The Bank of England (BoE) set out the expected design for a new financial stability tool – the Contingent NBFI Repo Facility (CNRF) – that it intends to invite applications for later this year.
The Bank is expanding its toolkit to intervene where severe liquidity-related dysfunction in gilt markets threatens financial stability, by developing a facility that will allow eligible non-bank financial institutions (NBFIs) to borrow cash against gilts at times of severe gilt market dysfunction.
As a contingent facility, the CNRF would be activated at the BoE’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 BoE 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.
The CNRF is expected to open to insurance companies that are authorized to operate in the UK; defined benefit pension schemes; and alternative investment funds with sterling-denominated liability-driven investment (LDI) as its primary strategy. In other words, insurance companies and pension funds (ICPFs).
Highlights
- The CNRF is expected to be structured as a collateralized loan facility between the BoE and eligible ICPFs, similar to the way in which lending facilities in the Sterling Monetary Framework operate.
- The BoE 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.
- The BoE 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.
- The BoE expects to accept gilts (both conventional and index-linked, including unconventional gilts such as strips) as collateral.
- 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.