Bank of England steps up bond purchases, announces liquidity measures for pension funds

Bank of England Governor Andrew Bailey said central bank independence “is critically important”.

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LONDON — The Bank of England on Monday announced new measures to ensure financial stability in the UK, building on its intervention in the long-term bond market.

On September 28, the Bank’s Financial Stability Committee announced a two-week emergency purchase program for long-term British government bonds – known as “gilts” – to restore the order in the markets and to protect Liability Driven Investment (LDI) funds from imminent collapse.

The central bank announced on Monday that it would introduce new measures to ensure an “orderly end” to its buying program on October 14, including increasing the size of its daily auctions to allow room for gold purchases before the Friday deadline.

“To date, the Bank has conducted 8 daily auctions, offering to buy up to £40bn, and has completed approximately £5bn of bond purchases. The Bank is ready to deploy this capability unused to increase the maximum size of the remaining five auctions above the current level by up to £5 billion in each auction,” the Bank said in Monday’s announcement.

The bidding limit will be confirmed each morning at 9 a.m. local time, with Monday’s limit set at £10 billion ($11 billion).

The Bank will also launch a Temporary Extended Collateral Reverse Repo Facility (TECRF), which will allow banks to ease liquidity pressures on client funds plagued by recent market volatility. Following the unprecedented surge in gilt yields last month, LDIs – which hold significant amounts of gilts and are mostly owned by final salary pension schemes – were receiving margin calls from lenders.

A margin call is a request from brokers to increase the equity of an account when its value falls below the amount required by the broker.

The TECRF will allow banks to conduct what the Bank has called “liquidity assurance operations”, which will last beyond Friday’s deadline and ease pressures on customers’ LDI funds.

“As part of these transactions, the Bank will accept collateral eligible under the Sterling Monetary Framework (SMF), including index-linked gilts, as well as a wider range of collateral than would normally be eligible under the SMF, such as corporate bond guarantees,” the bank said.

Third, the Bank said it would be ready to use its regular index-linked long-term repo operations every Tuesday – which allow market participants to borrow the BOE’s cash reserves for six months in exchange for less liquid assets – to further alleviate liquidity pressures on LDI funds.

“This standing facility will provide additional liquidity to banks against SMF-eligible collateral, including index-linked gilts, and thereby support their lending to LDI counterparties,” the Bank said.

“Liquidity is also available through the Bank’s new standing short-term repo facility, launched last week, which offers unlimited reserves at the discount rate every Thursday.”

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