The Bank of England has opened applications for the Contingent Non-Bank Financial Institution Repo Facility (CNRF), preparing for further cases of gilt market dysfunction.
Details of the CNRF were first outlined last July, explaining that the BoE felt it necessary to develop a new lending facility to deal with market shocks that increase non-bank financial institutions’ (NBFIs) need for liquidity. The announcement followed a number of cases of market stress, most notably the LDI crisis in 2022.
Applications were expected to open in Q4 2024. Since then, the issue has become even more prevalent; gilt yields spiked globally in early January, led by the US market and expectations that government borrowing will remain high under a second Trump tenure.
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Vicky Saporta, executive director for markets at the Bank of England, said: “This marks a significant step forward in our efforts to deal with future episodes of gilt market dysfunction. Having the ability to lend to eligible non-bank financial institutions in times of severe market stress means we are better equipped to protect financial stability for the benefit of households and businesses throughout the UK.”
The CNRF aims to supply cash to pension funds, insurance companies and liability-driven investment funds against gilts on a short lending term basis.
The growing importance of NBFIs to the UK economy means that their liquidity risks can have a significant impact on the wider market.
In cases of stress, investor deleveraging, liquidity mismatches and insufficient preparedness to reach the liquidity demands of margin calls can cause forced gilt sales by NBFIs, encouraging price spirals and potentially harming market stability.
These risks must be managed, with NBFIs insured against extreme system-wide liquidity stresses and related forced selling. As these institutions cannot maintain this level of resilience independently, the BoE can support them through the provision of backstop liquidity, lending to NBFIs and minimising their need to sell assets.
The CNRF is the first component of the bank’s efforts to improve market resilience. It is also developing a facility to enable access to a broader range of NBFIs and insurance corporation and pension funds counterparties.
In order to be eligible for the CNRF, the Bank requires eligible ICPFs “to make a material contribution to the gilt market in order to maximise the effectiveness of the CNRF in addressing severe gilt market dysfunction that threatens financial stability, while the broader facility is still under development”. More than £2 billion in gilts must be held by a company in order for it to be considered for the facility.
BlackRock, Schroders and LGIM declined to comment on the measures.
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