Outright Bond Purchases and Electronic Tenders

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Outright Bond Purchases and Electronic
Tenders Graham Young Bank of England
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Seminar Plan
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Changes to the Banks operations

• Current OMO repo operations to be conducted via
  electronic tender.
• Bank to undertake outright purchases of gilts and
  of foreign currency bonds (swapped into fixed
  rate sterling).
• Phased launch.

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Why purchase bonds ?

• Asset-liability management the value of
  banknotes in issue fluctuates during the year but
  has a large permanent element.
• Operational efficiency less churn of shorter
  maturity repo assets.

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Principles

• Five principles to guide the investment strategy
  for the portfolio-
• Simple and transparent
• Is, and can be seen to be, wholly
  non-discretionary
• Minimal credit risk
• In line with behavioural maturity of Issues
  liabilities, ie banknotes
• Not disruptive of HMG debt management policy

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Investment Strategy

• Buy-and-hold in routine circumstances
• Eligible assets
• Gilts
• FX bonds swapped into fixed rate sterling
  synthetic gilts
• Conventional only
• Target maturity distribution of gilts in issue
• Maximum maturity of 20 years
• AAA, domestic-currency only

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Gilt Tenders
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Gilt tenders

• Six bonds within three segments
• Fixed quantities to be purchased in each segment
• Minimum/maximum quantities for pairs of bonds
  within a segment
• Narrow range
• Relative value using market prices
• No maximum counterparty allocation

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Gilt tenders (contd)

• Minimum issue size 4bn
• Exclude Cheapest-to-Deliver bond and open
  issues
• Tender size 400mn
• Monthly except December
• Monday following publication of MPC minutes
• 2.00-2.30pm

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Announcement schedule

• Annually
• Aggregate financing to be provided via bond
  purchases during the forthcoming calendar year
• Quarterly
• Outright bond purchase tender sizes
• Foreign currency issuers to be purchased
• Monthly (one week ahead of tenders)
• Details of the specific bonds for purchase

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Outright Bond Purchases and Electronic Tenders
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Settlement Processes Andrew Grice Bank of England
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Settlement processes (1)

• No change to the settlement process, or contacts
  for STR and LTR operations.
• The trade record for the gilt outright purchase
  will be from the Btender system.
• No other separate trade confirmations will be
  provided.
• The Banks CREST account to be used is 8FMAY.
• All purchases will be expected to settle by
  2.30pm on settlement date. We have a zero fails
  policy for settlement.

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Settlement Processes (2)

• Fractional/partial delivery of gilts allowed if
  agreed with the Bank in advance.
• The Bank retains the right not to allow partial
  deliveries.
• OMO counterparties must provide back office
  contact details for themselves, and any custodian
  used.
• We need your CREST account details in advance of
  the Dress Rehearsal.
• Contact Andrew Grice with any questions.

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Btender Overview and Demonstration Mike Jones
and Katy Webser Bank of England
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Contents

• Design
• System Build
• Testing Familiarisation
• System Overview
• Access
• Bidding/Offering
• Results
• Demonstration

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Design

• Simple/Intuitive
• Quick
• Secure
• Accurate
• External Input
• Other systems
• Pilot Group, Demonstrations and Market Standards

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System Build

• Core system complete for Repo and Gilts
• Demonstrate the system being used by the Bank for
  internal familiarisation
• System functionality similar to that demonstrated
  previously
• Refined e.g. counterparty set plausibility
• Improved look and feel

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Training Familiarisation

• IT requirements
• SWIFTNet connectivity in place
• Live for training and familiarisation
• Any SWIFT issues, use usual internal and external
  channels
• Any issues with the Btender application, contact
  the Bank

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System Overview - Access

• Access in place desktop or stand-alone
• Btender uses SWIFT accreditation details, not a
  separate log-on/password
• Level of identification your decision
• Start by logging onto Browse

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System Overview - Access(2)

• Once session open, select browsing menu and then
  Btender system
• Can set Btender as default on log-in

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Btender Schedule Screen

• Initial screen on entry
• Lists operations you are eligible for
• Ability to sort and filter
• Access to
• Key details and plausibility limit setting before
• Bidding/Offering during
• Results after

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Btender Short-Term Repo

• Common features with other operations
• Menu bar and OMO information bar
• Bid/Offer entry and management
• Countdown when active traffic lights
• Clock synchronisation

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Btender Short-Term Repo (2)

• Enter bid (mn) in box at the bottom of the
  screen
• Validation checks at input/submission
• Amend or cancel bid at top of screen
• Bid history available via hyperlink

