BofE announces new measures to support market functioning

The Bank of England (BofE) has confirmed that it will “stand ready” to increase the size of its daily auctions to ensure there is sufficient capacity for gilt purchases before market interventions end on Friday 14 October.

The BofE announced plans for temporary and targeted purchases in the gilt market in an effort to "restore orderly market conditions" and prevent a "self-reinforcing spiral", after gilt yields surged following the Chancellor's mini-Budget.

To date, the BofE has carried out eight daily auctions, offering to buy up to £40bn, and has made around £5bn of bond purchases.

To support an "orderly end" of the purchase scheme from 14 October, the BofE confirmed that it is prepared to deploy its unused capacity to increase the maximum size of the remaining five auctions above the current level of up to £5bn in each auction.

It also announced plans to launch a Temporary Expanded Collateral Repo Facility (TECRF), to enable banks to help to ease liquidity pressures facing their client liability driven investment (LDI) funds through liquidity insurance operations.

Under these operations, the Bank will accept collateral eligible under the Sterling Monetary Framework (SMF), including index linked gilts, and also a wider range of collateral than normally eligible under the SMF, such as corporate bond collateral.

In addition to this, the Bank has said that it also prepared to support further easing of liquidity pressures facing LDI funds through its regular Indexed Long-Term Repo operations, a permanent facility which will provide additional liquidity to banks against SMF eligible collateral, including index linked gilts, and so support their lending to LDI counterparties.

More broadly, the BofE confirmed that it would continue to work with the UK authorities and regulators to ensure that the LDI industry operates on a more resilient basis in future, having recently emphasised that it would continue to "closely monitor" the progress of LDI funds.

MPs also previously wrote to the regulators after the market volatility prompted concerns that pension schemes could be on the brink of collapse, with industry experts having to reassure members that pension protections are in place.

However, areas of concern remain, particularly over the impact of recent market volatility on lifestyling funds, the bulk purchase annuity market, and the push for infrastructure investment.

In addition to this, AJ Bell head of retirement policy, Tom Selby, suggested that while the BofE has outlined its plan to maintain order in the market following the end of the interventions on Friday, there remains "huge uncertainty" over the adjustment period once BofE steps back.

"[The Bank] will no doubt be crossing its fingers that the certainty it has attempted to provide today will ensure calm is restored to the market," Selby stated.

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