Report on the Bank’s official market operations 2023-24

Executive summary

The Bank’s mission is to promote the good of the people of the United Kingdom by maintaining monetary and financial stability. Our operations in sterling markets support these objectives.

The Bank regularly reports on its market operations conducted in support of monetary and financial stability, including – but not limited to – those delivered through the Sterling Monetary Framework (SMF). The Bank’s operations are conducted to implement Monetary Policy Committee (MPC) decisions by transmitting Bank Rate and managing assets; and to safeguard financial stability by offering liquidity to eligible participants in the financial system. In the main, the Bank’s market operations are undertaken in sterling, but facilities also exist in a range of foreign currencies. Operations are conducted across the Bank’s own balance sheet,^{footnote [1]} and via subsidiaries.^{footnote [2]}

Further detail on the Bank’s objectives, as well as a full list of the operations considered in this report, can be found in the Bank’s Market Operations Guide.

Our SMF facilities are there to be used by firms, and the Bank remains ‘open for business’. This means that participant firms that meet regulatory threshold conditions for authorisation and have the appropriate type and amount of collateral, have the flexibility to use our SMF facilities as and when they deem appropriate. Firms are not required to justify their decision to utilise facilities to the Bank or to the Prudential Regulation Authority (PRA). There is no specific or limited list of cases in which firms may use our facilities, and there is no fixed order in which we expect firms to use one form of liquidity over another. Further information for firms seeking to apply for access to our facilities is available at Information for applicants.

The Bank aims to publish a short, factual annual report covering key developments in facilities and their usage. In addition, every third year, the Bank aims to publish a more in-depth review of its market operations, allowing for a broader stocktake of developments. Following the first broad review in 2021, and short reports in 2022 and 2023, this report is a broader review, covering the period March 2023 to end-February 2024.

The structure of this report is as follows:

• Section 1 summarises SMF membership over the review period.
• Section 2 outlines the Bank’s deposit-taking activities, including the impact of the Bank’s current and future operations on the overall level of reserves.
• Section 3 discusses the management of assets held within the Asset Purchase Facility.
• Section 4 outlines usage of the Bank’s liquidity insurance facilities over the review period, including key developments in these operations.
• Section 5 discusses the future development of the Bank’s facilities for supporting financial stability.
• Section 6 summarises the Bank’s risk management framework, including key developments in this area.

This report also includes two boxes. These provide further information on topics that have been particularly notable during the reporting period:

• Box A: The Short-Term Repo (STR) facility – 18 months since launch:
  The STR was established to maintain monetary control over the coming years. As intended given its positioning as a routine weekly operation, STR usage has increased among market participants, with the tool becoming of increasing importance in sterling money markets.
   
• Box B: The unwind of the Term Funding scheme with additional incentives for Small and Medium-sized Enterprises (TFSME):
  The TFSME is coming to an end and most drawings will mature in 2025. This unwind represents a normalisation of bank funding conditions and of the central bank’s balance sheet following several crisis-era interventions. The Bank is working with firms to ensure they plan well ahead for the repayment of maturing TFSME; look to smooth their exit from the scheme; and consider how the actions of other firms might increase their refinancing costs.

1: SMF membership

Access to the Bank’s sterling monetary operations is open to a wide range of eligible financial firms.^{footnote [3]} Firms that wish to use the Bank’s reserves accounts or liquidity facilities must sign-up to the Sterling Monetary Framework (SMF).

Interest in joining the SMF comes from a range of firms, including both UK firms, as well as those headquartered abroad. Some are new firms, while others are existing SMF participants wishing to sign up for access to additional facilities (Chart 1).

At end-February 2024, 226 participants had access to one or more of the SMF facilities.^{footnote [4]} During the review period, four firms joined as new SMF participants, and nine existing participants signed up for access to additional facilities, broadening the range of facilities available to them. Three firms exited the SMF, this year, as the Temporary Permissions Regime,^{footnote [5]} which allowed European Economic Area-based firms to passport into the UK, ended on 31 December 2023.

