News Release
UK Government ECU Treasury Bills
03 December 96
- The Bank of England has today published proposals for changes in its daily operations in the sterling money markets, through which it implements monetary policy.
- The key proposals are:
(i) Gilt repo. The Bank proposes to extend its daily open market operations to include operations in gilt repo, as well as continuing operations, as at present, in Treasury bills and eligible local authority and bank bills.
(ii) Counterparties. In parallel, the Bank proposes to broaden the range of counterparties able to participate in these operations, to include market participants active in the gilt repo and/or bill markets; at present its main counterparties are the specialist discount houses.
(iii) Late lending. Changes are proposed to simplify the existing late lending arrangements, through which the Bank is prepared within limits to lend secured money at the end of the trading day to adjust for any end-of-day imbalance in the market.
- The detailed proposals are set out in the consultative paper issued by the Bank today. Comments on the proposals are invited by 10 January 1997. In the light of comments received, the Bank will finalise its plans and then issue a definitive paper setting out the changes, with a view to introducing the new operating arrangements in the early months of 1997, if possible.
- The Bank's proposals are designed to take account of the successful development of the gilt repo market, which began operating at the beginning of this year. The gilt repo market has now developed to the point where it has become, in essence, a modern form of secured money, and therefore an appropriate additional instrument for the Bank's open market operations.
- The broadening in the range of counterparties will enable banks, building societies and securities firms who wish to participate directly in the Bank's daily open market operations to do so, provided they meet certain functional requirements set out in the Bank's paper. Firms who wish to express an interest in participating in the Bank's operations on the basis of the proposals in the paper are invited to contact the Bank.
- Technical changes are also proposed in the timing of the Bank's operations at the end of the day. To meet the needs of the market, the timing of the final round of the Bank's open market operations each day will be adjusted from 2.00 pm to 2.40 pm. This should substantially relieve the need for access to late lending from the Bank, but a late lending facility will be provided for the settlement banks, since they provide wholesale payments services to the rest of the market and need to balance their settlement accounts at the Bank at the end of each day. For a transitional period, a similar facility will continue for the discount houses.
- The paper explains that there will be no requirement for counterparties to be separately capitalised or specialised entities. Similarly, in the gilt market, the Bank will no longer require gilt-edged market makers (GEMMs) to be separately capitalised firms; this will not, however, alter the continuing obligation of GEMMs to make markets in gilts and to participate actively in gilt auctions.
- The changes are evolutionary in nature. They retain unchanged the basic structure of the Bank's present operating arrangements. They nonetheless represent a substantial development of the Bank's operations. They are framed to foster an orderly transition.
- The Bank believes the changes will have the following benefits. They will:
- Extend the range of instruments in which the Bank conducts its daily money market operations.
- Broaden the range of market participants with whom the Bank conducts operations.
- Simplify the structure of the Bank's operations.
- Enhance the scope for banks and other sterling market participants to manage their day-to-day liquidity.
- Promote further development of gilt repo as a high quality secured money market instrument.
- Facilitate further integration of the sterling money and bond markets, to form an integrated yield curve.
- Foster the development of efficient and competitive sterling money markets.
- Secure a useful degree of convergence with other international markets. In particular, the changes are consistent with the direction and spirit of the proposals currently under discussion at the European Monetary Institute for future monetary operations in euro, which are of relevance whether or not the UK participates in monetary union.
- Extend the range of instruments in which the Bank conducts its daily money market operations.
- The Bank will monitor carefully the practical effects of these changes and will keep under review the possible need for further adaptation of the structure of its operations in the light of the evolution of the market environment.
Notes to Editors
- These proposals relate to the mechanics of the Bank's day-to- day operations in the sterling money markets. They do not alter the Bank's basic approach to implementing monetary policy by managing short-term interest rates through open market operations. It remains the objective of the Bank's money market operations to steer short-term interest rates to the levels required to implement monetary policy.
- These proposals constitute a further step in the continuing programme of development of the money and bond markets pursued over the past few years. Other elements of the programme have been the extension of the auction programme for gilts, along with greater structure and transparency in the issuing programme for gilts; development of the open trading market in gilt repo; reform of the taxation of gilts, including reducing the incidence of withholding tax; preparation for a gilt strips market in 1997; and the introduction in early 1994 of a regular twice-monthly money market operation in gilt repo, as a stepping stone to the proposals in the Bank's paper issued today.
- The gilt repo market began operating in January 1996 and by August (the latest date for which figures are available) had grown steadily to a size of around £60bn outstanding, with daily turnover of at least £15 bn and activity extending along the maturity spectrum. A review of the development of the gilt repo market was published in the Bank's Quarterly Bulletin in November; copies of this review are being included with today's consultative paper.
- The Bank's current framework for money market operations was introduced in 1981. The key features are daily open market operations conducted in Treasury bills and eligible local authority and bank bills with specialist counterparties, the discount houses.
- There are currently seven discount houses, all of which are active participants in the bill and/or gilt repo markets. It will be open to these banks to seek to be participants in the Bank's money market operations under the new operating arrangements.
- Both the discount houses and the GEMMs are currently subject to supervision by the Bank under supervisory arrangements tailored to reflect their specialist roles. Under the new arrangements, there will be no special supervisory arrangements for counterparties per se. Prudential oversight of firms which participate in the Bank's market operations will be undertaken by the Bank's banking supervisors, the Building Societies Commission or the Securities and Futures Authority (or equivalent EEA supervisors) depending on the nature of a firm's business.
- The Bank will, however, continue to monitor closely the operational performance of its counterparties. In the money markets, it will want to satisfy itself that firms participating in its daily operations continue to meet the functional requirements set out in the paper. In the gilt market it will continue to monitor the market-making performance of the GEMMs.
