United Kingdom: Asset Purchase Facility

The BoE announced a GBP 200 billion increase to the BEAPFFL’s holdings of gilts and corporate bonds on March 19, 2020, to support the functioning of these and other financial markets early in the COVID-19 crisis (BoE 2020a). Prior to the crisis, the BEAPFFL held GBP 435 billion in gilts and GBP 10 billion in corporate bonds (BoE MPC 2020a).

The BoE’s Monetary Policy Committee, in the minutes of its special meeting on March 19, frames the asset purchases as an emergency measure that also satisfied monetary policy objectives. For gilt purchases, the MPC says the goal was to “improve the functioning of the gilt market and help to counteract a tightening of monetary and financial conditions that would put at risk the MPC’s statutory [inflation] objectives” (BoE MPC 2020b, 9). For corporate bond purchases, it says, “Given recent market developments, such purchases would help to improve market functioning and to reduce liquidity premia” (BoE MPC 2020b, 10). The MPC describes market stability and longer-horizon monetary policy objectives as mutually reinforcing. March minutes state that the MPC was also prepared to further expand the program, if necessary.

The BoE announced similar increases to the BEAPFFL of GBP 100 billion in June 2020 and GBP 150 billion in November 2020. Later rounds were primarily meant to provide monetary stimulus rather than to support securities market liquidity (BoE 2020b; BoE MPC 2020d). The June and November minutes acknowledge that gilt markets had stabilized and cite the MPC’s statutory monetary policy objectives (BoE MPC 2020b; BoE MPC 2020c; BoE MPC 2020d). As the year progressed, the MPC also softened its language about the scope of further action. The June and November minutes note that the MPC was ready to “increase the pace” of government bond purchases if market functioning deteriorated (BoE MPC 2020b, 12; BoE MPC 2020c, 13; BoE MPC 2020d, 12).

This case study focuses on the first round of asset purchases during the COVID-19 crisis due to its focus on promoting liquidity in gilt and corporate bond markets.

The BoE did not include asset purchases in its initial COVID-19 measures decided upon at its first special meeting on March 10, 2020, as shown in Figure 8 in the Appendix (BoE MPC 2020e). The events of the following week led the BoE to vote on asset purchases at the second special meeting on March 19 (BoE 2020a; BoE MPC 2020b).

By early March 2020, public financial institutions and central banks had cut interest rates, launched liquidity facilities, and purchased assets of public and private origin (Douglas 2020). These were efforts to shield economies from financial disruption stemming from the COVID-19 crisis. In the UK, the BoE’s Monetary Policy Committee voted to cut the Bank Rate by 50 bps, bringing the headline interest rate to 0.25% on March 11, 2020 (BoE FPC 2020). Meeting minutes note the “role for monetary policy to help UK businesses and households bridge a sharp but temporary reduction in activity” (BoE MPC 2020a, 6). To further preserve small businesses’ access to credit, the MPC decided to offer banks a Term Funding Scheme with additional incentives for small and medium-sized enterprises (TFSME) at, or near, the Bank Rate (BoE MPC 2020a).

Within the UK, fixed-income strategists expected the government to launch ambitious fiscal stimulus measures to counter the effects of COVID-19 on businesses and consumers (Ainger and Ritchie 2020). Her Majesty’s Treasury’s Budget 2020, announced on March 11, described just GBP 30 billion of coronavirus relief, and the government’s five-year macroeconomic forecasts limited the incorporation of additional COVID-19 spending into its projections of fiscal expenditure (HMT 2020).

On March 17, Chancellor Rishi Sunak announced additional emergency support for both new and existing programs, and the additions were not captured by the Budget 2020’s GBP 30 billion figure (Sunak 2020a). 

Worldwide, financial market participants moved money away from risky assets and government bonds, and shifted to cash,^FNCzech et al. (2021) describes the “dash for cash” dynamic that led to the sterling market dysfunction. especially US dollars (BoE MPC 2020b). Given the massive public costs of emergency programs in the UK, some investors were reportedly concerned about the source of demand for the soon-to-be-issued gilts that would pay for the stimulus (Aldrick 2020b). Their worries showed in the data, and by mid-March, UK financial markets exhibited heightened volatility: the USD-to-GBP exchange rate hit a 35-year low, risky asset prices fell, investment-grade and high-yield bond spreads soared, and gilt yields rose (Giles, Parker, and Payne 2020). On March 19, the Debt Management Office, which is HMT’s office responsible for issuing the government’s wholesale sterling debt, successfully completed the morning’s auction; thereafter, gilt markets entered a standstill and could not function until the BoE intervened (Aldrick 2020a). Yields on government debt peaked and gilt markets froze, leaving the DMO temporarily unable to sell government debt to gilt-edged market makers (GEMMS) because traders were hesitant to determine the price of government debt (Aldrick 2020b).

