BoE publishes feedback statement on transitioning to a repo-led operating framework

The Bank of England (BoE) has published a feedback statement in response to its December 2024 discussion paper on transitioning to a repo-led operating framework. The discussion paper proposed changes to the Sterling Monetary Framework (SMF), aiming to shift towards a repo-led, demand-driven system for supplying central bank reserves, including proposals to adjust the design of the indexed long-term repo (ILTR) facility.

While there was broad support for the overall design of the framework, concerns were raised in the following areas:

• Predictability of ILTR pricing and allocation. The BoE has maintained that the ILTR's current high-level design, as a variable price, variable size auction, strikes an effective balance between flexibility and responsiveness to changing market conditions and predictability for SMF participants. However in response to concerns it: (i) recalibrated the ILTR to increase reserves at minimum spreads; (ii) introduced a gentler pricing curve; (iii) has published an ILTR participant guide; (iv) confirmed an increase in the minimum spread on Level A collateral expected to take effect in November; (v) raised the ILTR's maximum auction size from GBP25 billion to GBP35 billion; and (vi) reaffirmed its broader liquidity toolkit, including the short term repo facility (STR), the operational standing facilities (OSFs), the discount window facility (DWF) and the contingent term repo facility (CTRF), which can be flexibly deployed in stressed conditions.
• Flexibility of lending facilities. Some respondents had called for greater adaptability to meet varying liquidity needs. The BoE has emphasised that the SMF already includes a range of complementary tools and highlights that the STR and CTRF's are capable of providing liquidity on flexible terms in response to market-wide stress.
• Other enhancements. In response to additional feedback, the BoE has confirmed: (i) a reduction in the minimum bid size for the ILTR and STR from GBP5 million to GBP1 million; and (ii) clarifying expectations on the roles of OSFs and the DWF within a repo-led framework.

The statement has also addressed feedback on several technical areas, including:

• Collateral eligibility processes. Respondents had raised concerns that delays in pre-positioning raw loan portfolios and verifying new structured finance securities may limit firms′ use of SMF facilities. The BoE has confirmed that this feedback will guide its review to address the concerns raised. Current priorities focus on improving processes related to raw loan portfolios, structured finance securities and raw loans and structured finance.
• Settlement model. While some respondents had suggested moving towards an operating model that is more closely aligned to standard practices in the sterling repo market, the BoE has reaffirmed its preference for a single collateral pool to collateral management citing its consistency across different SMF facilities and its operational advantages.
• On collateral and settlement encumbrance reporting. This includes areas on the scope of eligible collateral, collateral haircuts and operational arrangements and systems.

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