Contingent NBFI Repo Facility (CNRF) – provisional Market Notice 24 July 2024

Provisional design and parameters of CNRF

This provisional Market Notice should be read alongside the Explanatory Note setting out the Bank of England’s (the Bank’s) motivation for, and approach to, expanding its financial stability toolkit through the introduction of the Contingent Non-Bank Financial Institutions (NBFI) Repo Facility (CNRF).

As a contingent facility, the CNRF would be activated at the Bank’s discretion in episodes of severe gilt market dysfunction that threaten UK financial stability, to lend cash, against gilt collateral, to eligible insurance companies, pension funds and liability-driven investment funds for a short lending term.

The Bank expects applications for the CNRF to open in 2024 Q4. The application process for the facility would enable eligible counterparties, once onboarded, to take part in the CNRF as and when the facility is activated.

Certain facility parameters, such as the lending spread to Bank Rate, would be announced at the point of activation to ensure they are tailored to prevailing conditions.

This provisional Market Notice sets out the Bank’s expectations of how the CNRF would operate. The Bank is providing this information now to allow NBFIs to familiarise themselves with the expected design and operational features of the CNRF.

This information is also intended to support the Bank’s ongoing engagement with stakeholders – including insurers, pension funds, other non-banks and regulators – as the Bank undertakes detailed design and calibration work ahead of launch. For queries regarding this facility, please email CNRFapplications@bankofengland.co.uk.

Further details of the facility (including supporting operational and legal documentation) will be published on the Bank’s website when the application window opens later this year.

The Bank reserves the right to amend or supplement the information contained in this provisional Market Notice, and to adjust the operational parameters of the CNRF or any other aspects of the facility at its sole discretion.

Motivation and purpose of the facility

The Bank is expanding its toolkit for addressing severe market dysfunction that threatens UK financial stability. The CNRF aims to address episodes of severe dysfunction in the UK sovereign debt (gilt) market in particular, arising from system-wide shocks that temporarily increase non-banks’ demand for liquidity, when that demand is outside the reach of the Bank’s existing Sterling Monetary Framework (SMF) liquidity facilities. It is not intended to provide liquidity support to counterparties facing idiosyncratic liquidity or balance sheet pressures.

Further detail on the purpose of the facility, and rationale underlying the design, is available in the accompanying Explanatory Note.

Eligible counterparties

The CNRF is expected to open to the following types of institutions, subject to meeting the facility’s wider eligibility criteria:

• insurance companies that are authorised to operate in the UK;
• defined benefit pension schemes; and
• Alternative Investment Funds with sterling-denominated liability-driven investment as its primary strategy (‘LDI funds’)

This provisional Market Notice collectively refers to these institutions as insurance companies and pension funds, or ‘ICPFs’. The Bank intends to consider the merit of expanding eligibility to other sectors in the future.

A number of additional eligibility criteria will apply in order for ICPFs to qualify for the CNRF. The Bank anticipates that these will encompass the following areas (along with other factors to be announced when the tool opens for applications):

• the Bank expects that ICPFs will need to be, in its sole assessment, appropriately regulated by any relevant regulatory body (for example, the Prudential Regulation Authority (PRA), the Financial Conduct Authority (FCA), the Pensions Regulator or any other relevant regulatory body, including overseas regulators);
• eligible ICPFs will also need to meet, in the Bank’s sole assessment, an appropriate standard of financial health on a current and forward-looking basis. We expect counterparties to be able to demonstrate this by meeting PRA or FCA regulatory threshold conditions or by providing other evidence of equivalent financial health. In practice, being subject to the macroprudential measures recently introduced in Luxembourg and Ireland^{footnote [1]} is likely to satisfy this requirement for LDI funds. Other pension funds or LDI funds may need to provide evidence of financial health equivalent to an investment-grade credit rating. Where no public agency rating is available, the Bank expects to consider relevant credit information from other qualified sources, including private ratings from commercial lenders or other relevant third-party sources;
• to maximise the targeted effectiveness of the CNRF in addressing severe gilt market dysfunction while recognising limits to the number of firms the Bank can onboard to the CNRF, eligible ICPFs will need to make a material contribution to the gilt market. Further information on how the Bank will look to assess an ICPF’s contribution to the gilt market will be published when the facility is open for applications, but we anticipate that this is likely to be based around ICPFs’ holdings of gilts and related gilt market activity. The Bank will require counterparties to submit data as part of the application process, for example information on their gilt holdings.

Activation

It is expected that the CNRF would be activated when the Bank, in its sole discretion, judges there to be significant gilt market dysfunction presenting risks to UK financial stability. It is expected that the CNRF would remain active until the Bank judges such risks to have subsided. To inform these decisions, the Bank will draw on a range of information regarding market conditions, including financial market data and market intelligence.

Design and operating parameters

The CNRF is expected to be structured as a collateralised loan facility between the Bank and eligible ICPFs, similar to the way in which lending facilities in the Sterling Monetary Framework operate.

The Bank’s expectations for the frequency, terms and pricing of the facility are set out below. However, the precise parameters will be calibrated by the Bank based on prevailing market conditions at the point at which the CNRF is activated, and would be confirmed and published in a Market Notice at the relevant time.

