Transitioning to a repo-led operating framework – discussion paper feedback statement

1: Background

This feedback statement provides a summary of the responses to the Bank’s December 2024 discussion paper ‘Transitioning to a repo-led operating framework’, and the Bank’s position on key issues respondents raised.

The discussion paper (DP) set out the changes that the Bank is making to the Sterling Monetary Framework (SMF) to transition to a repo-led, demand-driven operating framework for supplying central bank reserves, including proposals to recalibrate the Indexed Long-Term Repo (ILTR) facility.

The DP sought feedback from SMF participants and other interested stakeholders on: (i) the design of our framework (including the recalibration of the ILTR) and its ability to effectively meet the Bank’s stated policy aims; and (ii) the collateral and operational processes that support our framework.

The Bank received 61 written responses to the DP from a broad cross-section of UK and international banks, building societies, and other interested stakeholders (including industry associations).

This feedback statement summarises the responses we received, focusing on the issues respondents identified as key to ensuring the framework functions effectively. In doing so it supports our commitment to transparency and aims to promote understanding of the SMF framework design.

The transition from an environment of abundant reserves to a repo-led, demand-driven operating framework is a major change for the SMF. The Bank will monitor how this new framework performs against the design principles set out in the DP on a continuous basis. As part of that we will continue to engage with a wide range of market practitioners and interested parties, including via dedicated sessions for SMF participants.

2: Overall design of the framework

There was broad support from respondents for the transition to a repo-led, demand-driven framework. Responses indicated that the framework would be effective at delivering on the Bank's principles for its design.^{footnote [1]}

Respondents were also supportive of the proposed recalibration of the ILTR, with respect to the increase in the total reserves available per operation, the increase in the quantity of reserves available at fixed minimum spreads, and the gentler upward sloping curve which should help ensure a gradual rise in spreads.

Two key areas of feedback were raised in firms’ responses on the overall design of our framework and the recalibration of the ILTR. Some firms raised concerns relating to the predictability of the ILTR, particularly at higher levels of demand or in response to a stress. And some firms argued for increasing the overall level of flexibility in reserves supply offered by our facilities – in terms of the availability of liquidity at different tenors, and the frequency of our market-wide operations.

Respondents welcomed the recently published Prudential Regulation Authority (PRA) statement on the ILTR facility which, alongside the PRA statement on the STR facility published in August 2022, confirmed that the PRA would judge usage as part of firms’ routine sterling liquidity management.^{footnote [2]} The PRA statement on the ILTR also encourages firms to ensure they are operationally ready to use this facility.

Consistent with this, usage of our facilities has continued to increase over recent months, alongside a broadening of participation. This is as intended and is encouraging. Over time, more frequent participation from a broader range of firms will be essential for supplying the system with the liquidity it needs. Some firms’ responses indicated that they would continue to view the ILTR primarily as a ‘backstop’ to obtaining liquidity through private market activity. The Bank, and PRA, are clear that firms should be looking to use the facility for routine liquidity management as a complement to private market activity as and when it makes sense to do so – and not just as a backstop.

Respondents also welcomed the Bank’s continued market engagement on the transition to a repo-led, demand-driven operating framework so far, and the clarity and usefulness of our publicly available documentation (on the Bank’s website) explaining the SMF.^{footnote [3]}

2.1: Predictability of ILTR pricing and allocation

Some respondents remarked that the lack of full predictability in ILTR pricing and allocation could pose a risk to the effective functioning of the repo-led framework, particularly at higher levels of demand or in response to a stress.

Predictability in normal market conditions

The Bank continues to judge that the ILTR’s current high-level design as a variable price, variable size auction best delivers the balance required between flexibility and responsiveness to changing market conditions on the one hand, and sufficient predictability for SMF participants on the other.

