LONDON (MNI) – The Bank of Engalnd launched a position paper
Tuesday, proposing a framework for permanent long-term repurchase
agreements. The full text of the BOE release follows:

======================================================================

BANK OF ENGLAND POSITION-PAPER: PROPOSED FRAMEWORK FOR
PERMANENT LONG-TERM REPO OPERATIONS

1 As part of its existing Red Book framework, the Bank has provided
liquidity to the banking system via regular long-term repo operations
since January 2006. In December 2007, and again in September 2008, the
Bank increased the size and frequency of its threemonth operations and
expanded the range of eligible collateral1.

2 A consultation document published in October 2008 outlined the
Banks intention to incorporate long-term repo operations, against a
broader range of collateral, as a permanent part of the Sterling
Monetary Framework. This short paper provides an update on the Bank’s
thinking, addressing some of the questions raised in the consultation
document. The proposed framework will be discussed further with
counterparties after which final details will be decided. The new
operational design will then be launched later in 2010.

Objectives of permanent long-term repo operations

3 In addition to their role in providing reserves as part of the
Banks implementation of monetary policy, long-term repos can provide
liquidity support to the banking system in times of stress. They can do
this by offering refinancing against an extended range of collateral and
by helping to lengthen the maturity of banks liabilities.

4 The primary objective of the new operations is to provide
liquidity insurance without distorting banks’ incentives for prudent
liquidity management, and whilst minimising the risk being taken onto
the Bank’s own balance sheet.

5 In the new operations, participants will be able to borrow
against two different sets of collateral one set that corresponds
with securities eligible in the Banks shortterm repo operations
(“narrow collateral”) and a second set containing a broader class of
high-quality third-party debt securities that, in the Bank’s judgement,
trade in liquid markets (“wider collateral”). The wider collateral set
will exclude own-name securitisations and covered bonds.

6 The new auction design will permit the allocation of a greater
proportion of funds against a broader range of collateral as evidence of
stress increases, although the Bank would expect to lend some funds
routinely against both collateral sets. The proportion of 1 The size and
frequency of these operations have subsequently been scaled back in
light of revealed demand but funds continue to be provided against a
broad range of collateral. bids allocated to each collateral set will be
based on the pattern of bids received and the Banks preferences for
allocating funds between collateral sets. More specifically, if bids
against wider collateral are high relative to bids against narrow
collateral, the Bank will allot a greater proportion of bids against
wider collateral.

Operational framework

7 The Bank expects to offer funds via a long-term repo operation
once each calendar month. Each operation will initially offer a
pre-announced fixed quantity and at a single maturity. The Bank plans
initially to conduct two operations with a three-month maturity and one
smaller operation with a six-month maturity in each calendar quarter.
The Bank expects the total stock of funds offered via these operations
to be 15 billion. The Bank will stand ready to adjust the size of
long-term repo operations in light of evidence of financial conditions,
including revealed demand at previous long-term repo operations.
Auctions will be held using the Banks electronic tendering system,
Btender.

8 The Bank plans to index the rate charged on repos to Bank Rate.
Indexing allows the Bank to reduce its exposure to market risk while
enabling counterparties to participate without having to take a view on
the path of future interest rates. Participants will therefore bid by
submitting a nominal amount and a spread to Bank Rate expressed in basis
points. Bids will be subject to a minimum bid spread of zero (i.e.
negative spreads will not be permitted). The Bank will place no
restriction on the number of bids submitted but will continue to place
restrictions on the total value of bids received from a single
participant.

9 The auction’s pricing mechanism will adopt a so-called
uniform-price format, in which every successful bidder pays the lowest
accepted spread (the stop-out spread) for borrowing against a specific
collateral set. This contrasts with the current mechanism for long-term
repo operations in which successful bidders pay the rate they bid. As
all successful bidders pay the stop-out spread, participants should face
little incentive to alter their bids on the basis of assumptions about
other participants likely behaviour. Bidding process

10 Participants may choose to submit multiple bids against either
collateral set. Alternatively, or in addition to single bids,
participants looking to raise a given quantity of funds and with both
types of collateral available may submit paired bids’. A paired bid
consists of a single nominal amount and two spreads at which the
counterparty is willing to borrow against the delivery of narrow and
wider collateral respectively. This provides participants with two
opportunities to raise a specific quantity of funds whilst avoiding any
risk of over-allotment that might otherwise occur if two single bids for
the same nominal amount were submitted. If both parts of a paired bid
are above their respective stop-out spreads, and therefore eligible to
be accepted, the participant will be allotted against the bid which
offers them better value (i.e. the bid with the highest spread relative
to the stop-out spread for that collateral type).

Allocation process

11 The proportion of the total amount on offer to be allocated to
each collateral set will be based on the pattern of bids received and
the Banks preferences for supplying funds against each collateral set.
For each collateral set, bids will be ranked in descending order of the
spread bid. Bids at the highest spread are accepted first, followed by
bids at successively lower spreads until the chosen proportion of the
auction is allocated or bids received against that collateral set are
exhausted.

12 A worked example to illustrate how the Bank might choose to
allocate between bids can be found in the Annex to this document.

Timetable for implementation

13 From mid-March to mid-April, the Bank will discuss aspects of
the proposed format for long-term repo operations with its
counterparties. Following this, and once any remaining issues have been
addressed, the Bank plans to schedule training and familiarisation with
counterparties in May. Subject to any unforeseen delays, final terms
will be published ahead of the first live operation, which is expected
to take place later in 2010.

Bank of England
23 March 2010

–London Bureau; Tel: +442076341655; email: ukeditorial@marketnews.com

[TOPICS: M$B$$$,M$$BE$, M$$CR$]