How is the transition to a repo-led framework progressing?

Sterling reserves have fallen due to quantitative tightening and TFSME roll-off…

Sterling reserves have been in steady decline due to the unwind of quantitative easing (QE) purchases and Term Funding Scheme with additional incentives for SMEs (TFSME) repayments. As of 28 May, the stock of central bank reserves stood at £693 billion, £286 billion lower than the £979 billion peak in early 2022. This change in reserves can be attributed to:  

1. a £275 billion reduction in the stock of assets held by the Asset Purchase Facility via redemptions and sales;  
2. £108 billion of repaid loans under the TFSME scheme; which has been partially offset by 
3. an £80 billion increase in drawings through the Bank’s Indexed Long-Term Repo (ILTR) and Short-Term Repo (STR) facilities.  

Chart 1 illustrates these changes (to end-Q1). Notable here is the uptick in ILTR and STR usage which has gathered pace over the last year or so. This has been expected and welcomed, as firms make increasing use of Sterling Monetary Framework (SMF) facilities to meet their individual reserves needs. As quantitative tightening (QT) and TFSME unwind continues, the Bank envisages that the ILTR will, alongside the STR, supply the majority of the stock of reserves in normal market conditions.^{footnote [2]}

As a quick reminder of the terms and purpose of these two facilities: 

• The Short-Term Repo facility was introduced in 2022 to ensure SMF firms have ready access to reserves when the Bank embarked on Asset Purchase Facility (APF) unwind. As such, it plays a key role in day-to-day interest rate control by lending reserves against high-quality collateral on a weekly basis.^{footnote [3]}
• The Indexed Long-Term Repo is a regular, market-wide sterling operation, providing reserves for a six-month term against the full range of SMF eligible collateral via a competitive auction. This facilitates a liquidity upgrade and supports the redistribution of liquidity across the banking system. The Prudential Regulation Authority (PRA) has made clear that both the STR and the ILTR should be used by firms as part of their routine sterling liquidity management.^{footnote [4]}

Chart 1: Reserves and their backing assets (as at end 2025 Q1) ^(a)

Footnotes

• Sources: Bank of England and Bank calculations.
• (a) The coloured areas summarise the Bank’s main on-balance sheet sterling facilities. The gap between the sum of those facilities and reserves primarily reflects sterling banknotes. ‘Term funding’ includes TFS and TFSME but excludes Special Liquidity Scheme and Funding for Lending Scheme (which were funded off-balance sheet). 

…leading to increased usage of SMF facilities (as intended).

Combined drawings under the ILTR and STR have now reached £80 billion (Chart 2). STR usage has steadily increased from around £5 billion in early 2024 to current weekly drawings consistently above £60 billion. Similarly, ILTR usage has increased – but only more recently – from around £750 million weekly drawings at the start of 2025 to around £1 billion per week in May 2025.

The number of counterparties using these facilities has also increased with more than 20 weekly STR participants and close to 60 participants with ILTR drawings outstanding. Both facilities are being used by a range of SMF firm types. This broader user base reflects a ‘normalisation’ and destigmatisation of the ILTR and STR.

Participation across the facilities is evolving with some firms shifting towards the ILTR.  ILTR stock outstanding currently stands at £20 billion with most borrowings against Level A collateral^{footnote [5]} (high-quality assets, like UK gilts) and, to a lesser extent against Level C collateral (broader assets including own-name securities and loan portfolios). We have observed that – in addition to an absolute uptick in ILTR demand – some firms are moving increasingly higher proportions of their STR drawings into the ILTR. This is consistent with the Bank’s expectation that most reserves are supplied by the ILTR (alongside the STR) in steady state. 

Chart 2: Combined ILTR and STR usage

Footnotes

• Sources: Bank of England and Bank calculations.

There are multiple factors driving facility usage. Our analysis and feedback from the market suggests several factors behind the rise in facility usage, specifically: ongoing normalisation, diversification benefits from using both Bank and financial markets, and increased participation from both large and small firms. Additionally:  

• STR participants value the certainty of its full-allocation mechanism and its role in keeping short-term rates near Bank Rate. It is used by both bank treasuries and repo or securities financing desks. 
• Some ILTR participants value lower operational overhead of the ILTR (evidenced by the shift from STR to ILTR Level A). Others are using the ILTR to refinance TFSME repayments, utilising Level C collateral currently placed with the Bank. 