The Bank continues to keep its SMF access policy under review. To find out more, see Information for applicants.

2: Deposit-taking activities

2.1: Reserves accounts

Reserves accounts are sterling-denominated, instant access accounts offered to eligible financial firms. There is currently no maximum or minimum balance for most participants. Reserves accounts can be used by SMF members for settlement of obligations arising as a result of direct participation in UK payment systems. Reserves balances held by market participants make up the largest aspect of the Bank’s balance sheet.

The Bank implements the MPC’s interest rate decisions by applying Bank Rate to reserves balances. This keeps short-term market interest rates in line with Bank Rate. The Bank currently remunerates reserves balances in full at Bank Rate for banks, building societies and broker-dealers. Central counterparties (CCPs) and International Central Securities Depositories (ICSDs) are required to maintain a target average reserves balance in order to receive remuneration at Bank Rate.

At the beginning of the review period (March 2023), Bank Rate was 4.0%. Across multiple meetings over the review period, the MPC voted to raise Bank Rate. Bank Rate at the end of the review period (end-February 2024) was 5.25%.

The Bank monitors market interest rates to assess the effectiveness of monetary policy implementation. Both secured and unsecured rates responded to the increases to Bank Rate in an orderly fashion as shown by changes in Sterling Overnight Index Average (SONIA), an unsecured overnight benchmark rate, and Repurchase Overnight Index Average (RONIA), a secured overnight benchmark rate (Chart 2).

Reserves over the review period

Between March 2023 and end-February 2024, the total stock of UK central bank reserves decreased by £122.9 billion, from £908.5 billion to £785.6 billion. This represents a significant reduction, relative to previous annual report periods (Chart 3). The majority of this decrease was driven by the sale and maturity of assets held through the Asset Purchase Facility (APF) for monetary policy purposes. Maturities and repayments of TFSME loans made to banks from April 2020 to October 2021 also contributed to the reduction in the level of reserves.

Several other factors impact the level of reserves at any given time, including the amount lent in SMF liquidity facilities, as well as other aspects of the Bank’s routine activities, including the value of sterling banknotes in circulation. Further information about the reduction in the stock of purchased assets in the APF, and the unwind of TSFME, can be found in Section 4 and Box B respectively. Quarterly reserves data can be found in the annex.

The future ‘new normal’ balance sheet

Understanding the potential future demand for reserves is important for designing the Bank’s future ‘new normal’ balance sheet and policy toolkit. Reserves supply has amply exceeded demand in recent years, reaching a peak of £979 billion in January 2022, and remains ample at current levels. The supply of reserves was driven largely by asset purchases via the APF and term funding schemes.^{footnote [6]}

Since this peak, the supply of reserves has begun to reduce gradually, with the Bank’s balance sheet on a path towards greater ‘normalisation’. However, as Andrew Bailey noted in a speech in May 2024, the ‘new normal’ for the Bank’s balance sheet will be larger than it was pre-global financial crisis. This is required to meet today’s financial system’s demand for reserves and liquidity buffers.^{footnote [7]}

Over the coming years, quantitative tightening and TFSME unwind will continue to reduce the supply of central bank reserves. Eventually, reserves supply could approach the minimum level needed by market participants. The Bank refers to the aggregate amount demanded by firms for transactional and precautionary needs as the Preferred Minimum Range of Reserves (PMRR). At this point, firms may respond by seeking to borrow reserves in money markets, increasing the rates they are willing to pay to do so, and thereby causing short-term market interest rates to rise relative to Bank Rate. If no other actions were taken, this could impair the transmission of monetary policy to the wider economy.^{footnote [8]}

In 2022, we launched the Short-Term Repo (STR) facility, which ensures firms can borrow reserves at Bank Rate. The facility should support reserves supply to stabilise around the PMRR and ensure that short-term market interest rates remain close to Bank Rate.^{footnote [9]} We expect usage of the STR and the Bank’s other facilities to become increasingly routine as the total stock of reserves continues to reduce. Further information on the STR facility can be found in Box A.

