Date: 20 June 2023
Time: 1pm – 2.30pm | Location: Bank of England, 20 Moorgate London EC2R 6DA
Item 1 – Welcome
The Chair thanked members for attending and confirmed that the minutes of the March 2023 meeting had been published on the Bank’s website. He welcomed new members and alternates, as well as those who were attending as part of the Bank’s Meeting Varied People (MVP) initiative.
The Chair also noted that this would be his final meeting on the Committee due to an internal role change, and introduced Andrea Rosen from the Bank of England as his successor.
Item 2 – Sub-Committee updates
A representative from the Securities Lending Committee (SLC) provided an update on its recent work. A working group on settlement fails had been launched, which it was hoped could report its findings to the SLC by Spring 2024. As part of its diversity and inclusion initiatives, the SLC membership had also made a firm commitment not to sit on non-diverse industry panels.
A representative from the UK Money Markets Code Sub-Committee (UKMMC) also provided an update on recent work. The UKMMC had committed to carrying out an update of the Money Markets Code starting in September 2023, and to conclude by mid-2024. The necessary work would be split into work streams to match the four key chapters of the Code. It remained to be seen what updates would be appropriate, but it was expected that this might include market standards around unexpected Bank holidays and CREST outages, as well as more guidance on the adoption and use of Environmental, Social & Governance (ESG) policies. Diversity and inclusion would also be important for the Code review, and the Sub-Committee had discussed relevant issues including potential avenues to promote careers in money markets to a younger generation as a method of building a stronger and more diverse pipeline of talent to the sector.
Item 3 – Discussion on market conditions
A high level update on market developments was presented by a member of the Committee, focusing primarily on the outlook for the UK and recent conditions in money markets. The presentation highlighted continued good money market functioning despite high levels of volatility.
In characterising the recent moves higher in UK short rates, several members of the Committee suggested that technical factors had played a notable role particularly in the initial stages of the selloff which had largely been led by positioning factors.
The Committee discussed current dynamics in the mortgage market. It was noted by one member that some borrowers had rolled onto standard variable rates rather than re-fixing in the hope that longer-term fixed rates would come down in the near future. This – amongst other dynamics - meant reduced hedging requirements on the asset side of treasury balance sheets, contributing to lower liquidity in the middle of the UK curve.
The impact of the upcoming supply of gilts to the market via both the Debt Management Office and the Bank of England was also discussed. Some members noted that the current specialness in the repo market was in part due to the lack of supply in the sub-3yr sector of the market in particular, a sector in which the Bank was not actively selling bonds. That said, the recent trend had been towards a cheapening in repo markets, which was considered likely to continue over the coming months as more supply came through the pipeline. It was noted that coverage in DMO and Bank auctions had been resilient, albeit with some concessions ahead of operations, which some members put down to an increase in hedge fund activity
Item 4 – Developments in haircuts/initial margins for repo
A member of the Committee provided a presentation on how the use, and levels, of haircuts in the repo market had developed in light of recent elevated volatility. It was noted that haircuts were usually determined by a Value-at-Risk (VaR) based model, typically with lookback periods of 2-10 years.
Given this, periods of significant volatility such as Autumn 2022 introduced a shock to the levels of haircuts applied to cleared transactions, which would persist for some time due to the length of look-back windows. In particular there was a difference between the haircuts applied for long-dated gilts in cleared DBV versus triparty structures, which had become more prominent following the VaR shock.
Banks often found it difficult to pass haircuts on in full to their clients, which had led to some rebalancing of business away from cleared transactions and some reorganisation of collateral between cleared, triparty and bilateral transactions to optimise between differing haircuts.
Some members suggested that a shorter lookback period, or even a minimum mandated haircut level, may alleviate some difficulties around rapid changes in haircut levels and the differing approaches between market segments.
The Committee agreed that the SLC sub-Committee should discuss this topic in more detail at an upcoming meeting.
Item 5 – AOB
The Chair informed the Committee that the Sector Response Framework was looking for a volunteer representative from the MMC membership. Members were asked to express interest via email.
A member suggested that the Committee should discuss the ongoing work to move more settlement to a t+1 basis, noting that given the period of LDI stress there is a question over whether the market infrastructure would support it.
The Committee closed by expressing its thanks to the outgoing Chair.
Gordon Lowson - Abrdn
James Winterton - Association of Corporate Treasurers
Michael Manna - Barclays Bank UK
Madhumita Srinivasan - Barclays Bank UK (observer)
Romain Dumas - Credit Suisse
Inna Shaykevich - Goldman Sachs
James Murphy - HSBC
Chris Brown - Insight Investment
Olivia Maguire - J.P. Morgan Asset Management
Peter Left - Lloyds Bank
Oliver Butcher - NatWest Markets
Nic Erevik - Newcastle Building Society
Nina Moylett - M&G
Avi Tillu - PIMCO
Chirag Patel - Rabobank
Alan Williams - Santander UK
Rajan Sharma - Santander UK (presenter)
Itziar Recalde Eleno - Santander UK (observer)
Romain Sinclair - Soc Gen
Matthew Heaton - Tradition (alternate)
Niamh Staunton - BP (observer)
Jessica Pulay - DMO (observer)
Liam Browne - FCA (observer)
Ina Budh-Raja - Bank of New York Mellon
Emma Cooper - Blackrock
Marije Verhelst - Euroclear
Victoria Worsfold - Guildford Borough Council
Ben Challice - J.P. Morgan
John Wherton - LGIM
John Argent - Tradition
Bank of England
Rhys Phillips (Chair)