Date: 1 July 2022
Time: 11am – 12.30pm | Location: Bank of England
Minutes
Item 1 – Welcome
The Chair thanked members for attending and confirmed that the Minutes of the March 2022 meeting had been published on the Bank’s website.footnote [1]
Item 2 – Publication of discussion paper on resilience of MMFs
Authors of the Bank of England Discussion Paper “Resilience of Money Market Funds”footnote [2] gave a brief presentation Committee covering the context of the discussion paper, the policy options within the paper and the likely next steps following the discussion paper. The Bank noted the deadline for submitting responses to the discussion paper is 23 July.
Committee members noted that under the current regime the 30% threshold for 7 day liquidity essentially renders that part of the fund unusable to provide liquidity, as falling below this level would trigger processes for a decision on gating or changes to fees. Thus members suggested that any changes proposed in relation to increases in liquid asset requirements should be flexible and not add additional pressure.
The Committee discussed adjustments to the requirements to hold an increased proportion of public sector debt securities and felt it would be difficult in sterling given the small supply of UK Treasury Bills each week and the lack of a secondary market. A number of members noted consideration of any knock-on impact to other areas of the market, particularly the unsecured overnight market.
Members expressed concern that the accounting treatment of assets held in Money Market Funds may be altered if the underlying structure deviated from the current low volatility model.
Item 3 – Discussion on market conditions
A broad update on developments and conditions in global markets was presented by a member of the Committee, highlighting in particular the potential impact of Quantitative Tightening (QT) on the market, given the announcement by the MPC at its May meeting and challenges faced in repo markets.
The Committee discussion focused on the current challenges in the repo market, with short maturity specific gilts being difficult to cover and this had become worse since rates started to rise. A number of members noted that this has been exacerbated by market positioning and strategy.
Members noted that since the announcement from the DMO that the Standing Repo Facility (SRF) would continue to be no more than a 75bps spread, pressure had eased off slightly on specifics and there has been some duration coming back into the market. The announcement has given some certainty of borrowing costs over MPC meetings.
On the short-end challenges, the DMO also noted that the repricing of the SRF following the increase in Bank Rate on 16 June seems to have eased some strains in the repo market.
The DMO has also recently updated its websitefootnote [3] to include additional information on Standing Repo to allow the facility to be more visible to market participants.
Typically the DMO structures its remit to supply gilts to the market in a balanced way across benchmark maturities (usually 5 years and longer) to mitigate refinancing risk.
Expectation from the Committee members is that the start of QT would also help to ease some of the burden felt on the repo markets. But it was noted the MPC needed clear in its communications in August.
The difficultly in sourcing short-dated gilts has led to a small tick up in settlement fails but still far from the fails levels seen earlier this year. It was also noted that the current cut-off for the SRF is 12pm yet at that time RepoClear is yet to settle, so many banks are unlikely to know if they have short positions. The idea was floated that possibly an extension to the SRF, even by an hour would help. Some members flagged that if the whole market used net settlement correctly, fails would reduce notably.
Item 4 – Update from the Securities Lending Committee (SLC)
The Committee received an update on the recent SLC, held on 11 May, from the Chair.
SLC discussed recent market trades, noting the macro environment had been challenging with the Russia/Ukraine conflict, rate hikes and the prospect of QT, although the increased volatility has supported revenues in some markets. Under the context of Russia/Ukraine conflict, the Committee also discussed agent lender disclosures. It was noted most firms did not lend Russian or Ukrainian securities or collateral in recent months and had excluded these from collateral sets.
The SLC discussed a well-publicised instance where a counterparty had borrowed shares for voting purposes at an AGM. The Bank stated they were disappointed that this transaction had taken place which is in clear breach of the UK Money Markets Code. The Bank re-iterated that borrowing specifically to vote was against the widely agreed best practice in the market.
Finally the SLC turned to Diversity and Inclusion (D&I), noting the London network of Women in Securities Finance (WISF) continues to grow in membership. As the industry returns to in-person events, the group this year has intentionally focussed on networking opportunities.
Item 5 – Update from the UK Code Committee
The Co-chairs of the UK Code Committee provided the MMC with a short update on their recent meeting.
The Sub-Committee had discussed the recent uptick in the level of settlement fails in the UK market and whether to further amend the Explanatory Note of the Code to address the issue. The Bank noted that it was unhappy to see the current level of fails, particularly in the repo market, and urged all market participants to work together to rectify this.
The Sub-Committee discussed the recent breach in the Money Market Code which saw the borrowing of stock (in a transaction conducted by an agent lender) with the view to using the shares acquired to vote in a contested AGM. The Committee was in agreement that this was a breach of the Money Market Code, particularly as the Code clearly states that this type of transaction breaches the Code.
The Sub-Committee agreed that a letter should be written to all signatories of the Code highlighting the issues raised alongside any non-substantive changes to the text, and any updates to the Explanatory Note.
The Sub-Committee felt that it might be appropriate to review the wording in the Code with regards to ‘working from home’ to include ‘hybrid’.
Item 6 – Diversity and inclusion
A member of the Committee shared a personal story on challenges faced as someone with a disability. The Committee discussed and challenged itself on how it could do better to address a wider set of barriers to inclusivity in the workplace. Employers should not be afraid to approach the issue and ask sometimes difficult questions.
It was noted the environment of hybrid working during Covid-19 has opened some doors for those less abled with the increased flexibility of working from home. But it was also noted that this also led to some not making the changes needed to create an inclusive work environment for all.
Item 7 – AOB
Members of the Committee raised the recent Non-Standard Crest Closure (NSCC) which took place on 17 June, noting the costs incurred by the banks in such an event. The Chair confirmed this topic would be on the agenda for the Committee’s September meeting.
The Chair confirmed that the next MMC was scheduled for 14 September 2022, to be hosted externally at Lloyds Bank.
Committee attendees
Stephen Grainger – Aldermore
James Winterton – Association of Corporate Treasurers
Michael Manna – Barclays Bank UK
Emma Cooper – BlackRock
Romain Dumas – Credit Suisse
Inna Shaykevich – Goldman Sachs
Glenn Handley - HSBC
James Murphy – HSBC
Chris Brown – Insight Investment
Olivia Maguire – J.P. Morgan Asset Management
Tony Baldwin – LCH
John Wherton – Legal & General Investment Management
Peter Left – Lloyds
Nina Moylett – M&G
Jordan Broad – NatWest (alternate)
Nic Erevik – Newcastle Building Society
Alan Williams – Santander UK (alternate)
Romain Sinclair – Société Générale
Matt Heaton – Tradition
Jessica Pulay – DMO (Observer)
Alan Barnes – FCA (Observer)
Bank of England
Rhys Phillips (Chair)
Jon Pyzer
Nicole Webster
Kpakpo Brown
Steve Dodkins
Apologies
Gordon Lowson – Abrdn
Robert Thurlow – Mizuho
Jo Whelan – DMO (Observer)
Ina Budh-Raja – BNY Mellon
Marije Verhelst – Euroclear
Vicky Worsfold – Guildford Borough Council
Ben Challice – J.P. Morgan
Chirag Patel – Rabobank
Paul Barnes – Santander UK
John Argent – Tradition