The precise PMRR level, and when it might be reached, are both uncertain. 2024 Q1 assessments fall in the range of £345 billion–£490 billion.^{footnote [10]} The Bank continues to keep the optimal size and composition of its future ‘new normal’ balance sheet under careful review.^{footnote [11]}

2.2: Operational Standing Facilities – deposits

The Bank’s Operational Standing Facilities (OSFs) allow participating firms to deposit reserves on an overnight basis throughout each business day. The Bank generally pays a return of 0.25% below Bank Rate on deposits.

There was decreased usage of the OSF deposit facility compared to the previous review period. The limited usage was primarily driven by CCPs and ICSDs who are required to maintain a pre-determined target balance on their reserves accounts, and use the OSF deposit facility as intended to manage excess reserves. Aggregate quarterly OSF usage data can be found in the annex.

2.3: Alternative Liquidity Facility

The Bank launched the Alternative Liquidity Facility (ALF) in December 2021. It is a weekly, fund-based deposit facility available to UK banks that face formal restrictions on engaging in interest-bearing activity, including but not limited to Islamic banks.

Deposits in the ALF are backed by a portfolio of high-quality eligible assets, which include two ‘sukuk’ bonds issued by the Islamic Development Bank. Returns generated from the backing fund may be passed back to depositors in lieu of interest, net of hedging and operational costs. The deposit capacity of the ALF is limited to the size of the backing fund, which is currently £200 million. This is kept under periodic review.

The Bank publishes monthly average aggregate data on ALF usage each quarter, with a one-quarter lag. Usage increased gradually during the review period, with average aggregate monthly usage of £186.5 million.

3: Asset purchases, maturities and sales

3.1: Asset Purchase Facility

The Bank holds a stock of assets purchased for monetary policy purposes through the APF as part of quantitative easing which is currently being unwound via quantitative tightening. During the review period for this report, the APF portfolio included UK government bonds (also known as gilts) and sterling non-financial investment-grade corporate bonds.

Gilt maturities and sales

In September 2022, the MPC voted to reduce the stock of gilts held in the APF by £80 billion over the following 12 months, comprising both gilt maturities and a programme of gilt sales. In September 2023, the MPC voted to reduce the stock of gilts held in the APF by £100 billion over the following 12 months, also comprising gilt maturities and sales. The MPC’s stock reduction target is expressed in terms of the proceeds first paid to purchase APF holdings, so-called ‘initial proceeds’.

Over the review period, and in line with relevant MPC decisions, the Bank conducted regular multi-stock gilt auctions. Auctions were designed and operated to meet the stock reduction target, accounting for maturing APF gilt holdings over that period. During this time, the total stock of gilts held in the APF for monetary policy purposes decreased from £823.2 billion to £732.8 billion. £38.2 billion of gilts matured from the APF without replacement, and £52.2 billion of gilts were sold via Bank auctions. A summary of APF holdings over the review period can be found in the annex.

For 2024 Q1 and subsequent quarters, the Bank adapted its approach of setting equal auction sizes in order to continue to reduce the APF as evenly as possible across maturity sectors, measured in initial proceeds terms. The Bank allows the size and number of auctions to vary across maturity sectors on a quarter-by-quarter basis in order to deliver that goal, and continues to publish its auction calendar in advance of every quarter.

The APF is subject to comprehensive governance, reporting, including on risk, and transparency arrangements consistent with the indemnity provided by HM Treasury and the HM Treasury Accounting Officer’s requirement to protect the rights and assets of the taxpayer including value for money.^{footnote [12]}

Corporate Bond Purchase Scheme

At its peak, the stock of corporate bonds held by the APF was £20 billion. In August 2022, the Bank announced its approach to unwinding the full stock of the Corporate Bond Purchase Scheme (CBPS). The primary method of sale was confirmed as regular multi-stock auctions, starting in September 2022.

