This Market Notice sets out the operational arrangements that the Bank of England (the Bank) intends to apply to the sale of gilts held in the Asset Purchase Facility (APF), as and when the Monetary Policy Committee (MPC) votes to commence gilt sales. It covers: (1) the Bank’s approach to gilt sales; (2) operating parameters; (3) participation; and (4) gilt lending.
This Market Notice supersedes the Market Notice published on 4 August 2022. It forms the Bank’s consolidated market notice as regards the sale of gilts from the APF.
In the minutes of its meeting ending on 3 August 2022, the MPC said that it was provisionally minded to commence gilt sales shortly after its September policy meeting, subject to economic and market conditions being judged appropriate and subject to a confirmatory vote at that meeting. The Committee asked the Bank to be in a position to begin a sales programme before the end of September.
The Bank is providing this information now in order to allow market participants to prepare for the start of any gilt sales. However, the details outlined in this notice remain provisional until confirmed at the point at which the MPC votes to commence gilt sales. At the point of a future MPC vote to begin gilt sales, the Bank will provide final confirmation of its initial sales schedule and operation sizes alongside the MPC’s announcement, which will give market participants at least one week’s notice ahead of the start of gilt sales.
The Bank’s approach to gilt sales
In the event that gilt sales should proceed, the MPC agreed at its meeting ending on 3 August 2022 to set an amount for the reduction in the stock of purchased gilts held in the APF over a twelve-month period from the point at which the policy was voted on.
The Bank will reduce the stock of gilts held in the APF as instructed by the MPC via (a) allowing gilts to mature over the relevant 12 month period and (b) a programme of gilt sales over the same period.
The amount of APF stock reduction set by the MPC will be expressed in terms of the initial proceeds paid to purchase the APF holdings. This is consistent with the terms in which the stock of APF holdings have been measured since its inception, and the approach taken to gilt maturities to date.
At its August 2022 meeting, the MPC judged that, over the first twelve months of a gilt sales programme starting in September 2022, a reduction in the stock of purchased gilts held in the APF of around £80 billion was likely to be appropriate. Given the profile of maturing gilts over this period, this would imply a sales programme of around £10 billion per quarter over the twelve months from September. However, the amount of gilts to be sold in the first quarter will be confirmed when the MPC votes to begin its gilt sales programme. At that point the Bank will set out the precise timing and size of gilt sale operations in the quarter ahead.
Thereafter, the Bank will set a sales schedule once per quarter, accounting for prevailing market prices, the realised distribution of sales across the APF’s holdings in previous quarters, and the available operating dates in the quarter ahead. The quarterly schedule for the next quarter will ordinarily be announced by the Bank at least one week ahead of the end of each calendar quarter.
The Bank will closely monitor the impact of its gilt sales programme on market conditions, and reserves the right to amend its schedule (including the gilts to be sold), pricing method or any other aspects of its approach at its sole discretion.
Operating parameters for gilt sales
Gilts to be made available for sale
The Bank will make available for sale conventional gilts held in the APF with a minimum residual maturity of greater than three years.
Sales will be distributed evenly across short, medium and long maturity buckets. These buckets will be defined as: gilts with a residual maturity of between 3-7 years (short), those with a residual maturity of between 7-20 years (medium), and those with a residual maturity of over 20 years (long). The Bank will keep the definition of the maturity sectors under review in light of market conditions and subsequent policy actions.
The Bank will not make available for sale gilts which the DMO has announced it will re-open, including via a tender, during the period of two weeks (exactly 336 hours) before and after the re-opening. If the DMO announces a re-opening, including via a tender, within that two week period, of a stock that the Bank had previously announced it would make available for sale on a particular day, the Bank will remove the stock from the list of bonds to be made available for sale at that time.1
The Bank reserves the right to exclude any gilt from sale, at any time, at its sole discretion.
The Bank intends to sell gilts via a series of multi-stock sale auctions, divided evenly between the three maturity buckets described above. In each auction the Bank intends to sell a fixed value of gilts based on total sales proceeds, including any accrued interest, subject to the bids received.
Sales will be undertaken at prices determined in a variable rate auction on a discriminatory-price basis. Each auction will be open to competitive bids only; non-competitive bids will not be invited.
The amount of each individual stock that the Bank will sell in each gilt auction will not be pre-determined. Bids for different stocks will be allocated based on their attractiveness relative to market mid yields for the stocks, as published by Tradeweb, at the close of the auction.
The Bank intends to set minimum levels for the bid prices / maximum yields it is willing to accept, as a backstop, in support of its objective not to disrupt the functioning of financial markets. This backstop will be set at a level such that it would not be expected to bind regularly, but would allow the Bank to respond to evidence of particularly weak demand within the auction by reducing the amount it supplies in those conditions.
Any unallocated sales proceeds in an auction will be incorporated into the sales proceeds target for future auctions in order that the MPC’s target reduction in the stock of gilts will still be met.
The Bank will not restrict the maximum total value of gilts for sale to a single counterparty in each auction. There will be no minimum or maximum allocation to a particular stock. The Bank reserves the right to introduce concentration limits to its operations at a future date, including at bond, counterparty or end-client level.
