Provisional Market Notice
At its May meeting, the MPC asked the Bank of England (the Bank) to develop a strategy for selling UK government bonds (gilts) held in the Asset Purchase Facility (APF) and committed to providing an update following its August meeting.
In the minutes of its meeting ending on 3 August 2022, the MPC said that it was provisionally minded to commence gilt sales shortly after its September policy meeting, subject to economic and market conditions being judged appropriate and subject to a confirmatory vote at that meeting. The Committee asked the Bank to be in a position to begin a sales programme before the end of September.
In the event that this should proceed, the MPC agreed to set an amount for the reduction in the stock of purchased gilts held in the APF over a twelve-month period from the point at which the policy was voted on, comprising both maturing gilts and gilt sales. The Committee judged that, over the first twelve months of a sales programme starting in September 2022, a reduction in the stock of purchased gilts held in the APF of around £80 billion was likely to be appropriate. Given the profile of maturing gilts over this period, this would imply a sales programme of around £10 billion per quarter over the twelve months from September.
This provisional Market Notice sets out the key features of how the Bank would achieve such a reduction in the stock of gilts held in the APF over a twelve-month period, if and when voted for by the MPC.
It covers: (1) the Bank’s approach to designing a gilt sales plan; (2) liaison with the UK Debt Management Office (DMO); (3) key operational terms; and (4) details of additional information that the Bank will require Gilt-edged Market Makers (GEMMs) to submit on end-client participation in the Bank’s gilt operations.
The Bank is providing this information now in order to allow market participants to prepare for the start of any gilt sales. Further provisional detail on operational terms and how to participate will be published on or around 1 September 2022.
At the point of a future MPC vote to begin APF gilt sales, the Bank will provide final confirmation of its initial sales schedule and operation sizes alongside the MPC’s announcement, providing at least one week’s notice ahead of the start of sales.
Approach to designing a gilt sales plan
The Bank will deliver the reduction in the stock of APF gilts set by the MPC via gilt maturities over the relevant twelve-month period, and a programme of gilt sales over the same period.
The amount of APF stock reduction set by the MPC will be expressed in terms of the initial proceeds paid to purchase the APF holdings. This is consistent with the terms in which the stock of APF holdings has been measured since its inception, and the approach taken to gilt maturities to date.
The size of the sales programme necessary to deliver the MPC’s desired reduction in the stock of purchased gilts held in the APF is expected to be around £10bn per quarter. The amount of gilts to be sold in the first quarter will be confirmed when the MPC votes to begin its sales programme. At that point the Bank will publish a final Market Notice, setting out the precise timing and size of gilt sale operations in the quarter ahead.
Thereafter, the Bank will set a specific sales schedule once per quarter, accounting for prevailing market prices, the realised distribution of sales across the APF’s holdings in previous quarters, and the available operating dates in the quarter ahead. The quarterly schedule of operations will be announced by the Bank around two weeks ahead of the end of each calendar quarter.
Liaison with the DMO
As set out in the exchange of letters between the Governor and the Chancellor in February 2022, any decision on whether, when, and how to commence gilt sales from the APF is for the MPC to make in the context of achieving its statutory objectives.
In the exchange of letters it was agreed that, in designing a strategy for gilt sales, the Bank “would liaise with the UK Debt Management Office (DMO) in order to minimise interference with the DMO’s own issuance programme”. This was intended to support the longstanding principle that, when a reduction in the monetary stimulus provided via the APF became appropriate, the MPC would take every step to ensure such a reduction could be implemented in an orderly fashion.
Accordingly:
- To minimise scheduling conflicts, the Bank will not schedule a gilt sales operation on the same day(s) as a DMO supply event;
- To avoid undue overlaps in gilt supply, the Bank will a) not sell a gilt that the DMO has sold in the past 2 weeks, or that the DMO intends to sell in the coming 2 weeks; and b) endeavour to ensure a sufficient gap between supply events of the same maturity; and
- To ensure that both organisations remain able to fulfil their respective remits, Bank and DMO staff will maintain liaison.
Key operational terms
The Bank will sell gilts by holding regular multi-stock auctions. Sales will be distributed evenly across short, medium and long maturity buckets. These maturity buckets will be defined as gilts with a residual maturity of 3-7 years (short), those with a residual maturity of 7-20 years (medium), and those with a residual maturity of over 20 years (long). The Bank will keep the definition of the maturity sectors under review in light of market conditions and subsequent policy actions.
In each auction the Bank intends to sell a fixed value of gilts based on total sales proceeds. Each auction will be conducted on a competitive basis whereby bids on different stocks will be allocated using a discriminatory pricing method based on their attractiveness relative to market mid yields.
The Bank reserves the right to reject bids, in whole or in part, including in the light of other bids received. The Bank also reserves the right to set a minimum bid price/maximum yield it is willing to accept.
The Bank will closely monitor the impact of its APF gilt sales programme on market conditions, and reserves the right to amend its schedule (including the gilts to be sold), pricing method or any other aspect of its approach at its sole discretion.
Subject to final confirmation of the amount of APF stock reduction set by the MPC, the Bank expects to hold an auction in each maturity sector once per fortnight. Where possible the Bank will hold short and medium maturity bucket auctions in the same week and long bucket operations in the following week as a way to balance the supply of duration into the market.
The Bank’s operations will usually be held on Mondays and Thursdays in order to avoid overlaps with DMO supply events.
All gilts held by the APF in each eligible maturity bucket will be made available for sale. However, as noted above, the Bank will exclude from APF sales operations gilts that the DMO intends to issue within a two week window either side of the relevant APF operations.
Accordingly the Bank does not intend to sell gilts which the DMO has announced it will re-open, including via a tender, during the period two weeks either side of the re-opening. If the DMO announces a re-opening, including via a tender, within that period, the Bank will remove the relevant gilt from the list of bonds to be sold on a particular day.
Those eligible to participate as counterparties in the auctions will be firms that are GEMMs (as listed on the website of the DMO) and that are also signed up to the Bank’s gilt-purchase open market operations. Within a Group, only one firm may apply to participate. Existing counterparties will not need to re-apply.
Collection of additional information on end-user participation
Information on the interaction of the Bank’s operations with the broader market is central to understanding the impact of the Bank’s monetary and financial stability policies. From the start of APF gilt sales, the Bank will therefore require participants in its APF gilt operations to identify any bids or offers submitted on behalf of a client, and disclose the names of underlying clients via a set of unique client identifiers to be determined by the Bank.
The Bank will aim to build on existing market practices so as to minimise unnecessary overheads as far as possible. Firms that wish to participate in APF operations via GEMMs should, in the first instance, send an email to clientidentifiers@bankofengland.co.uk. Firms will be required to notify all relevant GEMMs of their Bank-provided identifier code prior to participation. In due course the Bank will also provide a means for new participants to take part in auctions via GEMMs prior to an identifier code being assigned.
Further details of the Bank’s approach will be provided in the notice to be published on or around 1 September, including but not limited to: how the Bank will design this approach, how it will handle this information, and any potential additional obligations this will place on GEMMs.
The Bank has considered the use of concentration limits in its gilt sales operations. At this stage the Bank has decided not to introduce such limits, but will keep this decision under review as sales proceed. The Bank reserves the right to introduce concentration limits to its operations at a future date, including at bond, counterparty or end-client level.