Fees and pricing

• The Bank wants to encourage eligible ICPFs to sign up for the CNRF. Accordingly, while the Bank expects to charge an annual access fee, it expects to set this at a level that would encourage early sign up. Further details regarding fees will be communicated when the facility is open for applications.
• The Bank expects that lending through the facility would be priced at a spread to Bank Rate. This spread will be calibrated such that the facility would be unattractive when compared to market pricing in normal conditions, but attractive during times of stress when the tool will be active.

Frequency of operations

• The Bank expects that, once activated, the CNRF would be readily available to provide liquidity at the frequency required to restore market functioning. This could include daily operations, if needed.

Eligible collateral

• The Bank expects to accept gilts (both conventional and index-linked, including unconventional gilts such as strips)^{footnote [2]} as collateral. This reflects the CNRF’s aim of addressing severe episodes of dysfunction in the gilt market.
• Prospective counterparties may find it helpful to familiarise themselves with the Bank’s SMF Operating Procedures^{footnote [3]} as the operational processes for haircuts and margin calls on collateral are likely to be similar.

Haircuts and concentration limits

• The Bank expects to set haircuts in line with the SMF.^{footnote [4]} The Bank reserves the right to apply additional haircuts to any individual counterparty to account for large exposures or other risks.
• The Bank intends to apply concentration limits to cap the amount of any individual gilt that may be pledged as collateral by a counterparty, at £500 million per International Securities Identification Number (ISIN). This cap would help to diversify the collateral holdings that the Bank receives from any one counterparty, and minimise potential price distortions from post-default collateral sales.

Borrowing limits

• The Bank intends that counterparties will be subject to borrowing limits equal to 50% of their total gilt holdings.^{footnote [5]}
• The Bank expects to update borrowing limits annually with counterparties required to submit annual data to the Bank regarding gilt holdings.
• The Bank expects that it would notify counterparties of their borrowing limit prior to activation of the facility.

Allocation process

• The Bank intends that CNRF operations will operate as a full allotment at a fixed price, subject to borrowing limits as described above.

Term of the facility

• The maturity of the lending is expected to be short-term, with an expected lending term of 1 to 2 weeks. However, the Bank expects that eligible counterparties will be able to roll their borrowing in operations while the CNRF is active.

Bidding process

• The Bank intends to conduct operations using the Bank’s electronic tendering system, Btender,^{footnote [6]} which runs over SWIFT. Installation and completion of testing on Btender will be required prior to admission.
• The Bank expects that bids will be submitted either by the participant directly, or by its nominated operating agent. Applicants will be expected to inform the Bank of their nominated agent as part of the onboarding process.

Settlement and collateral management

• The Bank expects settlement will be on a T+0 basis.
• All payment of funds to the counterparty or the Bank, will be paid or received via CHAPS.
• Gilt securities can only be delivered to the Bank’s CREST account.^{footnote [7]}
• Cash lent via the CNRF will be paid to ICPFs’ nominated bank according to Standard Settlement Instructions (SSIs) provided to the Bank as part of the application and test trade process in advance, with a requirement to provide ongoing updates as appropriate. The Bank will provide a data collection form for counterparties to submit SSIs.
• ICPFs will not be eligible to join the SMF or to hold a reserves account.
• The Bank will require counterparties to provide a unique BIC11 SWIFT address to enable settlement. 
• The Bank intends to operate a collateral pooling model to support this facility. Counterparties will be provided with a collateral pool account at the Bank through the onboarding process. Collateral held in the pool will not be earmarked against individual transactions. Instead, the value of the collateral held in the pool will be used to collateralise the value of the Bank’s exposure to the counterparty. More detail on the methods of instructing collateral movements to a counterparty’s pool account will be provided in the CNRF operating procedures, to be published when the tool is launched for applications.

Results publication arrangements

• The Bank intends to publish aggregate usage of the facility after the close of each operation in line with most SMF facilities. Historical aggregate usage will also be uploaded to the Bank’s website.

Onboarding process and requirements for eligible counterparties

ICPFs wishing to sign up for the CNRF will be required to submit documentation to allow the Bank to assess their eligibility and conduct detailed due diligence, including anti-money laundering (AML), Know-Your-Customer (KYC) checks, and financial risk assessments. Participation in a test trade will also be required as part of the onboarding process, to demonstrate operational readiness. Applications should be submitted by individual legal entities, with valid Legal Entity Identifiers.

The Bank recognises that certain ICPFs may wish to appoint an operating agent (such as a bank or asset manager) to act on their behalf for the CNRF. The Bank expects that operating agents will be able to act for one or more ICPFs.

Once onboarded, the Bank expects that counterparties will be required to:

• regularly provide to the Bank such financial information as the Bank may require (including information on gilt holdings), where such information is not already provided to the Bank or the Prudential Regulation Authority;
• contribute to the Bank’s market intelligence work in support of its functions; and
• demonstrate ongoing operational readiness, including through participation in periodic test trades as required by the Bank.

The CNRF will be governed by legal documentation designed specifically for the facility, including terms and conditions and operating procedures to be published when the facility is launched for applications. It will sit outside of the Sterling Monetary Framework.

In the meantime, firms interested in signing up to the CNRF can express their early interest or raise any queries to CNRFapplications@bankofengland.co.uk. We also invite firms considering the use of an operating agent to contact us. Further detail and guidance on the application process, including how the Bank expects to incorporate the role of operating agents, will be published when the tool is launched for applications.