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Btender Short-Term Repo (3)

• Results available once allocation complete
• Aggregate result at top of screen released on
  wire services/ internet as well
• Individual results at bottom of screen
• Print/download available

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Btender Long-Term Repo

• Can set plausibility range for rates for each
  maturity on the day of the operation
• Bank will also set a range aimed at capturing fat
  finger errors if counterparty limits not set
• Basic principles of bidding and bid management
  the same as Short-Term Repo

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Btender Long-Term Repo (2)

• Select maturity from drop down box
• Enter bid amount (mn) and rate
• Can submit one or multiple bids
• Validation at entry/amendment
• Identical bids flagged
• Filter/sort bids
• Spinner available to move rate on one or more bids

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Btender Long-Term Repo (3)

• Results available once allocation complete
• Aggregate result at top of screen - released on
  wire services/ internet as well
• Individual results at bottom of screen
• Print/download available

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Btender Gilt Operation

• Can set price plausibility range for each gilt on
  the day of the operation
• Bank will also set a range aimed at capturing fat
  finger errors if counterparty limits not set
• Basic principles of bidding and bid management
  the same as Repo operations

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Btender Gilt Operation (2)

• Select bond from drop down box
• Enter offer amount (in mn nominal) and clean
  price
• Can submit one or multiple offers
• Validation at entry/amendment

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Btender Gilt Operation (3)

• Yield calculated and displayed for information
• Total proceeds calculated and displayed
  liquidity provision operation so limits and
  allocation based on this value.
• Identical offers flagged
• Filter/sort offers
• Spinner available to move price on one or more
  offers

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Btender Gilt Operation (4)

• Results available once allocation complete
• Aggregate result at top of screen released on
  wire services/ internet as well
• Individual results at bottom of screen
• Print/download available

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Btender - Demonstration

• Available after this talk
• Also happy to answer any questions

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Next Steps Sarah John Bank of England
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Training (Mid May Mid Jun)

• Chance for you/your traders to learn from us how
  the system works and ask any questions about the
  tender process.
• Interactive Btender sessions at your office or
  BoE.
• Small groups, can be tailored to attendees.
• Contact Sarah John to arrange a session.

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Familiarisation (18 Jun 3 Aug)

• It is compulsory for you/your traders to practise
  using the system and get to know how BoE is going
  to conduct tenders.
• Chance to see how Btender will fit in with your
  internal processes.
• Scripted and unscripted tests to cover a range of
  functionality and scenarios. Scripts will be
  provided, including expected results.
• Generally two tenders a day over the period.
• Contact any member of the team with questions.

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External dress rehearsal (23 July tender, 24
July settlement)(contingency 26/27 July)

• To prove the whole process involved in a gilt
  tender, including settlement.
• Script will be provided. Timing will be key
  (scheduled over lunchtime) so please follow the
  script carefully.
• Run over test systems, including CREST.
• Contact Katy Webster with questions. More
  details to follow.

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Documentation

• Btender User Guide will be sent out in June.
• Draft Operating Procedures have been circulated.
  A further version will be sent out in the next
  couple of months. New procedures come into force
  with the start of electronic tendering.
• We will request sign off (on a pro forma) that
  you are ready operationally following training,
  familiarisation and dress rehearsal.

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Go-live schedule

• Phased ST repo then LT repo then gilts then
  asset swaps.
• STR and LTR go-live a few weeks after EDR
  (dependent on fam and EDR)
• Gilt tenders start a few weeks after that
  (dependent on repo experience)
• Longer gap to asset swaps early 2008.
• (Asset swap training, familiarisation and dress
  rehearsal end 07/ early 08)
• Announce go-live window for repo and gilts at the
  start of fam.
• Specific go-live dates will be announced after
  the EDR.

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Contact details

• Graham Young (Chief Manager, Sterling Markets
  Division)
• ? 020 7601 3181 ? graham.young_at_bankofengland.co.
  uk
• Sarah John (Manager, Sterling Markets Division)
• ? 020 7601 3847 ? sarah.john_at_bankofengland.co.uk
  
• Mike Jones (Project Manager, Electronic Tender
  System)
• ? 020 7601 4375 ? michael.jones_at_bankofengland.co
  .uk
• Katy Webster (Project Analyst, Electronic Tender
  System)
• ? 020 7601 4948 ? katy.webster_at_bankofengland.co.
  uk
• Andrew Grice (Manager, Settlement and Custody)
• ? 020 7601 3581 ? andrew.grice_at_bankofengland.co.
  uk