The Bank has taken the feedback around the importance of predictability into consideration in setting the ILTR’s precise calibration. While firms should expect to see some variation in pricing between auctions – as they would with private market instruments – the increase in the quantity of reserves available at minimum spreads in the recalibrated ILTR will provide greater certainty of allocation to firms early in the transition to a repo-led framework. And the ‘gentler’ upward-sloping curve of the ILTR has been calibrated to ensure that in normal market conditions, any week-on-week volatility in pricing firms face is not unduly high compared to the variation experienced in private markets. The Bank will pay close attention to variation in clearing spreads and market funding rates as part of its monitoring of the appropriateness of the facility’s calibration in transition.

The Bank has also published, alongside this feedback statement, additional information for participating firms. The ILTR guide for participants provides practical information for firms on how to participate effectively in the ILTR. Following this guidance will improve the predictability of pricing and allocation outcomes for firms, and the impact of doing so is illustrated through example auctions. The guide encourages firms to:

• bid the maximum they are willing to pay for liquidity against each collateral set. Doing so increases the likelihood of their bids being allocated in full;
• access the ILTR regularly and distribute their demand across auctions, which will improve the predictability and stability of allocation and pricing across auctions;
• be operationally ready to use the ILTR, and ensure they are familiar with the Bank’s trading systems and collateral processes.

As with all SMF facilities, the Bank will keep the calibration of the ILTR under review and may periodically update the parameters of the ILTR to ensure that its terms remain robust to structural changes in market conditions, and that it continues to meet the Bank’s policy objectives. Any changes to the calibration will be communicated in advance.

The Bank intends to increase the minimum spread to Bank Rate on bids against Level A collateral only in the ILTR from 0 basis points to 3 basis points over Bank Rate. This change, originally announced in 2022, is now scheduled to take effect in November 2025 and apply to new drawings thereafter. By introducing a modest spread above Bank Rate, this change is intended to balance incentives for participants between the STR and ILTR facilities against Level A collateral by more closely aligning the effective costs of the facilities given the longer tenor of the ILTR. The effective date of this change will be confirmed ahead of time in a market notice. The Bank does not intend to change minimum spreads on Level B and C collateral at that time.

Predictability at higher levels of demand and in response to stress

The ILTR’s maximum auction size has been increased, from £25 billion to £35 billion. This will ensure that, even at higher levels of usage, the auction has sufficient capacity to scale up further in response to any spikes in demand.

Furthermore, the ILTR is just one part of the Bank’s toolkit for meeting firms’ demand for liquidity both in normal and stressed market conditions. Our standing SMF facilities also include the market-wide STR facility, and our bilateral facilities, the Operational Standing Facilities (OSFs) and Discount Window Facility (DWF). The Bank has the flexibility to temporarily amend the terms of these facilities in response to periods of market stress, and in past periods of market stress has temporarily increased the frequency of some of its operations.

The Bank also has a range of additional tools such as the Contingent Term Repo Facility (CTRF). The CTRF can provide liquidity against the full range of eligible collateral at any time, term, and price the Bank chooses. The Bank can activate it in response to any actual or prospective market-wide event. This enables us to respond to a market stress in a flexible way, taking prevailing market conditions into account when setting the terms of the facility.^{footnote [4]} The Bank stands ready to use this tool if needed in the future.

2.2: Flexibility offered in our lending facilities

A number of respondents to the DP requested greater flexibility in our market-wide facilities to better match their liquidity needs – either in the form of increased operation frequency, a greater variety of tenors, or the ability to repay ILTR drawings earlier. Respondents suggested that these forms of additional flexibility would improve the framework’s ability to respond to sudden changes in demand for reserves.

Frequency of STR and ILTR

The Bank continues to judge that offering its market-wide lending operations – the STR and ILTR – on a weekly basis remains appropriate. This balances sufficient frequency of access to reserves for firms with the risk of greater market disintermediation that could arise from more frequent operations. Our weekly market-wide operations are complemented by bilateral facilities that are available daily, and on-demand, to meet firm-specific liquidity needs in between our regularly scheduled market-wide operations. The Bank also has the flexibility to temporarily amend the terms of our facilities in response to periods of market stress.