On 6 June 2023, the Bank announced that it had completed all planned sales of sterling non-financial investment-grade corporate bonds, and intended to hold the remaining small portfolio of very short maturity corporate bonds to maturity. Over the reporting period, the stock of corporate bond holdings decreased by £8.8 billion, from £9.1 billion to £218 million.

As planned, in April 2024, after the review period for this report, the remaining bonds held in the CBPS portfolio matured, marking the full unwind of the CBPS programme.

4: Funding and liquidity operations

The Bank offers a framework of liquidity insurance and funding operations to support our financial stability objective. These facilities are provided on a regular basis, on demand, and at the Bank’s discretion.

Some operations are bilateral (ie between the Bank and one firm at a time) and others are market-wide (ie between the Bank and a number of firms at a time). However, all facilities operate on published terms that do not vary across participants.

All of our liquidity and funding activities are intended to support our ‘open for business’ approach. This means there is no presumptive order of usage – an eligible firm can choose to meet a liquidity need by using our liquidity facilities, alongside market sources of liquidity and their own liquidity buffers, according to their own preference.

Decisions around when and how Bank facilities are used is up to individual firms. We would not expect firms to rely solely on our facilities for routine day-to-day liquidity management (and have priced these facilities accordingly). However, our facilities are also not intended to be used solely as a last resort.

Aggregate quarterly data on usage of the Bank’s liquidity and funding facilities can be found in the annex.

4.1: The Term Funding scheme with additional incentives for Small and Medium-sized Enterprises

The Term Funding scheme with additional incentives for Small and Medium-sized Enterprises (TFSME) was launched in March 2020 as part of the Bank’s response to the Covid-19 pandemic. Its purpose was to support the pass-through of Bank Rate, being designed to incentivise banks to provide credit to small and medium-sized enterprises (SMEs) in particular. The TFSME was open for new lending from 15 April 2020 to 31 October 2021.

Participants may choose to terminate any TFSME transaction, in part or in full, before its contractual maturity date. Outstanding TFSME drawings fell from £180.5 billion to £151.3 billion during the review period. Further information on the unwind of TFSME can be found in Box B.

4.2: Operational Standing Facilities – lending

The bilateral OSF lending facility allows participating firms to borrow reserves on an overnight basis throughout each business day. The Bank generally applies an interest rate of 0.25% above Bank Rate on lending. Firms can use the OSF facility as a tool to manage any unexpected or frictional payment shocks that could arise due to technical problems in their own systems, or in market-wide payments and settlements infrastructure.

As illustrated in Chart 4b, OSF lending remained low throughout the review period. Usage can be attributed to the periodic testing of firms’ ability to access the facility, as well as a limited number of technical issues encountered by SMF participants. Aggregate quarterly OSF usage data can be found in the annex.

4.3: Short-Term Repo

The Short-Term Repo (STR) facility provides eligible firms with ready access to reserves, in exchange for high-quality, highly liquid (Level A) assets, at a fixed price of Bank Rate. This helps to ensure short-term market interest rates remain close to Bank Rate as the total stock of UK central bank reserves gradually decline. In 2022, the PRA confirmed that it judges use of the STR to be routine participation in sterling money markets, and intends that it should be seen as such by firm boards and overseas regulators.^{footnote [13]}

During the review period, there were aggregate drawings of £38.8 billion, and average weekly drawings of £693 million. Weekly drawing sizes increased towards the end of the review period, peaking at £4 billion in December 2023 (Chart B). This represents an increase in usage compared to the previous review period. As expected, while reserves supply remains ample, STR usage is low relative to the total stock of reserves. Further information on the STR facility and its usage so far can be found in Box A.

4.4: Indexed Long-Term Repo and Contingent Term Repo Facility

The Indexed Long-Term Repo (ILTR) is one of the Bank’s regular market-wide sterling operations. Currently offered via weekly competitive auctions, the ILTR is designed to allow market participants to borrow central bank reserves for a six-month period against the full range of eligible collateral.

ILTR usage remained broadly stable at low levels, as expected while reserves supply remains ample. Aggregate drawings were £2.09 billion throughout the review period (Chart 4b). This represents a decrease in usage compared to the previous review period. Aggregate usage in 2022/23 was £6.56 billion, which was largely due to financial market volatility during this period.

