ICMA responds to the Bank of England's Discussion Paper on Transitioning to a repo led operating framework
31 January 2025 On behalf of the ICMA European Repo and Collateral Council, ICMA has responded to the Bank’s Discussion Paper on Transitioning to a repo-led operating framework. The Discussion Paper outlines the Bank’s proposals for transitioning its framework for supplying central bank reserves from a supply-driven to a demand-driven, repo-led framework. This is necessary as the quantity of reserves steadily falls with the unwind of quantitative easing and term funding schemes. It seeks feedback from market participants on how they envisage new framework will operate as well as on its calibration.
To formulate its response, ICMA convened a dedicated Taskforce of member firms from its European Repo and Collateral Council (ERCC) that are active in the sterling repo market and regular users of the Sterling Monetary Framework (“SMF participants”).
The response highlights a number of key themes and recommendations that can be considered as broadly consensus views across SMF participants intended to support a successful transition to the new framework. Chief among these is that the SMF operations should be settled on a delivery-versus-payment (DVP) basis, along the lines of a triparty model. Participants highlight the challenges related to the existing free-of-payment (FOP) model, not least the drain on intraday liquidity arising from the requirement to pre-position collateral, and which could ultimately make it difficult to use the SMF as a business-as-usual liquidity management tool. Other recommendations include expediting the process for verifying and requesting collateral eligibility, greater flexibility in tenors for the Indexed Long-term Repo (ILTR), enhanced operational efficiencies related to partialing, substitution, and margining, as well as improvements to the Short Term Repo (STR) tender process.
