Temporary Purchases of Index-linked Gilts – Market Notice 11 October 2022

Market Notice

The Bank has announced that it will widen the scope of its daily gilt purchase operations also to include purchases of index-linked gilts. This enhancement to our operations will be in effect from 11 October 2022 until 14 October 2022. Index-linked gilts will be purchased via a separate auction each day, in addition to the Bank’s existing daily conventional gilt purchase auctions.

These additional operations will act as a further backstop to restore orderly market conditions by temporarily absorbing selling of index-linked gilts in excess of market intermediation capacity. As with the conventional gilt purchase operations, these additional index-linked gilt purchases will be time-limited and fully indemnified by HM Treasury. The Bank has also consulted with the Debt Management Office.

As announced on 10 October, the Bank stands ready to purchase up to £10bn of gilts each day, of which up to £5bn will be allocated to long-dated conventional gilts and up to £5bn to index-linked gilts. The pricing of this additional operation will reflect its nature as a backstop and that this is not a monetary policy instrument. The total size of these auctions will be kept under review. All purchases will be unwound in a smooth and orderly fashion once risks to market functioning are judged to have subsided.

The Bank may adjust any of the parameters of its auction in order to achieve its financial stability objective.

The remainder of this Market Notice sets out the arrangements that apply to these index-linked gilts purchases, as well as amendments to the operations to purchase long dated conventional gilts announced on 28 September 2022. The Market Notice may be supplemented, amended and refined further over time.

The operations to purchase long dated conventional gilts announced on 28 September 2022 are unaffected by this Market Notice, except that the auctions will now take place daily between 3.15pm and 3.45pm as set out below.

Form of operation

The Bank is inviting market participants to offer to sell index-linked gilts in competitive reverse-auctions. Initially the size of each auction will be up to £5 billion. This will be kept under review each day in light of prevailing market conditions.

Reflecting the specific dynamics in the market for index-linked gilts, the Bank will set a minimum yield that will be applied to its temporary purchase operations for these index-linked gilts.

Initially, the Bank will not allocate any offers for index-linked gilts at real yields below the levels observed, as quoted by Tradeweb, at close of business on 10 October 2022.^{footnote [1]}

In addition, the Bank is studying patterns of demand and intends to use reserve pricing in order to ensure the backstop nature of the scheme is delivered. In its auctions for index-linked gilts, the Bank would be likely to accept most offers above market mid-yields at the close of the auction, subject to competition within the auction and to the minimum yields described above. As confirmed in the 3 October 2022 Market Notice, the 'reserve spread' will be reviewed ahead of each auction to ensure consistency with the backstop nature of the scheme. In doing so, the Bank takes into account a wide range of information on prevailing market conditions and the pattern of demand in its auctions. More information on the Bank's reserve pricing approach is available on the Bank's website.

Timing and frequency of operations 

Auctions to purchase index-linked gilts will be conducted daily from 11 October 2022 to 14 October 2022, between 2.15pm and 2.45pm.

Auctions to purchase long dated conventional gilts will be conducted daily from 11 October 2022 to 14 October 2022, between 3.15pm and 3.45pm.

The auction schedule will be kept under review, and details of each auction will be confirmed by the Bank on its wire services pages at 9am. 

Eligible instruments in index-linked gilt purchases

The Bank will purchase index-linked gilts with a residual maturity of three years and above in the secondary market.  Index-linked gilts with an 8-month indexation lag will be excluded.

Eligible instruments will be subject to further exclusion criteria. In particular, the Bank will not offer to purchase index-linked gilts newly issued by the UK Debt Management Office (DMO) within one week of their issue; and will not offer to purchase index-linked gilts which the DMO has announced it will re-open, including via a mini-tender, during the one week before and after re-opening. 

In addition, the Bank does not intend to purchase index-linked gilts where it holds more than 70% of the free-float, i.e. the total amount in issue minus government holdings. 

Instrument eligibility will be kept under review. 

Auction parameters for index-linked gilt purchases

Auctions will be held using the Bank’s electronic tendering system, Btender. The Bank reserves the right, at its sole discretion, to restrict the number and/or the timing of offers submitted by counterparties who do not have access to Btender.

Counterparties must input the nominal sterling amount in millions for each specific index-linked gilt they wish to sell and the clean price they wish to offer.

The number of decimal places allowed for the price is currently 3. 

Offers are submitted by counterparties using a clean price.

The minimum offer amount and increment are currently set at £5 million and £1 million respectively.

The Bank will not restrict the maximum total value of index-linked gilts for purchase from a single counterparty in each auction.

