to levels at the start of the Covid stress, in particular for the gilt repo and reverse repo markets.
Item 5 – Update from Securities Lending Committee (SLC)
14. The Chair of the Securities Lending Committee (SLC) updated the Committee on what had been discussed in their February meeting. It was noted that conditions in securities lending markets had continued to function well with good liquidity and availability of collateral. Year-end had passed smoothly in securities lending markets.
15. There had been a continued significant focus on Environment, Social and Corporate Governance (ESG). “Green” repo volumes had continued to grow; members had noted that securities lending could play a positive role in improving liquidity in these markets. There had been a discussion around voting rights, in particular on how underlying clients may consider their voting rights in the ESG space; the SLC had noted that discussions on voting rights may become more important for ESG going forward.
16. Additionally, the SLC had continued to discuss D&I themes; some members had attended a Diversity & Inclusion (D&I) Clearstream event which had proved very valuable and had helped enrich their discussions on this theme more broadly. The SLC had also discussed the post-Covid work environment, in particular how to best leverage lessons learned from the experience of universal working from home during the pandemic.
Item 6 – Meeting Varied People (MVP) and D&I Initiatives
17. Sumita Ghosh and Arjun Popat provided an overview of the upcoming MVP event as well as an update on D&I initiatives at the Bank more broadly, with a particular focus on those initiatives within the Bank’s Markets directorate. It was confirmed that the MVP virtual event was scheduled for 21 April. All members of the MMC would be invited to attend, not least as it was expected that the event would include the launch of the updated UK Money Markets Code.
Item 7 - AOB
18. The Chair confirmed that the next MMC was scheduled for 8th June and was provisionally expected to be a conference call. Whether it could be held in person would depend on Government guidelines.
19. The Chair also requested that Committee members email suggested forward agenda items for future MMC meetings to the secretariat.
Committee attendees
Gordon Lowson – Aberdeen Standard
Stephen Grainger – Aldermore
James Winterton – Association of Corporate Treasurers
Mick Chadwick – Aviva Investors
Michael Manna – Barclays Bank UK
Emma Cooper – BlackRock
Ina Budh-Raja – BNY Mellon
Romain Dumas – Credit Suisse
Inna Shaykevich – Goldman Sachs
Vicky Worsfold – Guildford Borough Council
James Murphy – HSBC
Chris Brown – Insight Investment
Olivia Maguire – J.P. Morgan Asset Management
Ben Challice – J.P. Morgan
Elissa Holme – LCH
Peter Left – Lloyds
Nina Moylett – M&G
Robert Thurlow – Mizuho
Rachel Lane – NatWest Bank
Nic Erevik – Newcastle Building Society
Paul Barnes – Santander UK
Romain Sinclair – Société Générale
Lynda Heywood – Tesco PLC
John Argent – Tradition
Jessica Pulay – DMO (Observer)
Jo Whelan – DMO (Observer)
Alan Barnes – FCA (Observer)
Bank of England
Rhys Phillips (Chair)
Jon Pyzer
Ton Jennings
Rebecca Jones
David Glanville
Sumita Ghosh
Arjun Popat