What is The Bank of England’s Long-Term Repo Facility?

The Bank of England’s (BOE) primary long-term repo tool is the Indexed Long-Term Repo Facility (ILTR), and is a regular open-market operation designed to provide central bank reserves to eligible participants* for payments and precautionary liquidity management. Under this facility, eligible financial institutions can borrow cash (sterling/GBP) on a weekly auction basis for a six month maturity by providing a wide range of collateral.

*Eligible participants – In the ILTR are Banks, Building Societies, and Broker-Dealers (who must participate in the SMF** (the BOEs Sterling Monetary Framework) operations. 

**SMF – This is the operational set of facilities and rules the central bank uses to execute monetary policy, manage banking system liquidity, and maintain financial stability in the United Kingdom. 

The collateral accepted by the BOE is a broad range of Level A, Level B and Level C collateral and the definitions of these collateral are outlined below.

Level A collateral –  Financial assets that are expected to remain highly liquid in almost all market conditions. Such examples of this category are high-quality sovereign debt, (e.g., government bonds) issued by the UK, United States, Canada, France, Germany and the Netherlands. 

Level B collateral – Financial assets that are normally liquid under routine market conditions but may face slightly lower trading volumes or greater price sensitivity during a crisis than Level A collateral. Such examples of this category are less liquid sovereign debt, supranational bonds (debt securities issued by international or multilateral institutions such as the World Bank, the European Investment Bank or the Asian Development Bank), high-quality asset backed securities (ABS) or certain regional or local government debt.

Level C collateral – Typically illiquid or lacks an active secondary market. This level features complex structures, unrated underlying pools, or own-name assets (securities issued by the same institution that is offering them as collateral). Such examples of this category are whole portfolios of residential mortgages, consumer loans, commercial real estate loans and private securitisations. 

Today, analysts advise that the BOE is swapping a higher level of category C assets with data revealing that for the month of October and from time to time, Level C accounted for more than half the total of collateral for cash exchanged. Indeed, figures released for last week’s auction by the BOE show Level C at £1.20 Billion, a jump of 80% from the previous month. Indeed, some financial outlets are advising that Level C collateral exchanged for cash has now reached in excess of £19 Billion, and experts suggest that as approved financial institutions are using Category C collateral, it suggests they may have a greater need for cash at the moment. 

Experts note that this facility whilst reducing risks held by financial institutions opens up the possibility that it will unfortunately provide for systemic risks in the future. Indeed, one expert noted that, “The collateral could provide less protection precisely when the BOE needs it. The limited secondary market liquidity of Level C assets could also complicate their valuation during periods of stress”. 

Data released also shows that financial institutions, through borrowing billions from the BOA against their Level C collateral, are using the cash to buy UK bonds that are paying a higher rate and banking the difference. This particular transaction has become more popular as spreads have widened due to the surge in gilt yields. Whilst these trades could be deemed as abuse, there has been no statement from the BOE to this effect.