Date of meeting: 5 August 2022
Location: Virtual meeting
Minutes
Introduction
Bank staff provided an overview of the information published in the provisional Market Notice relating to APF gilt sales on 4 August 2022.
In the minutes of its meeting ending on 3 August 2022, the MPC had 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 Monetary Policy Committee (MPC) had asked the Bank to be in a position to begin a sales programme before the end of September. The accompanying provisional Market Notice set out the key features of how the Bank would achieve a reduction in the stock of gilts held in the APF over a twelve-month period, if voted for by the MPC.
Attendees were reminded of their responsibilities under competition law in relation to this discussion.
Questions from attendees
Discussion in the meeting covered the following questions.
1: How will the Bank choose the amount to be sold each quarter?
The amount of APF stock reduction will be set by the MPC over a twelve-month period and 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 MPC 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.
Gilt redemptions over this period will reduce the stock of holdings in the APF by £35 billion in initial proceeds terms. The Bank’s sales programme would therefore be calibrated to achieve a further reduction in the stock of £45 billion in initial proceeds terms.
The precise amount of sales required to achieve this will depend on the price realised on those sales relative to the average price at which the relevant gilts were initially purchased by the APF. This cannot be predicted perfectly in advance, but can be estimated based on prevailing market prices and assuming a broadly even distribution of sales across the gilts in each bucket. On that basis the size of the sales programme necessary is expected to be around £40 billion over the twelve months, or £10 billion per quarter.
To account for these dynamics, 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.
2: Will the announced pace be equally split across months or could there be more in a month/fortnight?
The quarterly schedule of operations, setting out the precise timing and size of gilt sale operations, will be announced by the Bank around two weeks ahead of the end of each calendar quarter.
The Bank’s intention is to spread sales as evenly as possible across the quarter, and with equal sizes across operations. As with all aspects of the sale programme, the Bank will keep this under review.
3: Is there a set number of APF gilt sale operations per quarter that the Bank will run? Will the Bank be operating every week?
The Bank’s operation schedule will be set quarterly, and announced around two weeks before the start of each calendar quarter. The number of operations per quarter will depend on the operating days available and could vary depending on a number of factors, including UK public holidays and DMO issuance plans.
Subject to those restrictions, the Bank will usually aim 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.
4: What would be the implications of an uncovered or cancelled auction in terms of completing the quarter’s sales?
The Bank’s approach will remain consistent with that taken during purchase operations. Any cancelled auctions may be rescheduled within the quarter, where appropriate and any shortfall in sales completed during a quarter overall will be accounted for in the following quarterly sales schedule.
5: How will the Bank decide whether to adjust the sales programme in response to a deterioration in market conditions?
In terms of the overall programme, the MPC has said there would be a high bar for amending the planned reduction in the stock of purchased gilts outside the scheduled annual review. If such amendments were judged necessary, for example if markets were judged to be very distressed, the MPC said it would first consider amending or halting the sales programme before considering restarting reinvestments or additional asset purchases.
At an operational level, 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. For example, during APF gilt purchases, a small number of auctions were cancelled due to technical reasons with the shortfall in purchases made up at a later date in order to meet the MPC’s target.
6: Did the Bank consider aligning its maturity buckets in line with the DMO, specifically for long maturity operations to 15 years+?
The maturity bucket definitions for gilt sales are in line with APF purchase operations since March 2020 and allow for a broadly even distribution of sales across the APF portfolio. As with all parameters the Bank will keep its bucket definitions under review.
7: Would the Bank consider allocating a higher proportion of the APF sale operations to shorter maturities, for example in response to strong auction results in that sector?
The Bank has designed APF gilt sale operations in a way that makes all gilts available for sale and in a manner that allows for a consistent approach over time, for as long as the MPC vote to reduce the APF stock of gilt holdings. Selling a greater proportion of ‘short’ maturity holdings at the start of the programme would leave the APF portfolio less balanced and imply a greater proportion of ‘long’ maturity sales later, and vice versa.
8: Did the Bank consider restricting its sales to bonds where it has large holdings? For example only making gilts eligible for sale if the APF holds more than 35% of the free-float.
The Bank has designed APF gilt sale operations in a way that makes all gilts available for sale in order to remain market neutral and respond to demand in the auctions. This will also allow for a consistent approach over time, for as long as the MPC vote to reduce the APF stock of gilt holdings. The Bank will continue to monitor gilt market functioning, and the impact of APF operations over the course of its sale programme.
9: What is an acceptable range of prices to bid within the auctions?
The Bank reserves the right to set a private limit (or ‘reserve’ price) on the yield it is willing to accept in gilt operations. This is similar to APF purchase operations to date and the market can assume that is the case moving forward. Market participations should make their own judgements on the price they are willing to bid in the Bank’s auctions. The Bank will continue to publish detailed results for each operation to provide post-trade price transparency.
10: How will auctions be allocated and priced?
Consistent with the approach taken in APF gilt purchase operations, bids on different stocks in APF gilt sale operations will be allocated using a discriminatory pricing method based on their attractiveness relative to market mid yields. This provides a simple, transparent and well understood process, based on clearly observable pricing benchmarks.
11: The Bank has said it will require GEMMs to identify any bids submitted on behalf of a client using unique identifiers. Will clients be able to submit bids, if they do not yet have this code?
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 encouraged GEMMs to help clients set up codes well in advance of any potential start date of APF sale operations. But in the rare instance in which a participant code has not been set up in advance of the operation, the Bank will provide a means for new participants to take part in auctions via GEMMs prior to an identifier code being assigned.
Further provisional detail on operational terms and how to participate will be published on or around 1 September 2022.
12: What time of day do you expect these operations to take place?
Further detail on operational parameters will be published on or around 1 September 2022.
APF purchase operations to date have taken place in the afternoon, to minimise overlap with the DMO’s operations which have typically taken place in the morning. Since APF sale operations will usually be held on Mondays and Thursdays, this may be less relevant in future. The Bank therefore invited views from participants on their preferred approach to inform its decision.
13: Will the Bank be publishing the collateral it receives via the Short Term Repo Facility?
No. The Bank does not provide details of the collateral positioned by participants in any of its lending operations.
Attendees
Banco Santander
Barclays
BNP Paribas
Citigroup Global Markets
Deutsche Bank
Goldman Sachs
HSBC Bank PLC
JP Morgan
Lloyds Bank Corporate Markets plc
Merrill Lynch
Morgan Stanley & Co International plc
NatWest Markets
Nomura
Royal Bank of Canada
UBS
Bank of England