The Bank of England (BoE) has launched a Temporary Expanded Collateral Repo Facility (TECRF) to avoid dysfunction in core funding markets, in line with the bank’s financial stability objective.
This facility will enable banks to help ease liquidity pressures facing their client liability-driven investment (LDI) funds through liquidity insurance operations, which will run beyond the end of this week. It will aid LDI funds in addressing the risks to their resilience from volatility in the long-dated gilt market.
Under these operations, the Bank will accept collateral eligible under the Sterling Monetary Framework (SMF), including index linked gilts and a wider range of collateral than normally eligible under the SMF — such as corporate bond collateral.
The launch of the facility is one of three additional measures announced by the BoE. The other additional measures involve standing ready to increase the size of its daily auctions to ensure there is sufficient capacity for gilt purchases ahead of Friday 14 October.
Additionally, the Bank will stand ready through its regular Indexed Long Term Repo operations each Tuesday to support further easing of liquidity pressures facing LDI funds.
The BoE says this permanent facility will provide additional liquidity to banks against SMF eligible collateral, including index linked gilts. Therefore, it will support their lending to LDI counterparties.
Liquidity is available through the bank’s new permanent Short Term Repo facility, which offers an unlimited quantity of reserves at Bank Rate each Thursday, according to the BoE.
Beyond the end of this week’s operations, the bank says it will continue to work with the UK authorities and regulators to ensure that the LDI industry operates on a more resilient basis in future.
