Bank opens up money market dealing

Sweeping reforms will end the discount houses' special status

The Bank of England yesterday announced the biggest reform for more than a century in the way that interest rates are set, marking the end of the privileged position of the City's seven discount houses.

The bank's dealings in the short-term money markets are to be opened early next year to a wide range of banks, building societies and securities firms of UK or continental ownership.

At the same time, gilt repos - debt backed by government bonds - are to become a key part of the bank's daily trading with the market.

The discount houses are specialist banks that have traditionally had a monopoly on daily dealings in bills of exchange with the Bank of England. Trading in the bills is used to control interest rates and signal changes in the cost of borrowing.

The reforms, scheduled for early next year, will restructure London's sterling money markets in line with proposals expected to be adopted for the market in euros when the single currency is in operation.

However, Ian Plenderleith, an executive director of the bank, denied the restructuring in London was prompted by the single currency or the discussions under way at the European Monetary Institute on how to set interest rates after monetary union.

"That's not our main motive," he said.

Mr Plenderleith said there were advantages in bringing the UK structure into line with the Continent, whether or not Britain joined the single currency. After the reforms, the London money markets would be "state of the art" and the bond markets would be "absolutely at the forefront" in world terms, Mr Plenderleith said.

He said the driving force for change was rapid evolution in the City, especially the mushrooming growth of the pounds 15bn-a-day gilts repo market, where pounds 60bn of repos are currently in force.

The bank will continue to use the traditional bill market operated by the discount houses. But from next year, changes in interest rates will be signalled by a move in repo rates rather than the traditional method of altering the rates at which the bank deals in the discount market.

The bank is also abandoning its insistence that gilt-edged market makers are established as separate firms, known as Gemms, and instead will allow them to be merged into their parent groups' balance sheets.

Gilts repo dealers will sign a private contract with the bank and there will be no published list.

There are to be changes in the money market dealing timetable during the day and new arrangements for clearing banks that need overnight loans. The discount houses' obligation to underwrite the weekly Treasury bill tender will be dropped.

The discount houses have been given a decade of quiet warnings by the bank that their market will be opened up.

They have already diversified into other financial specialisms and some have moved into the gilts repo market. Cater Allen, one of the leading houses, said: "We believe we will benefit [from the changes]."

Until the reform, however, the houses have retained their special access to the bank's dealing rooms. The value of this privilege has been whittled away in recent years because the clearing banks have become the dominant bill market traders, even though they have had to channel their dealings with the bank through the houses.

In 1994, the bank further eroded the houses' role by experimentally beginning fortnightly, rather than daily, dealings in gilt repos outside the discount market.

The European Monetary Institute is expected to publish proposals in January for the detailed operations of the money market in euros.

According to the bank's discussion document, the plans being drawn up by the European Monetary Institute are "relevant to any further development of the bank's operations whether or not the UK participates in monetary union: the changes proposed in this paper are consistent with the direction and spirit of the proposals currently under discussion at the European Monetary Institute".

PROMOTED VIDEO
News
video
Life and Style
tech
Arts and Entertainment
Up my street: The residents of the elegant Moray Place in Edinburgh's Georgian New Town
tvBBC's The Secret History of Our Streets reveals a fascinating window into Britain's past
Arts and Entertainment
Southern charm: Nicolas Cage and Tye Sheridan in ‘Joe’
filmReview: Actor delivers astonishing performance in low budget drama
Arts and Entertainment
While many films were released, few managed to match the success of James Bond blockbuster 'Skyfall'
film
Extras
indybest
News
Albus Dumbledore, the headmaster of Hogwarts School of Witchcraft and Wizardry has been the teaching profession's favourite teacher
education
News
ebookA unique anthology of reporting and analysis of a crucial period of history
Sport
Luis Suarez looks towards the crowd during the 2-1 victory over England
sport
Life and Style
Cheesecake frozen yoghurt by Constance and Mathilde Lorenzi
food + drinkThink outside the cool box for this summer’s frozen treats
News
John Barrowman kisses his male “bride” at a mock Gretna Green during the Commonwealth Games opening ceremony
peopleBarrowman's opening ceremony message to Commonwealth countries where he would be sent to prison for being gay
Sport
Sir Bradley Wiggins removes his silver medal after the podium ceremony for the men’s 4,000m team pursuit in Glasgow yesterday
Commonwealth games Disappointment for Sir Bradley in team pursuit final as England are forced to settle for silver
Sport
Alistair Brownlee (right) celebrates with his gold medal after winning the men’s triathlon alongside brother Jonny (left), who got silver
England's Jodie Stimpson won the women’s triathlon in the morning
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Junior Research Analyst - Recruitment Resourcer

£18000 - £20000 per annum + OTE £25K: SThree: SThree Group has been well estab...