Subject to final confirmation of the amount of APF stock reduction set by the MPC, the Bank expects to hold an auction in each maturity bucket once per fortnight. Where possible the Bank will hold short and medium maturity bucket auctions in the same week and long bucket auctions in the following week as a way to balance the supply of duration into the market.
Gilt sale auctions will usually be held on Mondays and/or Thursdays in order to avoid overlaps with DMO supply events. These auctions will normally begin at 2.15pm and finish at 2.45pm.2
The Bank will announce on its wire services pages3 each Thursday at 4pm the details of gilt sale auctions to be held during the following week including the stocks eligible for sale. The details of each gilt sale auction will be re-confirmed by the Bank on its wire services pages at 9am on the morning of the auction.
The Bank reserves the right to cancel an auction at any time before the results are published, at its sole discretion. If an auction is cancelled it may be re-scheduled to take place later the same day, or on a future date.
Gilt sale auctions will be held using the Bank’s electronic tendering system, Btender. The Bank reserves the right to restrict the number and/or the timing of bids submitted by counterparties who do not have access to Btender.
Counterparties must input into Btender the nominal sterling amount in millions for each specific gilt they wish to buy and the clean price at which they wish to bid. The number of decimal places allowed for the price is currently three.
Bids are submitted by counterparties using a clean price. Bids received in Btender will be converted to a yield using the standard gilt market conversion calculation available on the DMO’s website, and the yield will be displayed to counterparties for information.
The minimum bid amount and increment are currently set at £5 million and £1 million respectively.
For each bid entered, GEMMs will be required to identify whether it is 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 to be determined by the Bank as described below. GEMMs must enter the appropriate unique identifier in the relevant field on their bid input screen in Btender.
Bids will be allocated in ascending yield order, based on the attractiveness of bids for different stocks relative to market yields. Bids that are accepted at the highest 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.
Bids are accepted in full or in part at the counterparty’s bid price. The amount of each accepted bid in total proceeds will be paid to the Bank by the counterparty.
The Bank reserves the right to reject bids, in whole or in part, including in the light of other bids received, at its sole discretion.
The results of each gilt sale auction will be announced on the Bank’s wire services pages as soon as possible after its end. The Bank will publish for each stock offered the amount sold in terms of the total sale proceeds; the total size of bids received; the weighted average accepted price; the highest accepted price; and the lowest accepted price.
The Bank will publish each Thursday at 3pm the outstanding stock of gilt holdings in the APF in terms of the initial proceeds paid, and the aggregate weekly value of gilt sales.
Confirmation of the amount allocated to participants in gilt sale auctions will be available in Btender. In contingency situations, as set out in the Operating Procedures, where Btender is unavailable, the Bank will send a written electronic confirmation of each transaction on the day of sales.
Gilt sales will normally settle on a T+1 basis.
All counterparties must comply with the Settlement procedures outlined in the APF Operating Procedures.
Operational policy framework
Gilt sales will be undertaken as part of the implementation of monetary policy by the Bank of England Asset Purchase Facility Fund Limited (BEAPFF), which is a wholly-owned subsidiary of the Bank and is the legal counterpart to market transactions. The Bank acts as agent for BEAPFF.
All gilts sales, transactions and operations will be subject to the APF Terms and Conditions, APF Operating Procedures, any Market Notice and any other Documentation (as such term is defined in the APF Terms and Conditions), each as may be amended by the Bank from time to time. See the APF Terms and Conditions and other Documentation are available on the Bank's website.
Participation in gilt sales
Eligibility to participate as counterparties
Those eligible to participate as counterparties in gilt sale auctions will be firms that are GEMMs (as listed on the website of the DMO) and that are also signed up to the Bank’s gilt-purchase open market operations. Within a Group, only one firm may apply to participate.
Those wishing to participate in gilt sale auctions as counterparties should complete the Application Form for gilt sales available on the information for applicants page and submit it by email to firstname.lastname@example.org. Existing counterparties do not need to re-apply.
The Bank reserves the right to reject applications at its sole discretion at any time.
Collection of information on end-user participation
As was the case in the Bank’s gilt purchase operations, a range of end-users are able to submit bids into gilt sale auctions via GEMMs. GEMMs will be required to identify whether bids 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 email@example.com. 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. In any event, such applications must be made by 5pm on the London business day before any gilt sale auction. End-users will be responsible for sharing their unique identifier with relevant GEMMs.
In exceptional circumstances, GEMMs may submit bids 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 firstname.lastname@example.org to identify the new bidder and its bids. 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 thus on its monetary and financial stability objectives. 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 Bank announced on 6 August 2009, in a joint statement with the DMO, an arrangement for a significant amount of the gilts acquired by the Bank via the APF to be made available for on-lending to the market by the DMO through the DMO’s normal repo market activity. This arrangement will continue during any gilt sales programme. The Bank and DMO will keep under review the details of the lending programme as the Bank commences gilt sales in order to ensure efficient and effective settlement of gilt sales transactions.
The Bank will publish the average daily aggregate value of gilts lent by the APF to the DMO on a quarterly basis.
1 For context of see section titled ‘Liaison with the DMO’ in Asset Purchase Facility: Gilt Sales – Provisional Market Notice 4 August 2022
2 All times referred to in this Market Notice are in GMT, or BST where applicable.
3 Reuters BOE/Markets1; Bloomberg BOEO3