Bank opens up money market dealing
Sweeping reforms will end the discount houses' special status
Thursday 05 December 1996
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".
- 1 I was a Woman Against Feminism too
- 2 Fifty Shades of Grey movie trailer released: First look at Jamie Dornan as Christian Grey
- 3 Is Gideon Levy the most hated man in Israel or just the most heroic?
- 4 Students offered grants if they tweet pro-Israeli propaganda
- 5 Israel has discovered that it's no longer so easy to get away with murder in the age of social media
Vladimir Putin employs a full-time food taster to ensure his meals aren't poisoned
Peaches Geldof: Her final day – and her fatal decision
Students offered grants if they tweet pro-Israeli propaganda
Israel-Gaza conflict: Israel may have committed war crimes, says UN human rights chief
John Barrowman praised for Commonwealth Games opening ceremony gay kiss
Malaysia Airlines MH17 crash: Vladimir Putin is given 'one last chance' to end hostilities in Ukraine
The 'scroungers’ fight back: The welfare claimants battling to alter stereotypes
The truth about conspiracy theories is that some require considering
Arizona execution lasts two hours as killer Joseph Wood left 'snorting and gasping' for air
Malaysia Airlines MH17 crash: Ukrainian military jet was flying close to passenger plane before it was shot down, says Russian officer
Malaysia Airlines MH17 crash: Massive rise in sale of British arms to Russia
iJobs Money & Business
£18000 - £20000 per annum + OTE £25K: SThree: SThree Group has been well estab...
competitive: Progressive Recruitment: This really is a fantastic chance to joi...
£40000 - £60000 per annum + BONUS + BENEFITS: Harrington Starr: CXL, Triple Po...
£60000 - £75000 per annum + BONUS + BENEFITS: Harrington Starr: Business Anal...