The STR has helped ensure money market rates remain close to Bank Rate as reserves drain…

Overnight money markets have, in the main, remained close to Bank Rate since QT began. Lower levels of reserves, all else equal, should lead to structurally higher repo rates relative to Bank Rate. Overnight sterling general collateral (GC) repo rates have generally traded close to – but at a positive spread to – Bank Rate over the past year (typically in the +3 to 8 basis points range, Chart 3). This compares to GC repo rates being below Bank Rate prior to the start of the QT programme, (typically trading 5 to 15 basis points below Bank Rate in 2021).  

Unsecured rates, specifically the Sterling Overnight Indexed Average (SONIA) have also edged higher but remains lower than the Bank Rate. There are several factors at play here, including that sterling reserves are still abundant.^{footnote [6]}

Chart 3: Money market and Bank rates

Footnotes

• Sources: Bank of England, Bloomberg L.P. Finance, and Bank calculations.

…and reducing the impact of increased gilt supply, which has shifted further the cash-collateral balance.

Since February 2022, the free float of UK government bonds has increased by over £600 billion, largely driven by new gilt issuance but also QT. This has led to more plentiful collateral in the system which, in addition to declining reserves, has further shifted the cash-collateral balance, adding to the upward pressure on secured money market rates in the UK (and globally).^{footnote [7]}

This dynamic has led to higher secured rates on key financial reporting dates where dealer intermediation is constrained. Known balance sheet constraints for repo dealers have driven some volatility in repo rates globally at month, quarter, and year-end, with overnight rates spiking upwards over the past 18 months. For example, overnight GC repo rates reached 15 basis points and 22 basis points over Bank Rate during the March and April month-ends, respectively (Chart 4). Such patterns are not new, and period-end pressures have often been a characteristic of repo markets.

Gilt maturities also contribute to temporarily higher repo rates, especially where APF holdings are significant, given the extinguishing of reserves as the gilt matures. This was observed in March 2025 and we anticipate temporary increases around the upcoming June and September gilt maturities. 

Our analysis and market intelligence suggests our facilities (and the STR specifically) maintain an effective ‘cap’ on rates. This shows in the data where spikes in overnight rates quickly return towards Bank Rate as the specific pressures abate. Feedback from market participants suggest that markets levels would be moving much higher and for longer absent the STR. This provides confidence that our facilities are working as intended.

Chart 4: Repo spreads to Bank Rate ^{(a) (b) (c)}

Footnotes

• Sources: Bloomberg L.P. Finance, Sterling Money Market data collection and Bank calculations.
• (a) The shaded grey area shows a range of market participants’ estimates for where the Overnight GC repo rate would need to trade for the STR to start to become economically attractive.
• (b) The Overnight GC repo rate is calculated as a spread to Bank Rate. The 1-week repo rate is calculated as a spread to 1-week OIS and then adjusted for the Bank Rate – SONIA wedge.
• (c) The downward spikes in the 1-week repo rate around the end of January and start of May coincide with market expectations for a reduction in Bank Rate at the February and May Monetary Policy Committee meetings, respectively.

All SMF facilities remain ‘open for business’…

We expect our bilateral facilities – the Operational Standing Facility and Discount Window Facility (DWF) – to play an important role in the repo-led framework alongside our regular market-wide operations. We encourage usage of these bilateral facilities, which remain ‘open for business’^{footnote [8]} and should be used by SMF participants for the purposes of liquidity management. Both are available daily, on-demand, to meet firm-specific liquidity needs.

…with further facility usage expected as balance sheet transition continues.

As reserves continue to decline through QT and TFSME repayments, all SMF facilities will play a central role in ensuring a smooth transition to the PMRR. We therefore expect ILTR and STR usage to further increase to meet firms’ demand for reserves. 

Given their importance, the Bank will continue to closely monitor how the ILTR and STR are being used – and their effectiveness in supporting our monetary and financial stability goals. This will include engagement with SMF participants, as we did with our recent discussion paper.^{footnote [9]}

This post was prepared with the help of Amina Sagna, Callum Ashworth, Colleen Faherty, Jon Paxton, Kash Chundoo, Malek Salisbury-Jones, and Simon Dolan. 

Share your thoughts with us at BankOverground@bankofengland.co.uk