BoE is working to design a contingent NBFI repo facility
The Bank of England (BoE) has set out its progress on work to develop a facility to allow eligible pension funds, liability-driven investment (LDI) providers and insurers to borrow cash against gilts at times of severe gilt market dysfunction.
The bank's report on its official market operations over the 2023-23 year – published yesterday (30 July) – noted the bank has begun work to expand the tools it has available to respond when severe dysfunction in core UK financial markets threatens UK financial stability.
This work was originally announced by the BoE's former executive director for markets Andrew Hauser in a speech on 28 September last year.
At the time, the bank said the motivation for this work stemmed from the risks to the functioning of core markets posed by the growing role of leveraged non-bank financial institutions (NBFIs) and the demands for liquidity they place on the system.
In its report yesterday, the BoE said its initial area of focus was to design a tool for supporting the gilt market – a move it said reflected the gilt market's size, its interconnectedness to other markets and the real economy, and its importance to financial stability.
Two phase approach
The BoE said it was developing this tool in two phases.
In the first phase, the bank said it is working to design a contingent NBFI repo facility allowing firms to borrow cash against gilts at times of severe gilt market dysfunction.
It said this facility would be open to eligible insurance companies, pension funds and associated LDI funds – sectors the BoE said had been "significant sellers of gilts in past stress episodes".
The BoE added that, as the tool is intended to address gilt market dysfunction, rather than being a source of individual firm liquidity insurance, it expected this to be a contingent tool that the bank activates in stress, rather than a standing facility that is available at all times.
It said: "While this is an innovative facility, it will draw on traditional central banking principles: the facility will be priced to be attractive in periods of stress but expensive relative to market pricing in normal times; and the provision of liquidity to the system will be supported by prudent levels of haircuts. These will help ensure market participants are suitably incentivised to self-insure against a range of liquidity shocks and improve resilience."
The BoE published further details of the tool last week in a provisional market notice and explanatory note.
