This Market Notice sets out the arrangements that apply to the purchases of gilts financed by central bank reserves as authorised by the Monetary Policy Committee (MPC).
Operational policy framework
Gilt purchases are undertaken as part of the implementation of monetary policy by the Bank of England Asset Purchase Facility Fund Limited (BEAPFF), which is a wholly-owned subsidiary of the Bank and is the legal counterpart to market transactions. The Bank acts as agent for BEAPFF.
Operating parameters
Gilts to be purchased
The Bank (as agent for BEAPFF) purchases conventional gilts with a minimum residual maturity of greater than three years in the secondary market.
The Bank does not currently intend to purchase index-linked gilts or stocks with an outstanding issue size below £4 billion.
The Bank does not currently intend to purchase gilts where the Bank holds more than 70% of the “free float”, i.e. the total amount in issue minus government holdings. The Bank will, however, continue to keep the identity of gilts eligible for purchase in the APF under review.
The Bank will not offer to purchase gilts newly-issued by the UK Debt Management Office (DMO) within one week of their issue; and will not offer to purchase gilts which the DMO has announced it will re-open, including via a mini-tender, during the period of one week (exactly 168 hours) before and after the re-opening. If the DMO announces a re-opening, including via a mini-tender, within that one week period, of a stock that the Bank had previously announced it would offer to purchase on a particular day, the Bank will remove the stock from those eligible to be purchased.
Purchase process
The Bank will offer to purchase gilts in reverse-auctions. In each auction the Bank will offer to purchase a fixed total value of gilts, based on total proceeds, including any accrued interest. Each auction will have both a competitive and a non-competitive element.
Non-competitive offers will be invited, and the aggregate amount allocated to non-competitive offers announced, ahead of the start of the competitive auction.
In the competitive auction, purchases will be undertaken at prices determined in a variable rate auction on a discriminatory-price basis. Offers in the non-competitive element of the auction will be allocated at the weighted average price at which the relevant stock was allocated in the competitive auction.
In any individual auction, the Bank intends to offer to purchase gilts divided into three maturity sectors defined as: gilts with a residual maturity of between 3-7 years, or between 7-15 years, or greater than 15 years only1. The maturity sectors are the same as those used by the DMO. The Bank will normally conduct three auctions a week: gilts with a residual maturity of 3-7 years will be purchased on Mondays; gilts with a maturity of over 15 years will be purchased on Tuesdays; and gilts with a maturity of 7-15 years will be purchased on Wednesdays.
The amount of each stock that the Bank will buy in each competitive auction will not be pre-determined, subject to the overall size of the operation. Offers for different stocks will be allocated based on the attractiveness of offers for each stock relative to market mid yields for the stocks, as published by Tradeweb, at the close of the auction. There will be no minimum allocation to a particular stock.
Announcements
The Bank will announce on its wire services pages2 each Thursday at 16.00 the size of the auctions to be held during the following week and the stocks eligible to be purchased. The details of each auction will be confirmed by the Bank on its wire services pages at 09.00 on the morning of the operation.
Non-competitive offers
Non-competitive offers must be submitted on the day of the auction by an authorised person via email using the pro-forma provided by the Bank. Such offers must be received by the Bank no later than noon, after which time they are irrevocable, and receipt should be confirmed by the Counterparty by telephone to the Bank’s sterling dealing desk on 020 3461 5000. Offers should state the nominal amount of each stock offered for sale on a non-competitive basis.
The minimum offer amount and increment for non-competitive offers are currently each set at £1 million.
The Bank reserves the right to restrict the aggregate amount of its purchases of a stock that is allocated to non-competitive offers. If the total of non-competitive offers in the relevant stock were to exceed the amount allocated by the Bank, they would be scaled down on a pro rata basis. Scaled offers would be rounded to the nearest allocation increment, currently £0.1 million.
The amount allocated to non-competitive offers and the degree of any scaling will be announced on the Bank’s wire services pages at 13.00. In the event that there is scaling, the Bank will confirm individual allocations by telephone.
Counterparties whose offers are accepted will be paid the weighted average clean price, plus accrued interest, at which the relevant stock was allocated in the competitive auction.
