LONDON – The Bank of England announced Monday further steps to ensure the U.K.'s financial stability, building on its intervention in the long-term bond market.
The Bank of England's Financial Stability Board announced on Sept. 28 a two-week emergency purchase program of U.K. long-term government bonds, known as “gilts,” to restore order to the market and protect liability-driven investment (LDI) funds from an impending collapse.
The central bank announced Monday that it will introduce further measures to ensure an “orderly end” to its purchase program on Oct. 14, including increasing the size of its daily auctions to make room for gilt purchases ahead of Friday's deadline.
“So far, the central bank has conducted eight daily auctions, offering to buy up to £40 billion and making about £5 billion of bond purchases. The Bank is prepared to deploy this unused capacity to increase the maximum size of the remaining five auctions beyond the current level of no more than £5 billion per auction,” the Bank said in an announcement on Monday.
Auction limits will be confirmed at 9 a.m. local time each day, with Monday's limit set at 10 billion pounds ($11 billion).
The Bank will also introduce the Temporary Extended Collateral Repurchase Facility (TECRF), which will allow the Bank to ease liquidity pressures on customer funds involved in recent market volatility. LDI, which holds a large number of gilts and is largely owned by final salary pension plans, is receiving margin calls from lenders following an unprecedented spike in gilt yields last month.
A margin call is a broker's request to increase the equity in an account when the value of the account falls below the amount required by the broker.
TECRF will allow the bank to run what the bank calls a “liquidity insurance operation,” which will last until after Friday's deadline and relieve pressure on customers' LDI funds.
“In these operations, banks will accept collateral that is compliant with the Sterling Monetary Framework (SMF), including index-linked gilts, as well as a wider range of collateral than is normally SMF-compliant, such as corporate bond collateral,” the bank said.
Third, the central bank said it would be prepared to use its regular indexed long-term repo operation – which allows market participants to borrow from the Bank of England's cash reserves in exchange for less liquid assets – to further ease liquidity pressures on LDI funds every Tuesday.
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