On the same day, the MPC convened in a special meeting^FNThrough the first quarter of 2020, the MPC had met off-cycle only four times in its 23 years of existence: after the terrorist attacks on September 11, 2001; during the Global Financial Crisis on October, 8 2008; and during the COVID-19 crisis on March 10 and 19, 2020 (Bailey 2020a; BoE MPC 2008). and obtained permission from HMT for the BEAPFFL to purchase GBP 200 billion of gilts and nonfinancial, investment-grade corporate debt from the secondary market to address the worsening financial conditions of gilt and corporate bond markets (BoE 2020a; BoE MPC 2020b). “Had the Bank not stepped in, things would have gotten very difficult,” said Sir Robert Stheeman, chief executive of the DMO (Aldrick 2020a). BEAPFFL began purchasing gilts on March 25 and corporate bonds on April 7, 2020 (BoE 2020e; BoE 2020g).

The APF was the product of coordination between HMT and the BoE during the Global Financial Crisis (GFC), although it is unclear which agency first raised the idea.^FNChancellor Darling has claimed that the APF started as BoE’s idea while Governor King has asserted the opposite (Darling 2021; King 2012). HMT formally requested and authorized the BoE to set up and operate the APF on January 19, 2009 (Darling 2009b; Darling 2011; HMT 2009). With an initial size of GBP 50 billion, the APF’s original objective was “to increase the availability of corporate credit, in order to support the Bank of England’s responsibilities for financial stability and monetary stability in the United Kingdom” (Darling 2009b, 1). Introduced alongside several measures meant to reassure markets and stabilize the economy, the APF aimed to improve corporate credit conditions, especially for larger companies, by “reducing the illiquidity of the underlying instruments” (Darling 2011, 203; HMT 2009). For more information on the APF’s legal origins, please refer to the Appendix B.

The BoE decides the value and composition of asset purchases through the BEAPFFL via majority MPC vote, similarly to how it set the Bank Rate (BoE 2021d; BoE 2021e). Unlike with traditional monetary policy, however, the BoE must obtain HMT’s explicit permission before changing the size of the BEAPFFL’s assets because of the HMT indemnification (BoE IEO 2021; HoL EAC 2021).

The BoE had to seek HMT’s approval three times in March, June, and November 2020 to expand HMT’s indemnity of the BEAPFFL, which allowed the BoE to pursue monetary policy objectives through additional asset purchases (“quantitative easing”) (Bailey 2020b; Bailey 2020c; Bailey 2020d; Sunak 2020b; Sunak 2020c; Sunak 2020d).

The BoE has implemented additional internal governance and risk oversight measures for the APF that it does not have for its traditional, independent monetary policy decisions. Those measures are necessary because of the risk associated with asset purchases through quantity, maturity, and type of asset (BoE IEO 2021).

The BoE’s asset purchase decisions span its policy, operations, and risk functions (BoE IEO 2021). For that reason, in 2018, the BoE established an internal memorandum of understanding to manage terms of engagement and scope of decision-making between BoE’s Court of Directors,^FNThe BoE Court of Directors is the governing body responsible for setting BoE’s objectives and strategies (BoE 2019b). The Court monitors BoE’s “performance in relation to its objectives, the exercise of [BoE’s] statutory functions and the processes of the policy committees,” and its five executive members are appointed by the Crown (BoE 2019b, 3). Executive, and MPC (BoE 2018; BoE IEO 2021). While the MPC selects the BoE’s tools and purchase amounts, BoE’s Executive determines the operational framework to create and execute the MPC’s decisions; BoE’s Court also delegates to the Executive the responsibility of assessing risks to BoE’s balance sheet (BoE IEO 2021). The BoE’s Independent Evaluation Office argues that this high-level arrangement among the MPC, Executive, and Court allows the BoE to remain flexible^FNThe BoE IEO (2021, 27) reports that the BoE saw occasional “grey areas” where existing internal governance guidelines did not distinguish the BoE branch responsible for setting a feature of asset purchases (for example, the maturity buckets of gilts). The IEO also asserts that the BoE navigated these gray areas successfully and that it may be operationally advantageous to not preassign responsibilities for every possible dimension of asset purchases. during times of crisis. The Executive assesses risk by engaging the BoE’s relevant committees:

• The Audit and Risk Committee of the Court “assists the court in meeting its responsibilities for maintaining efficient systems of financial reporting, internal control and risk management”;
• The Executive Risk Committee “oversees the operation of [the BoE’s] Risk Management Framework”;
• The Financial Operations and Risk Committee “provides advice and challenge on all material risk issues relevant to the Bank’s balance sheet”; and
• The Executive Committee “deals with issues of policy, strategy, and management that are not reserved for the Court or the Bank’s three statutory policy committees.” (BoE IEO 2021, 29–30)

General information about the BoE’s risk management practices, which also apply to asset purchases, can be found in the IEO’s 2021 report.

The external arrangement between the BoE and HMT makes this asset purchase program unique because the BoE conducts its asset purchases with a separately indemnified fund (BEAPFFL), unlike many other central banks, which use their own balance sheets to conduct similar purchases; the purpose is to keep the MPC “operationally independent [yet] fully accountable” (BoE IEO 2021, 10). IEO argues that this BoE/HMT arrangement is “well designed and [has] functioned effectively” (BoE IEO 2021, 24). However, IEO also suggests that a large and unexpected reversal of cash flows between HMT and the BoE could carry reputational risk for the BoE.

The APF is jointly administered by HMT and the BoE; this arrangement follows a memorandum of understanding (MoU) mandated by the Financial Services Act 2012 (FSA 2012). In the wake of the Global Financial Crisis, the UK Parliament passed the FSA 2012, which reformed the UK’s frameworks for financial regulation and supervision (FSA 2012; Metrick and Rhee 2018). Section 64 of the FSA 2012 requires HMT, the BoE, and the Prudential Regulation Authority (PRA) to formally coordinate any actions relating to financial stability, and Section 65 requires the institutions to plan their coordination through a publicly available MoU on resolution planning and crisis management (FSA 2012). Under the MoU, the BoE has “primary operational responsibility for financial crisis management” while HMT has “sole responsibility for any decision involving public funds” (HMT 2017, 1). This division of labor is reflected in the APF’s administration.

The BoE conducts asset purchases on behalf of the BEAPFFL, which is a wholly owned subsidiary of the BoE (BoE 2020h; BoE 2021f).

A variety of BoE staff are involved in the implementation of BEAPFFL’s purchases. Under the BoE’s Sterling Monetary Framework, the MPC determines^FNTo establish the appropriate size of APF holdings, BoE’s MPC relies on research and analysis from the Monetary Analysis, Markets, and the Research Hub, with further input from Financial Stability Committee and Prudential Regulation Authority (BoE IEO 2021). the total stock of monetary stimulus, while the BoE’s Executive is responsible for deciding how to deliver the stimulus and manage risk (BoE IEO 2021). Four executive directors (EDs: finance, markets, banking, and monetary analysis) serve as the APF directors. The BoE’s Markets Directorate is responsible for setting BEAPFFL’s purchase parameters “to ensure smooth market functioning” (BoE IEO 2021, 11). The bank’s risk management officials further evaluate operational choices, advise the EDs for further financial and nonfinancial risks, and consult with legal experts on relevant issues. Upon implementation, the BoE’s dealers execute the auctions and cooperate with counterparties, and the Markets Directorate’s middle and back offices process the trades. Afterwards, the BoE’s Communications Directorate delivers asset purchase decisions through MPC minutes and the Monetary Policy Report, and the BoE’s agents further communicate BoE’s decisions in their regions.

HMT coordinates APF’s risk and control frameworks with the BoE (BoE 2020h; BoE 2021c). Together, they observe the BEAPFFL’s operations, consider potential risks to public funds, and discuss potential effects on specific sectors and markets (BoE 2021c). HMT fully indemnifies the BEAPFFL’s net financial losses, so the BEAPFFL pays/receives remittances at quarterly intervals (McLaren and Smith 2013). See Key Design Decision No. 10, Source(s) of Funding for more discussion of these cash flows.

Within the HMT, the DMO manages the UK’s sovereign debt issuances while attempting to minimize the government’s long-term financing costs (DMO n.d.). DMO issues gilts to primary dealers called gilt-edged market makers, who trade gilts on secondary markets (DMO 2021). After the BEAPFFL buys gilts on the secondary market, it may lend a proportion of its gilts to DMO through the Debt Management Account for the purpose of the DMO’s short-term repo activities with market participants (BoE 2021c; BoE/DMO 2009). See Key Design Decision No. 13, Loan or Purchase for more information about the BEAPFFL’s gilt repo activities with DMO.