Looking ahead, in the context of reserves supply reducing, resulting in the transition to our repo-led demand-driven framework, the Bank expects the ILTR to play a greater role in meeting demand for reserves from participants.^{footnote [14]}

The Contingent Term Repo Facility (CTRF) allows the Bank to provide liquidity against the full range of eligible collateral at any time, term, and price chosen by the Bank. The facility can be activated in response to any actual or prospective market-wide event. The CTRF was not activated by the Bank during the review period.

4.5: Discount Window Facility

The Discount Window Facility (DWF) is a bilateral, on-demand facility provided to institutions anticipating or experiencing an unexpected liquidity need. It allows participants to borrow highly liquid assets (gilts or, in certain circumstances, cash) in return for other assets (a broad range of eligible collateral).

The Bank publishes quarterly data of DWF usage with a five-quarter lag. There was no DWF usage reported during the review period (relating to activity between September 2021 and September 2022). However, the Bank undertakes a regular programme of test trades with DWF participants and applicants to ensure operational readiness.

4.6: Non-sterling facilities

The Bank’s US dollar repo operation offers to lend dollars on a weekly basis. Participants can bid for unlimited funds for a seven-day term at fixed spread, secured against the full range of eligible collateral. The facility makes use of the international network of standing swap lines between participating central banks, which can be used to offer short-term repo transactions with participating firms in selected other currencies, to support our financial stability objective. In the case of the US dollar repo, the Bank makes use of the swap line with the US Federal Reserve.

Over the review period, there was limited facility usage, consistent with firms testing access to the facility.

In March 2023, the Bank, in co-ordination with other central banks, announced a temporary increase in the frequency of seven-day maturity US dollar repo operations from once per week to daily to improve the swap lines’ effectiveness in providing US dollar funding. This change was effective from 20 March 2023 to 28 April 2023. The network of swap lines between central banks serves as an important liquidity backstop to ease strains in global funding markets. This helps to mitigate the impacts of such strains on the supply of credit to households and businesses. The frequency of these operations reverted from daily to once per week from 1 May 2023.

The Bank continues to stand ready with other central banks to readjust the provision of non-sterling liquidity as warranted by market conditions.

5: Developing the Bank’s future facilities for supporting financial stability

In September 2023, the Bank set out that it had started work to expand the tools it has available to respond when severe dysfunction in core UK financial markets threatens UK financial stability.^{footnote [20]} The motivation for this work stems 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. This includes an increasing reliance by the real economy on core capital markets rather than banks; constraints on market intermediation capacity; and a range of vulnerabilities in NBFIs that operate in those markets.^{footnote [21]}

While it is first and foremost for non-banks to manage the liquidity risks they face, safeguarding financial stability requires an effective public backstop. To tackle any future episodes of dysfunction in core UK markets effectively, the Bank is therefore developing a new lending facility, enabling us to provide liquidity directly to NBFIs at times of severe liquidity stress in those markets. In such circumstances, it is preferable for the Bank to be able to address market dysfunction by lending directly to NBFIs rather than purchasing assets because lending offers four distinct advantages over asset purchases conducted by the Bank for financial stability purposes:

• a decreased risk to public funds as the Bank would not bear the market risk of holding the purchased assets directly, we would know in advance when exposure would unwind, and haircuts would protect against default risk;
• lower associated moral hazard of central bank asset purchases creating perverse incentives for NBFIs to take on more risk;
• a reduced risk of unintended spillover to the Bank’s overall monetary policy stance; and
• decreased costs for NBFIs, as borrowing will normally be less costly than fire sales of assets that might later need to be reversed.

Our initial area of focus is to design a tool for supporting the gilt market. This reflects the gilt market’s size, interconnectedness to other markets and the real economy, and its importance to financial stability.

The Bank is developing this tool in two phases.