Senior Analyst - Financial Modelling

competitive: Progressive Recruitment: This really is a fantastic chance to joi...

Associate CXL Consultant

£40000 - £60000 per annum + BONUS + BENEFITS: Harrington Starr: CXL, Triple Po...

Business Anaylst

£60000 - £75000 per annum + BONUS + BENEFITS: Harrington Starr: Business Anal...

Day In a Page

Backhanders, bribery and abuses of power have soared in China as economy surges

Bribery and abuses of power soar in China

The bribery is fuelled by the surge in China's economy but the rules of corruption are subtle and unspoken, finds Evan Osnos, as he learns the dark arts from a master
Commonwealth Games 2014: Highland terriers stole the show at the opening ceremony

Highland terriers steal the show at opening ceremony

Gillian Orr explores why a dog loved by film stars and presidents is finally having its day
German art world rocked as artists use renowned fat sculpture to distil schnapps

Brewing the fat from artwork angers widow of sculptor

Part of Joseph Beuys' 1982 sculpture 'Fettecke' used to distil schnapps
BBC's The Secret History of Our Streets reveals a fascinating window into Britain's past

BBC takes viewers back down memory lane

The Secret History of Our Streets, which returns with three films looking at Scottish streets, is the inverse of Benefits Street - delivering warmth instead of cynicism
Joe, film review: Nicolas Cage delivers an astonishing performance in low budget drama

Nicolas Cage shines in low-budget drama Joe

Cage plays an ex-con in David Gordon Green's independent drama, which has been adapted from a novel by Larry Brown
Ford Fiesta is UK's most popular car of all-time, with sales topping 4.1 million since 1976

Fiesta is UK's most popular car of all-time

Sales have topped 4.1 million since 1976. To celebrate this milestone, four Independent writers recall their Fiestas with pride
How to make your own gourmet ice lollies, granitas, slushy cocktails and frozen yoghurt

Make your own ice lollies and frozen yoghurt

Think outside the cool box for this summer's tempting frozen treats
10 best reed diffusers

Heaven scent: 10 best reed diffusers

Keep your rooms smelling summery and fresh with one of these subtle but distinctive home fragrances that’ll last you months
Commonwealth Games 2014: Female boxers set to compete for first time

Female boxers set to compete at Commonwealth Games for first time

There’s no favourites and with no headguards anything could happen
Five things we’ve learned so far about Manchester United under Louis van Gaal

Five things we’ve learned so far about United under Van Gaal

It’s impossible to avoid the impression that the Dutch manager is playing to the gallery a little
Screwing your way to the top? Good for Lana Del Rey for helping kill that myth

Screwing your way to the top?

Good for Lana Del Rey for helping kill that myth, says Grace Dent
Will the young Britons fighting in Syria be allowed to return home and resume their lives?

Will Britons fighting in Syria be able to resume their lives?

Tony Blair's Terrorism Act 2006 has made it an offence to take part in military action abroad with a "political, ideological, religious or racial motive"
Beyoncé poses as Rosie the Riveter, the wartime poster girl who became a feminist pin-up

Beyoncé poses as Rosie the Riveter

The wartime poster girl became the ultimate American symbol of female empowerment
The quest to find the perfect pair of earphones: Are custom, 3D printed earbuds the solution?

The quest to find the perfect pair of earphones

Earphones don't fit properly, offer mediocre audio quality and can even be painful. So the quest to design the perfect pair is music to Seth Stevenson's ears
US Army's shooting star: Lt-Col Steven Cole is the man Hollywood calls when it wants to borrow a tank or check a military uniform

Meet the US Army's shooting star

Lt-Col Steven Cole is the man Hollywood calls when it wants to borrow a tank or check a military uniform