The Bank reserves the right, at its sole discretion, to reject offers, in whole or in part, including in light of other offers received; and reserves the right, at its sole discretion, to set a minimum offer yield.

Offers will be allocated in descending yield order, based on the attractiveness of offers for different stocks relative to market yields, subject to the conditions mentioned above. Offers that are accepted at the lowest yield may be scaled down on a pro rata basis and will be rounded down to the nearest allocation increment, currently set at £0.1 million. 

Offers are accepted in full or in part at the counterparty’s offer price. The amount of each accepted offer in total proceeds will be paid to the counterparty.

The Bank reserves the right, at its sole discretion, to cancel an auction at any time before the results are published. If an auction is cancelled it may be re-scheduled to take place later the same day, or on a subsequent day.

Settlement of index-linked gilt purchases

Confirmation of the nominal amount allocated in the auction and the accepted clean price will be available in Btender. Confirmation of all other trade details, including settlement proceeds, will be confirmed via a trade ticket sent by the Bank by email or Bloomberg communication as soon as possible after the close of the auction on the operation day. This will form the agreed transaction record. Index-linked gilt purchases will normally settle on a T+1 basis. All counterparties must comply with the Settlement procedures outlined in the Asset Purchase Facility (APF) Purchase Operating Procedures.

Disclosure

Aggregate results will be announced after each operation and published on the Bank’s website. 

Funding

Gilt purchases for the purposes of financial stability will be financed by central bank reserves. 

Admission 

Only firms that are participants in the Bank’s gilt-purchase Open Market Operations (OMOs), and are also Gilt-edged Market Makers (GEMMs) as listed on the website of the DMO, are eligible counterparties for these auctions. Counterparties that are already participants in the APF and that participate in an auction are deemed to have accepted the terms set out in this and any other relevant Market Notices. Counterparties’ Admission Letters under the APF are deemed to be amended to admit them into these gilt market operations. Documentation under the APF will apply to all these gilt operations and this Market Notice forms part of such Documentation.

Operational implementation

As for the Bank’s temporary purchases of long-dated conventional gilts, purchases of index-linked gilts will be conducted within the Bank of England Asset Purchase Facility Fund Limited (BEAPFF), which is a wholly-owned subsidiary of the Bank. BEAPFF is indemnified by HM Treasury. These purchases, together with those purchased by the Bank under its market operations announced on 28 September 2022, will be segregated in a different portfolio from pre-existing asset purchases.

Collection of information on end-user participation

Consistent with the approach on the long-dated conventional gilt operations announced in the 3 October 2022 Market Notice, and as covered in the 1 September 2022 Market Notice and the APF Operating Procedures, the Bank is asking GEMMs to identify offers made on behalf of themselves or clients in its temporary purchases of index-linked gilts. 

GEMMs participating in these operations will be required to identify whether offers in the auctions are being made on behalf of themselves, their clients, or any other non-GEMM dealer(s) in their group(s) via a set of unique identifiers. Unique identifiers will be allocated and maintained by the Bank to be used for this purpose. 

All GEMMs, any non-GEMM dealer(s) in their group(s), and end-users intending to participate in the Bank's auctions should apply directly to the Bank for the allocation of a unique identifier. 

Applications for unique identifiers should be made directly to the Bank by each relevant firm, by email to clientidentifiers@bankofengland.co.uk. Applicants will be required to provide the Bank with the participant entity name and its legal entity identifier (LEI), where an LEI is available.

Applications for unique identifiers should be made to the Bank as soon as possible.  End-users will be responsible for sharing their unique identifier with relevant GEMMs.

In exceptional circumstances, GEMMs may submit offers from non-registered clients under the code ‘NEWC’. This will be permitted once for each new client. In the event this process is used, GEMMs should contact the Bank immediately via email to clientidentifiers@bankofengland.co.uk to identify the new client and its offers. GEMMs should also request that the relevant end-user client applies directly to the Bank for a unique identifier, as outlined above. 

The Bank is collecting this information to get a better understanding of the effect of its operations on the broader market and the financial stability objective of these purchases. It remains the responsibility of the GEMM to conduct appropriate due diligence on their clients and GEMMs are responsible for the legal and regulatory compliance of each transaction entered into on behalf of themselves, any non-GEMM dealer(s) in their group(s), or their clients. The Bank does not accept responsibility nor liability for undertaking any related due diligence on GEMMs’ clients. 

The details of this collection of end user information will be incorporated in the APF Operating Procedures for purchase operations in due course.