In the first phase, the Bank is working to design a facility allowing firms to borrow cash against gilts at times of severe gilt market dysfunction. This facility would be open to eligible insurance companies, pension funds and associated liability-driven investment funds. These sectors have been significant sellers of gilts in past stress episodes, and have higher levels of resilience relative to other non-bank sectors. As the tool is intended to address gilt market dysfunction, rather than being a source of individual firm liquidity insurance, we expect this to be a contingent tool that the Bank activates in stress, rather than a standing facility that is available at all times.

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.

Further details on the design of the tool’s first phase can be found in the Contingent NBFI Repo Facility – Provisional Market Notice and Explanatory Note.

In parallel to this work, the Bank is at an early stage of exploring how access might be expanded in a second phase to reach a broader set of NBFIs that are relevant to the functioning of UK core markets. This second phase of work will need to address three challenges:

• Deciding which other types of NBFI should be included to maximise the tool’s effectiveness in dealing with severe market dysfunction, and further safeguard UK financial stability.
• How to expand to other categories of NBFIs that might have lower levels of resilience than insurance companies and pension funds while ensuring those firms have sufficient incentives to improve their self-insurance against a range of shocks.
• How to operationally scale-up the tool to deal with a larger number of firms than we engage with in our existing operations.

As the Bank continues to progress this tool, feedback is welcomed on the proposed design of both phases from firms, industry bodies and regulators. Please send any queries or comments to CNRFapplications@bankofengland.co.uk.

6: Risk management

While the Bank’s market operations are designed to deliver monetary policy and to support financial stability, it is vital that facilities are designed and operated in a way that ensures risks to public funds are properly managed.

There is a presumption of access to the SMF for applicable firms that meet PRA supervisory threshold conditions and have the requisite collateral. A firm’s SMF eligibility is subject to a regular review of creditworthiness by the Bank’s financial risk management function, which enables the Bank to monitor its risk and exposures to counterparties across multiple operations. To produce credit assessments, data and information are sourced from PRA supervisors, publicly available information such as annual reports, and the member firms themselves, including through onsite interviews with executive management where appropriate.

Lending under the SMF is secured against collateral. The Bank’s eligible collateral list^{footnote [22]} is broad, including a wide range of securities and portfolios of residential mortgage loans, asset finance, consumer (excluding credit cards), auto, corporate, SME, commercial real estate, private finance initiative, social housing loans, and loans and asset finance under the various coronavirus lending schemes.^{footnote [23]} This enables a broad range of counterparties to have access to SMF facilities. The Bank strongly encourages SMF participants to deliver unencumbered eligible collateral to the Bank sufficient to meet their possible liquidity needs in times of stress. This is generally known as the ‘pre-positioning’ of collateral.

In principle, the Bank accepts collateral it judges it can effectively and efficiently risk manage. For certain types of collateral, the Bank requires SMF participants to complete due diligence ahead of pre-positioning, to ensure the collateral is within the Bank’s risk tolerance. This may include a data audit, legal review and risk assessment of the loan portfolio.

Collateral haircuts are set to protect the Bank’s balance sheet in a severe stress. As at end-February 2024, base haircuts for SMF collateral range from:^{footnote [24]}

• 0.5%–16.5% for sovereign securities;
• 12%–24% for residential mortgage-backed securities or covered bonds;
• 15%–37% for other asset-backed securities;
• 30%–42% for portfolios of senior corporate bonds; and
• 11%–51% for loan pool haircuts across all collateral types.

The aggregate value of collateral held at the Bank by SMF participants stood at £505 billion on 29 February 2024. The total amount of exposures across the Banks’ market operations was £158 billion, leaving unencumbered pre-positioned collateral of £347 billion. This is £51 billion more than on 28 February 2023. Total collateral holdings rose by £22 billion over the same period.

Residential mortgage collateral makes up over three-quarters of collateral delivered to the Bank (full breakdown of collateral composition is shown in Chart 5). High-quality liquid assets, such as gilts, are typically not pre-positioned since they are used by firms in their trading in private markets and can be delivered to the Bank at very short notice if needed.

Annex