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Bank of England strengthens emergency stimulus to ease market turmoil

Bank of England Governor Andrew Bailey has said central bank independence “is critically important”.

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LONDON — The Bank of England on Monday announced further measures to ensure financial stability in Britain, based on its intervention in the long-dated bond market.

The Bank̵[ads1]7;s Financial Stability Board on September 28 announced a two-week emergency purchase program for long-dated UK government bonds – known as “gilts” – to restore order to markets and protect liability-driven investment (LDI) funds from impending collapse.

The central bank announced on Monday that it will introduce further measures to ensure an “orderly end” to the buying scheme on October 14, including increasing the size of its daily auctions to allow for gold purchases before Friday’s deadline.

“To date, the Bank has conducted 8 daily auctions, offering to buy up to £40 billion, and has made around £5 billion worth of bond purchases. The Bank is prepared to use this unused capacity to increase the maximum size of the remaining five auctions over current level of up to £5 billion in each auction,” the bank said in Monday’s announcement.

The auction limit will be confirmed each morning at 9am local time, with Monday’s set at 10 billion pounds ($11 billion).

The bank will also launch a Temporary Expanded Collateral Repo Facility (TECRF), which will allow banks to ease liquidity pressures on client funds involved in the recent market volatility. Following last month’s unprecedented rise in gilt yields, LDIs – which hold significant amounts of gilts and are mainly owned by final salary pension schemes – received margin calls from lenders.

A margin call is a demand from brokers to increase the equity in an account when the value falls below the broker’s required amount.

TECRF will enable banks to run what the bank called “liquidity insurance operations”, which will last beyond Friday’s deadline and ease pressure on customers’ LDI funds.

“Under these operations, the bank will accept collateral eligible under the Sterling Monetary Framework (SMF), including index-linked gilts, and also a wider range of collateral than normally eligible under the SMF, such as corporate bond collateral,” the bank said.

Third, the bank said it would be ready to use its regular indexed long-term repo operations every Tuesday – which allow market participants to borrow BOE cash reserves for six months in exchange for less liquid assets – to further ease liquidity pressure on LDI funds.

“This standing facility will provide additional liquidity to banks against SMF-eligible collateral, including index-linked gilts, thereby supporting their lending to LDI counterparties,” the bank said.

“Liquidity is also available through the bank’s new permanent short-term repo facility, launched last week, which offers an unlimited amount of reserves at bank rate every Thursday.”

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