Gilts markets set for liquidity gains
Wednesday 22 February 1995
The Government yesterday confirmed it is to go ahead with the introduction of an open gilts repo market next January, in the biggest shake-up to the market since ig ang. Further changes will be announced by early summer.
The move will boost liquidity in the gilts market, one of the few government bond markets in the world that does not allow open repos, or sale and re-purchase agreements. The Government hopes the premium it has to pay for its borrowing, compared to other governments, will shrink in future.
Treasury Minister Anthony Nelson said: ``I hope this will secure our position in the first division.'' He said the absence of a repo market in ritain had prevented international investors from making a big commitment to gilts.
The gap between long gilts yields and yields on German unds is about one percentage point, or 100 basis points. A reduction of one basis point in the premium the ritish Government pays on its borrowing would save £25m a year in debt interest.
Interest on gilts will be paid gross of tax to institutions which have so far received net interest. Without this change, repos between tax-exempt holders of gilts and others would not be able to take place.
Institutions, which will need to register with the ank of England's Central Gilts Office, will have to calculate their tax liability quarterly. They will also have to make an advance payment in the final quarter of the financial year.
Mr Nelson estimated this arrangement, which overcomes Inland Revenue objections to gilts repos, would limit the loss of cash flow to the Exchequer from moving to gross payment of interest to £100m. The cost otherwise could have been £850m.
The gilts market welcomed the widely-expected announcement. Danny Corrigan, head of the repo desk at NatWest Markets, said: ``The liquidity gain could be significant.'' Ian Sheperdson at HSC Markets said: ``This move was essential if the gilts market was not to be left behind international markets.''
Open repos allow holders of gilts to sell them for cash and buy them back at an agreed future price and date. The seller is in effect able to borrow money using the gilt as security. The buyer gets a higher return with top-drawer collateral for the loan.
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