From the end of this month, the Bank, which manages total liquidity through its daily repurchase (repo) operations, is to allow euro-denominated securities from all the European Economic Area countries to be used as collateral in the repo market. These include Switzerland and Norway as well as the 11 members of the euro zone.
The existing pool of liquidity for the Bank's daily operations is about pounds 325bn.
Ian Penderleith, head of the Bank's market operations, said the move underlines the Bank's commitment to support the City of London' as an international financial centre. About 20 banks and finance houses are active participants in the UK repo market, many overseas based-banks or securities houses.
The Bank will be the only central bank to accept securities issued by another country for the purpose of its own domestic repo market, although the European Central Bank as a multinational organisation accepts securities issued by all the euro members as collateral. Until now only UK government paper such as gilts has been accepted for collateral.
As part of its contingency planning for the millennium, the Bank is planning to provide same-day payment against collateral delivered to the its accounts at Euroclear and Cedel, the European securities clearing houses. Currently securities have to be deposited a day in advance.
The repo operations are the principal mechanism whereby the Bank of England manages the liquidity of the banking system. Participants in the money markets are able to satisfy their need for sterling liquidity by depositing government securities with the central bank in return for cash. The deposit or margin which the bank takes when it hands the securities back sets the floor for interest rates. A technical shortage caused by lack of securities to deposit could result in an abnormal surge in short-term rates.