Available tenors in the STR and ILTR

The Bank also judges that the tenors of the STR and ILTR – which offer reserves for one week and six-month periods respectively – remain appropriate for now. Given the ILTR’s auction format, offering multiple tenors would require the Bank to make assumptions on the likely balance of demand across different tenors. As such, offering multiple tenors could lead to greater volatility of price and allocation outcomes faced by firms, particularly if the relative demand for different tenors varied substantially over time. This would also increase the chance that the supply of reserves is not priced in line with the Bank’s intentions as set out in the DP.

The Bank is open to considering moving the ILTR to a single, shorter tenor – such as a three-month term – if there is a compelling case that this would materially improve the usability of the facility, and that this benefit would exceed the cost of the increased operational burden for the Bank and participating firms of rolling over drawings more frequently. Moving to a single shorter tenor would require a recalibration of the terms of supply in the facility, since over a shorter drawing period fewer auctions would be available to build up the aggregate stock of reserves in order to meet firms’ overall needs.^{footnote [5]} The Bank welcomes continued engagement on this issue.

A small number of respondents requested longer tenors to be available in the ILTR. The Bank intends for the facility to be used for liquidity rather than term funding. As such we are not contemplating offering the facility for a tenor above six months at present. In line with its principles for operating framework design, the Bank seeks to minimise the risk that the terms on which it supplies reserves reduces incentives for firms to manage appropriately their own liquidity risk, or that the Bank’s operations disintermediate private funding markets.

Early repayment

Offering full flexibility to repay drawings at any time would undermine the integrity of the ILTR as a competitive auction – since participants would no longer have a strong incentive to bid in line with their true demand for liquidity. But the Bank will continue to review the case for offering alternative forms of flexibility such as strictly limited forms of early repayment. An important consideration here will be whether any additional flexibility could advantage some ILTR participants at the expense of others, for example if greater flexibility was particularly valued by a subset of participants. The Bank welcomes continued engagement on this issue.

2.3: Other feedback on overall framework

Minimum bid sizes in STR and ILTR

Some respondents noted that the minimum bid size for the ILTR and STR of £5 million was prohibitively large, particularly when seeking to conduct ‘test’ trades. In response to this feedback, the Bank has lowered the minimum bid to £1 million for both the ILTR and STR. This will support a wider set of SMF participants in preparing to use our facilities.

Role of the OSFs and DWF in the repo-led framework

Some respondents requested greater clarity of the role of the Operational Standing Facilities (OSFs) and the DWF in a repo-led framework. The Bank expects the OSFs and DWF to both play an important role in the repo-led framework, alongside our regular market-wide operations. As with all SMF facilities, the OSFs and DWF are ‘open for business’ and should be used by SMF participants for the purposes of liquidity management.^{footnote [6]}

The OSFs, as on-demand bilateral facilities, can support firms facing liquidity demand shocks such as payment frictions by lending reserves against level A collateral, or allowing reserves to be deposited, at a fixed spread to Bank Rate. Firms recognised that OSFs could play an important role in responding to shocks in demand for reserves which occur outside of the ILTR or STR auction window. However, given some comments from firms that they would use OSFs only as a last resort, we intend to engage with the market on the current design and effectiveness of our OSFs.

The DWF will continue to serve as the Bank’s bilateral facility for lending high-quality assets (gilts and reserves) to firms against the full range of SMF-eligible collateral. As with all SMF facilities, the DWF is ‘open for business’ and should be used by SMF participants for the purposes of liquidity management.^{footnote [7]}

Interactions with liquidity and funding policy framework

Respondents welcomed the recently published PRA statement on the ILTR facility which, alongside the PRA statement on the STR facility published in August 2022, confirmed that the PRA would judge usage is part of firms’ routine sterling liquidity management, and encourages firms to ensure they are operationally ready to use these facilities.^{footnote [8]}

Respondents noted the PRA’s intention to review its liquidity and funding policy framework, including relevant regulatory reporting, to ensure alignment with the Bank’s transition to a repo-led framework.^{footnote [9]} Several respondents emphasised that this would be important in supporting increasing uptake of SMF facilities during the transition.

3: Collateral eligibility processes and settlement model

The DP asked respondents for views on the potential barriers, within our collateral eligibility and settlement processes, to the smooth functioning of the Bank’s repo-led, demand-driven framework.