The BoE announced the MPC’s decisions about the APF in market notices and statements of varying specificity (BoE 2020a; BoE 2020d). During the COVID-19 crisis, the BoE announced an increase of GBP 200 billion to the BEAPFFL on March 19, 2020. On April 2, the BoE clarified that at least GBP 10 billion of the new purchases would consist of corporate bonds (BoE 2020a; BoE 2020c). The BoE also released MPC meeting minutes and summaries several days after the meetings took place; these minutes describe the MPC’s justification and economic contexts (BoE MPC 2020b; BoE MPC 2020c; BoE MPC 2020d).

Despite the BoE’s formal channels and procedures for communicating actions to the public, the House of Lords’ Economic Affairs Committee criticized the BoE for mixed messaging (HoL EAC 2021). On separate occasions in May and June 2020, Governor Bailey noted the close relationship between government funding and the BoE’s asset purchase program. BoE officials later publicly disagreed whether the primary purpose of the program was to support monetary policy objectives or market functioning. Critics from the House of Lords argued that the BoE did not sufficiently explain how the asset purchases served BoE’s mandate, so some of Governor Bailey’s public statements, they contended, may have convinced some observers that the BoE engaged in monetary financing during the crisis.

The chancellor of the Exchequer and BoE governor exchange letters about the APF whenever the BoE seeks to increase the size of HMT’s indemnity; these letters reiterate the BoE’s policy goals, relevant economic trends, and HMT’s administrative expectations. The letters that the parties sent during the COVID-19 crisis also explicitly state that the BoE’s secondary-market asset purchases had no direct effect on the DMO’s primary-market gilt issuances (Bailey 2020b; Sunak 2020b).

According to the MoU on resolution planning and financial crisis management, the BoE has several communicative responsibilities with HMT, Parliament, and the public (HMT 2017). The BoE is required to update HMT and the public on the progress of any financial crisis, along with BoE’s actions to mitigate the crisis. The BoE and HMT also must inform the markets of relevant regulatory reporting requirements and the use of BoE’s balance sheet.

The BoE publishes annual APF accounts, which are audited by the National Audit Office (BoE IEO 2021). The accounts contain statements on BEAPFFL’s income, financial position, and cash flows (BoE 2021b). The notes on the financial statements describe the BEAPFFL’s assets according to securities class, fair valuation, credit risk, geographical concentration, sectoral concentration, and maturity, among other analyses. The BoE also posts quarterly APF reports summarizing the gilt and corporate bond purchases during the prior three months (BoE 2021h). The BoE separately publishes APF results and usage data. For gilt transactions, the BoE publishes detailed operations data, including: operation dates, settlement dates, ISIN, bond identifiers, total offers received, total allocation (in both proceeds and nominal terms), allocation of noncompetitive auctions, weighted-average accepted yield, weighted-average accepted price, highest accepted price, allocation at highest price, and lowest accepted price (BoE 2022). For corporate bonds, the BoE publishes only the level of holdings and sectoral allocation.

The Bank of England Asset Purchase Facility Fund Limited was incorporated as the BoE’s subsidiary on January 30, 2009 (UK Gov 2021). BEAPFFL is fully indemnified by HMT, so HMT absorbs any losses arising out of and receives all gains coming from the BEAPFFL (BoE 2021c). The BoE relies on BEAPFFL to purchase private sector securities not eligible for open market operations (OMOs); as of January 2008, only gilts were eligible for OMOs (BoE 2008; HMT 2009). The securities resulting from BEAPFFL’s asset purchases do not appear on the BoE’s balance sheet (BoE 2021b). The BoE records only its outstanding loans to the BEAPFFL as assets under the Banking Department.

For the first round of asset purchases during the COVID-19 crisis, the BoE specified an additional GBP 200 billion of assets, establishing an upper limit of GBP 645 billion on BEAPFFL’s collective holdings of gilts and corporate bonds (BoE 2020a). To determine the level of gilts and corporate bond purchases necessary to fulfil its remit, the MPC considered the sizes of both the APF and the Covid Corporate Financing Facility, a market liquidity program in which the BoE purchased commercial paper financed by the creation of central bank reserves (BoE MPC 2020b). After two additional expansions to APF, BEAPFFL held about GBP 874.9 billion in gilts and GBP 19.9 billion in corporate bonds as of February 2, 2022 (BoE 2022).

