News Release
The Official Gilt Strips Facility
08 October 1997
The Bank of England has today issued a paper listing the decisions the authorities have made about the introduction of the gilt strips market, following extensive consultation with gilt market participants and other parties. The arrangements described in the paper have been agreed with HM Treasury.
The paper covers:
- what strips are and how they can be used by investors
- the authorities' decisions to date on the issuance and features of strippable gilts
- the mechanics of the strips facility
- the trading and settlement of gilt strips
- sources of information which will be available on, in particular, stripping activity and strip prices
- the legal and regulatory background, including the Strips Memorandum which will govern the arrangements for stripping and reconstituting gilts through the strips facility
- the tax treatment of strips
- possible future developments
Copies of the paper are available on the website (see Publications page ) and also from the Bank (+44 (0) 171 601 3672).
Notes to Editors
The Bank announced on 3 October that the upgraded Central Gilts Office settlement service will start on 10 November and that it is planned that the official gilt strips facility which it incorporates will be available from 8 December, with trading on a when-issued basis in gilt strips being permitted from 1 December.
The strips facility will enable gilt holders to exchange a coupon-bearing gilt for a series of new zero coupon strips matching exactly the cash flows of the parent bond; or, conversely, to exchange an appropriate bundle of strips for a coupon-bearing gilt. For example, a ten year bond could be separated into 21 zero coupon bonds, one from the principal repayment and twenty from the semi-annual coupons; coupon payments due, say, 6,12,18 months after issue would, if the underlying bond were stripped, become 6,12,18 etc month zero coupon bonds. The cash flows on the bundle of zero coupon strips would be identical to the cash flows on the original unstripped bond. Both coupon and principal strips remain direct obligations of HM Government.
The strips facility has been built following responses to the Bank's earlier consultations with the market; these consultations showed strong support for the proposed facility, as a further step in the continuing development of the gilt market. This is because the facility will make available to investors and traders the most basic cash flow structure, namely zero coupon paper; through investing in a portfolio of strips, an investor can thus in principle more easily achieve a desired pattern of cash flows. Domestic long-term savings institutions are interested in the higher duration assets which stripping will make available, and more generally in the enhanced ability to match liabilities without reinvestment risk. Retail investors, and their advisors, are attracted by a product which could permit them to have investments with cash flows of their choice. Domestic and international traders concentrate on the duration and convexity properties of strips. (The duration of a bond is a measure of the timing of its cash flows. Convexity is, broadly, the rate at which the price sensitivity of a bond with respect to yield changes with yield.)
The total nominal amount of strippable stock outstanding is currently over £78 bn.