Respondents suggested various changes to the Bank’s collateral eligibility and settlement processes that in their view would enhance the overall usability of the Bank’s SMF facilities to SMF participants. The Bank recognises the importance of this feedback and is committed to reducing frictions in accessing our facilities. Further engagement on these issues by SMF participants is welcomed by the Bank.

3.1: The Bank’s collateral eligibility processes

Our approach to collateral is a core part of enabling the Bank to provide SMF participants access to predictable and reliable sources of liquidity through SMF facilities, both on a day-to-day basis and when they experience or anticipate an interruption to private markets. Our collateral eligibility processes enable us to provide predictability to firms while also ensuring we complete the necessary due diligence to manage the risks to public funds.

Many respondents noted that the time taken to pre-position new portfolios of raw loans, or to top-up existing raw loan portfolios, and the speed of verifying the eligibility of new structured finance securities on request, was a potential barrier to firms using our SMF facilities to a greater extent. Firms’ feedback will help the Bank identify priority areas for review in order to address some of the concerns raised. Current areas of focus are:

1. Raw loan portfolios: we are assessing whether there is scope to tailor our due diligence requirements to be even more targeted and sensitive to the risks posed (such as considering the frequency of the Bank’s review requirement and potential streamlining of report processes). We will also publish clarifications to our guides to loan pool pre-positioning and movements. We also intend to introduce a loan pool ‘top-up’ request form to standardise requests, and the underlying information required.
2. Structured finance securities: we are reviewing our internal processes to consider whether there is more concrete guidance we can give on the eligibility of these securities in advance. In doing so, we will need to consider the balance among the efficiency and certainty that detailed, specific criteria can bring, the ability to assess risks in specific collateral and the type of flexibility that allows the Bank to accommodate developments in market standards and practices. We are also considering ways in which we can refine our due diligence process; for example, we find that Simple, Transparent and Standardised issuance is typically quicker to review.^{footnote [10]}
3. Raw loans and structured finance: we have recently appointed a panel of legal firms to advise the Bank on legal risks where appropriate. This has already led to an improvement in responsiveness and efficiency of necessary legal due diligence.

Eligibility and pre-positioning assessments are a joint endeavour between SMF participants and the Bank. The Bank will review its processes with a view to reducing response times where possible and asks SMF participants to reply promptly to information or data requests and engage proactively with legal or auditor third parties. Ensuring that securities meet the Bank’s transparency and data requirements prior to requesting eligibility also speeds up the process.

3.2: Settlement model

The Bank’s settlement model uses a collateral pooling arrangement known as the single collateral pool (SCP). This approach allows SMF participants to manage a wide range of eligible collateral across Levels A–C, which can be used to collateralise borrowing across our SMF facilities. Under this model, collateral is transferred into the pool free of payment and valued at that time. Firms’ overall SMF exposures can then be managed against the adjusted market value of the pool.^{footnote [11]}

A number of respondents suggested that the Bank move towards an operating model that is more closely aligned to standard practices in the sterling repo market. These respondents suggested moving the STR and ILTR to settle on a delivery versus payment (DvP) basis would alleviate the effective intraday liquidity drain and associated costs that firms experience with the current free of payment settlement method, when reserves are received late in the day. Some firms also suggested that the Bank could utilise a tri-party arrangement to simplify collateral and settlement processes. These respondents noted that a tri-party arrangement could reduce the Bank’s operational and settlement risk via facilitating collateral selection and substitution, management of securities, and efficient DvP settlement.

For now, the SCP remains the Bank's preferred approach to collateral management. It offers a consistent approach across different SMF facilities and collateral types as well as having specific operational advantages, such as: enabling SMF participants to net their borrowing within individual SMF facilities; allowing for the substitution of collateral; and reducing the number of margin calls required. It has been shown to offer a robust and flexible approach to underpin the Bank’s SMF facilities, including in times of significant market disruption.