From March 25 through June 17, 2020, BEAPFFL purchased about GBP 173.6 billion in gilts, at an average pace of about GBP 13.5 billion per week—more than twice the pace of the first asset purchases during the GFC (Bailey et al. 2020; BoE 2021i). The BoE front-loaded the program “as much as was operationally possible” to prevent monetary tightening (BoE MPC 2020b, 9). Bailey et al. (2020) speculates that the BoE’s front-loaded purchase pace may have been more effective than a slower, uniform purchase pace during COVID-19-induced market stress. Given the self-accelerating dynamics of market dysfunction, the argument goes, more firepower was needed at the beginning of the turbulence to prevent a counterfactual downward spiral from developing later. After the initial round of purchases during the COVID-19 crisis, the MPC voted to slow the rate of asset purchases to an average rate of about GBP 4.5 billion per week—one-third the weekly pace of the first round—because liquidity conditions had stabilized by mid-June 2020 (BoE 2021i; BoE MPC 2020c).

As shown in Figure 1, the BoE provides loans to the BEAPFFL so that it may purchase assets, financed by the creation of central bank reserves (Bailey 2020b; McLaren and Smith 2013). Depending on the MPC’s policy stance, the BEAPFFL may repay loan principal or reinvest proceeds from gilt redemptions (McLaren and Smith 2013). Similarly to how it treats gilt proceeds, BEAPFFL may occasionally reinvest the corporate bond cash flows back into eligible corporate bonds (BoE 2021f). If the BoE needs the BEAPFFL to sell these assets, the BoE may charge intermediary accounts, which requires market participants to pay cash to the intermediaries. The BEAPFFL repays loan interest (plus the BoE’s administrative costs) at the Bank Rate with incoming gilt coupon payments (McLaren and Smith 2013).

Since April 1, 2013, HMT has indemnified the BEAPFFL’s losses and transfers cash to/from the BEAPFFL every quarter (BoE 2021c). These transfers represent “actual cash movements,” such as interest payments or administrative costs; no cash is transferred due to “non-monetary gains or losses” such as variations in the market prices of gilts or corporate bonds (BoE 2019a, 1). Between March 1, 2020, and February 28, 2021, cumulative transfers stood at GBP 13.7 billion (BoE 2021c). Nearly all the cumulative transfers have gone from the BEAPFFL to HMT (BoE IEO 2021). The quarterly payment system allows the UK government to manage its cash with increased flexibility, similar to the processes of the US Federal Reserve and the Bank of Japan (BoE 2021c).

When BEAPFFL conducts initial rounds of asset purchases, the direction of net cash transfers likely has been from the BEAPFFL to HMT because coupon payments exceed interest costs in a low-interest-rate environment (McLaren and Smith 2013). However, this will likely reverse over time because the BEAPFFL typically purchases gilts above par (at a price greater than redemption value) (McLaren and Smith 2013). Given that the price of gilts approaches redemption value as the gilt approaches maturity, the redemption value probably will not cover the principal of the loan originally used to purchase the gilt. The BoE acknowledges that the APF involves large and variable cash transfers^FNThe size, timing, and direction of cash transfers depends on several factors, including the future path of the Bank Rate, the path of gilt sales, and the effect of sales announcements on the “term premia” (difference between the Bank Rate and the gilt yield curve) (McLaren and Smith 2013). The path of the Bank Rate directly affects the BEAPFFL’s interest payments to BoE and influences the gilt yield curve, which affects the market value of the APF’s gilt holdings. The path of gilt sales sets the time that remains in the asset purchase schedule, affecting the gilt sales prices. Similar to the path of the Bank Rate, the announcement of gilt sales influences the gilt yield curve and the consequent market value of the BEAPFFL’s gilt holdings. between the BEAPFFL and HMT and stresses that the BEAPFFL’s net gains or losses should not be used as a stand-alone metric for gauging the success or failure of the APF. Rather, BoE officials have argued that the success of the APF should be determined by its influence on corporate credit conditions, nominal spending, and the medium-term inflation target.

BEAPFFL purchases assets from banks and broker-dealers, who otherwise transact in the assets primarily with nonbank owners (BoE 2021f). Counterparty eligibility for the APF depends on the type of asset, the format of the auction, and the identity of the seller, as described by Figure 2.

