AN OPEN GILT REPO MARKET
Bank of England Consultative Paper

As the Chancellor of the Exchequer announced in the Budget, the
Bank of England is publishing today, as a consultative paper,
detailed proposals for the development of an open gilt repo market.
Final decisions will be taken after the completion of the
consultation process.

Two major changes from the present arrangements are proposed:

*      Repo activity would be widened beyond the gilt-edged market
       makers.

*      It would no longer be a requirement that stock be lent or
       borrowed only through a Stock Exchange money broker,
       although it would still be open to them to provide an
       intermediation service.  The repo market would thus be
       entirely open.

The Bank believes that these steps should enhance the liquidity and
efficiency of the market, increase demand for gilts, and thereby
reduce the overall interest cost over time to the government and
the taxpayer.  The proposed changes would do so by:

*      giving would-be investors in gilts ready access to the
       sterling money market, using gilts as collateral

*      enabling all of the market to borrow stock to cover short
       positions

*      widening arbitrage opportunities

*      introducing the price mechanism into stock borrowing

*      ensuring international investors could use the repo
       mechanism with which they are familiar, encouraging greater
       participation in the gilt market

*      extending the range of instruments traded in the sterling
       money markets (as it is essentially a form of secured money)

*      promoting greater integration of the money and gilt markets

*      enhancing the position of London as a financial centre

The Bank's consultative paper sets out how stock borrowing and
financing would be handled in a gilt repo market, and the
implication such a change might have for the gilt-edged market, the
sterling money market, the equity market, and for the business of
the Stock Exchange money brokers and the inter-dealer brokers.

The Bank considers it of great importance that gilt repo activity
should take place within a properly-regulated framework.  The
Bank's paper therefore sets out the arrangements envisaged for
prudential supervision and for regulation of conduct of business.
It is not envisaged that any formal change in the structure of
supervisory arrangements would be necessary.  Prudential
supervision, including of capital adequacy, would be the
responsibility of an institution's existing supervisor.  Business
in gilt repo would also be subject to the conduct of business
arrangements under the Financial Services Act.  Thus any repo
activity with retail customers will be covered by the investor
protection provisions of that Act.

The Bank's paper also outlines steps that might be taken to ensure
that a gilt repo market is operated in a sound and orderly manner.
To consider arrangements in more detail in this area, the Bank is
inviting market participants to form two working groups:

*      one to consider a master legal agreement for gilt repo
       transactions;

*      the second to compose a code of conduct which core
       participants in the repo market would be expected to
       observe.  The code could be issued under the umbrella of
       section 43 of the Financial Services Act like the London
       Code.

The Bank's proposals for monitoring gilt repo activity for
operational purposes are set out in the consultative paper.

The Bank believes that the security of gilt repo transactions would
be enhanced by settlement in a book-entry transfer system.  The
Bank is considering adjustments to the Central Gilts Office
service designed to enable settlement of repo transactions.

A gilt repo market could not begin to operate before all of this
preparatory work was completed, and market participants had had
time to make the necessary systems and other changes.  Commencement
of gilt repo activity could not be before July 1995.  In the
meantime the Bank wishes to underline that it does not wish gilt
repo activity to develop ahead of any date decided in due course
for implementation of the proposals in its paper in an orderly
manner.  The existing stock borrowing arrangements intermediated by
the SEMBs remain in place.

The Bank has no current plans to change its present methods of
operating in the money markets.

The consultative document is being sent to a wide range of market
participants and other interested parties, and copies are available
at the Bank.  Comments on the paper are sought by 31 January 1995.

29 November 1994

Notes to Editors

A repo is a transaction in which any two market participants can
agree that one will sell securities to the other and commit to
repurchase equivalent securities on a specified future date, or at
call, at a specified price.  A repo is therefore a flexible
transaction which is effectively the borrowing of cash against
collateral for one party and stockborrowing for the other.

Repo transactions have long been a feature of the gilt market but
hitherto have been undertaken only by the gilt-edged market makers,
to cover short positions resulting from their market-making
activities, and with all deals intermediated by the Stock Exchange
money brokers.

The Inland Revenue will be consulting separately on the potential
tax implications of a gilt repo market.  A Press Release inviting
comments will be issued shortly.