Any change to our current SCP could involve a multi-year programme of change. However, the Bank recognises the importance of the feedback received and is fully committed to working to reduce the operational frictions respondents raised in their responses. As part of this work, the Bank wants to ensure all participants have the requisite understanding of the functioning of the SCP and will engage with firms to ensure the full benefits of collateral pooling for SMF participants can be realised. This includes supporting greater use of the Collateral Management Portal (CMP) which offers the ability to manage collateral movements efficiently and to view a range of collateral related reports.

3.3: Other feedback on collateral and settlement

Encumbrance reporting

A number of respondents commented that inefficiencies arose from the encumbrance of collateral, especially raw loan portfolios, delivered to the Bank’s Single Collateral Pool (SCP).

Any loan collateral that is in the Loan Pre-Positioning Pool (LPP) is not encumbered. Any collateral that is delivered to the SCP (or sub-pools) has had either beneficial or legal title transferred to the Bank and is therefore encumbered.

However, excess collateral held by a participant in the SCP, whether securities or raw loans portfolios, if it meets the requirements of Paragraph 2 of Article 7 of Liquidity Coverage Ratio (CRR) rules relating to the eligibility of collateral held with central banks, can be regarded as unencumbered by the PRA and so could be available for Participants to count as part of their liquid assets.

Scope of eligible collateral

Some respondents asked the Bank to consider widening the scope of eligible assets for the Bank’s SMF facilities to include some additional specific types of raw loans and equities.

The Bank already accepts a broad range of collateral including certain types of raw loan pools. The Bank also has the discretion to accept equities as collateral, should the need arise. Guiding principles behind our collateral framework include that assets need to be held in sufficient quantities by a range of SMF participants in order to be eligible and that, in the event of default, the Bank must be confident in its ability to take ownership, value and risk-manage the assets effectively and efficiently, as part of protecting the Bank’s balance sheet and therefore public funds.

The Bank has no immediate plans to change the scope of assets which are eligible as collateral but will continue to keep the scope of eligible assets under review.

Collateral haircuts

Respondents also said that they considered the Bank’s haircuts higher than those in private markets and suggested that the Bank consider reviewing and possibly lowering them. The Bank’s haircuts are designed to meet the tolerance for risk set by the Bank’s Court across the economic cycle, which has the benefit of providing stability in drawing capacity for firms. The Bank continues to believe that providing that stability in haircuts and managing risk to our balance sheet, should be the primary drivers of its haircuts policy. In reviewing the appropriateness of SMF facilities pricing relative to market comparators, the Bank considers the ‘all-in’ cost of using our facilities – factoring in non-price costs such as haircuts, operational costs, and differences in tenor, frequency, or regulatory treatment.

Respondents also asked for greater transparency around collateral used in the Bank’s operations. Since 2024, the Bank has included aggregate data on SMF participants’ collateral holdings in the SMF annual report. Additionally, some respondents requested that the Bank publish specific haircuts alongside the ISINs of eligible securities collateral on the Bank’s website. The Bank is considering the merits and operational implications of this proposal. More generally, the Bank is reviewing its external documentation to ensure it is as clear and useful as possible.

Operational arrangements and systems

Some respondents asked for the STR to be indexed to Bank Rate so that the bidding window for the operation can be moved to the usual time of 10am on the days of the Monetary Policy Committee (MPC) announcement. The bidding window for the STR opens on Thursdays at 10am except for the Thursdays on which the MPC announcement is made, when it opens at 12.30pm.

The STR is indexed to Bank Rate but at the time of launching the facility the Bank judged that certainty of the rate at which reserves are being supplied (ie by holding the STR after the MPC announcement) would make the facility more predictable to firms. The Bank acknowledges the feedback and will consider making a change in due course.

Many respondents provided specific suggestions for improvements to Btender (the Bank’s electronic trading system) and the CMP. These were aimed at making the Bank’s systems more user-friendly. The Bank is in the process of replacing Btender and will consider the feedback received on potential areas for improvement during this work. While feedback on the CMP was overall positive, the Bank is keen to engage with SMF participants to further promote the full functionality of the CMP as noted above.

Some respondents noted the industry-wide move towards T+1 settlement. The Bank continues to support this initiative and will consider the implications this will have on its operations in due course.