In the event that none, or only a small amount, of a particular stock were allocated in the competitive auction, the Bank reserves the right to cancel relevant non-competitive offers, notwithstanding any earlier announcement.
Competitive offers
The size of the competitive auction will be announced at 13.00, reflecting the amount allocated to non-competitive offers. Competitive auctions will normally begin at 14.15 and finish at 14.45. They will be held using the Bank’s electronic tendering system, Btender. The Bank reserves the right to restrict the number and/or the timing of offers submitted by counterparties who do not have access to Btender.
Counterparties must input the nominal sterling amount in millions for each specific gilt they wish to sell and the clean price they wish to offer.
The number of decimal places allowed for the price is currently 3.
Offers are submitted by counterparties using a clean price. When offers are received in Btender they are also converted to a yield using the standard gilt market conversion calculation available on the DMO’s website, and the yield is also displayed for information to counterparties.
The minimum offer amount and increment are currently set at £5 million and £1 million respectively.
The Bank will not restrict the maximum total value of gilts for purchase from a single counterparty in each auction.
The Bank reserves the right to reject offers, in whole or in part, including in the light of other offers received; and reserves the right to set a maximum offer price/minimum yield.
Offers will be allocated in descending yield order, based on the attractiveness of offers for different stocks relative to market yields. Offers that are accepted at the lowest yield may be scaled down on a pro rata basis and will be rounded down to the nearest allocation increment, currently set at £0.1 million.
Offers are accepted in full or in part at the counterparty’s offer price. The amount of each accepted offer in total proceeds will be paid to the counterparty.
The Bank reserves the right to cancel an auction at any time before the results are published. If an auction is cancelled it may be re-scheduled to take place later the same day, or on a subsequent day.
Published information
The results of the competitive auction will be announced on the Bank’s wire services pages as soon as possible after its end. The Bank will publish, for each stock offered, the amount purchased, in terms of the total proceeds; the total size of offers received; the weighted average price; the highest accepted price; and the lowest accepted price.
The Bank will publish each Thursday at 15.00 the sum of gilts purchased, less maturities, to date, in terms of the total proceeds.
Eligibility to participate
Only firms that are participants in the Bank’s gilt-purchase Open Market Operations (OMOs), and are also Gilt-edged Market Makers (GEMMs) as listed on the website of the DMO, are eligible to apply to participate as counterparties in the competitive auctions. Within a Group, only one firm may apply to participate in the competitive auctions.
All firms that are appropriately authorised for the purposes of the Financial Services and Markets Act 2000 (FSMA), or are signed up to the Bank’s gilt-purchase OMOs, are eligible to apply to participate as counterparties in the non-competitive element of the auction. Different legal entities within the same Group may apply to participate in the competitive and the non-competitive elements of the auction, respectively, where they undertake different kinds of activity (e.g. banking and asset management).
Applications to participate
Those wishing to participate in the auctions, whether the competitive or non-competitive elements, should complete the Application Form for gilt purchases available at Quantitative easing and the asset purchase facility and submit it by email to applications@bankofengland.co.uk.
Participation will be governed by the Asset Purchase Facility (APF) Terms and Conditions (the Terms and Conditions) and the APF Operating Procedures, together with the other documentation issued by the Bank and as set out in the Terms and Conditions. The Terms and Conditions and other documentation are available at Quantitative easing and the asset purchase facility
The Bank reserves the right to reject applications without explanation at any time.
Settlement
In the case of participants in the competitive auction, confirmation of the amount allocated will be available in Btender.
In the case of those counterparties that submitted successful non-competitive offers, and those participants in the competitive auctions who do not have access to Btender, the Bank will send a written electronic confirmation of each transaction on the day of purchase.
Gilt purchases will normally settle on a T+1 basis.
All counterparties must comply with the Settlement procedures outlined in the APF Operating Procedures, available at Quantitative easing and the asset purchase facility
Gilt lending
The Bank announced on 6 August 2009, in a joint statement with the DMO, an arrangement for a significant amount of the gilts acquired by the Bank via the APF to be made available for on-lending to the market by the DMO through the DMO’s normal repo market activity. The statement is available.
The Bank will publish the average daily aggregate value of gilts lent by the APF to the DMO.
2 Reuters BOE/Markets1; Bloomberg BOEO 13