Gilt purchases. To purchase gilts, BEAPFFL conducts reverse auctions with discriminatory (i.e., variable) pricing (BoE 2020h). Each successful counterparty receives their offered sales price, in central bank reserves, in exchange for the security (BoE 2021f). To appraise offers in a competitive auction, BEAPFFL refers to the market yield of each gilt at the end of the auction, arranges the offers in descending yield order, accepts those that it deems attractive, and repeats this process until it has bought the desired amount of gilts (BoE 2020h; BoE 2021f). For noncompetitive auctions, BEAPFFL allocates the stock of securities at a weighted-average price, which comes from the relevant segment of the competitive auction (BoE 2020h). There are no restrictions on the number of offers and no limits on the proportion(s) of auctions to be allocated to particular gilts or counterparties (BoE 2021f). BEAPFFL may also reinvest the gilt cash flows into other gilts.

Corporate bond purchases. When BEAPFFL purchases corporate bonds with the APF, this is known as the Corporate Bond Purchase Scheme (BoE 2016a). To conduct the CBPS, BEAPFFL uses reverse auctions (BoE 2021f). BEAPFFL first collects offers and ranks them by attractiveness. In contrast to its gilt purchases, BEAPFFL uses a uniform pricing system to price corporate bonds because their markets are less liquid and more diverse than gilt markets. BEAPFFL pays a single clearing price—equal to the highest accepted price—for all successful offers of a given bond. Though BEAPFFL uses reverse auctions for the CBPS, it has the discretionary authority to purchase through other methods, such as bilateral purchases, on secondary markets (BoE 2020a). The MPC also reviews the possibility of purchasing corporate bonds on the primary market.

BEAPFFL purchases. BEAPFFL purchases gilts and corporate bonds from the secondary market, though the BoE keeps open the possibility of BEAPFFL’s purchasing corporate debt through primary markets (BoE 2020a). A full list of operational purchase parameters can be seen in Figure 3. The BoE conducts all its APF operations through Btender, the BoE’s electronic trading system (BoE 2020h, 3). More information about APF settlement procedures and contingencies can be found in the APF Operating Procedures (BoE 2020h).

BEAPFFL Loans. After the BEAPFFL buys gilts on the secondary market, it may lend a proportion of its gilts to DMO through the Debt Management Account for DMO’s short-term repo activities (BoE 2021c; BoE/DMO 2009). In exchange for BEAPFFL’s gilts, the DMO posts government securities of equal value as collateral, so there is no net change in the value of the BEAPFFL’s gilt portfolio (BoE/DMO 2009). The purpose of on-lending is to resolve market frictions stemming from the BEAPFFL’s asset purchases. The BEAPFFL allows the DMO to use at least 10% of each of the BEAPFFL’s gilts; the percentage is higher for gilts for which BEAPFFL owns most of that gilt’s free float, the amount of publicly tradable gilts. On April 22, 2020, the BoE doubled the gilt lending limits to minimize frictions between the BEAPFFL and DMO (BoE 2020d). That decision gave the DMO access to more than GBP 30 billion of the BEAPFFL’s gilt holdings. By doubling the limits, the BEAPFFL attempted to support DMO repo facilities, which use gilts as collateral, from BEAPFFL’s extensive gilt purchases.

To purchase gilts, BEAPFFL conducts reverse auctions with discriminatory pricing (BoE 2020h). To purchase corporate bonds, the BoE uses reverse auctions with uniform pricing (BoE 2021f). See Key Design Decision No. 12, Auction or Standing Facility for more information about the role of pricing in the BoE’s reverse auctions.

Gilt purchases. BEAPFFL purchases conventional gilts with remaining maturities of at least three years (BoE 2020h). BEAPFFL does not purchase index-linked gilts, rump stocks, or stocks with an outstanding issue size below GBP 4 billion. BEAPFFL also avoids purchasing gilts for which BEAPFFL possesses at least 70% of the free float. BEAPFFL waits at least one week after the DMO issues debt before purchasing it to avoid the impression of monetary financing (Aldrick 2020b; BoE 2020h). BEAPFFL also avoids transacting in DMO’s reissuances one week before and one week after the reopening; the purposes are to maintain central bank independence and to prevent GEMMS from simultaneously buying gilts from DMO and selling them to BEAPFFL.

Since 2016, the BEAPFFL’s asset purchases have mostly maintained the same operating procedures (BoE 2016b; BoE 2020h). However, for the expanded APF in response to the COVID-19 crisis, the MPC changed the definition of residual maturities from seven to 15 years to seven to 20 years (medium) and from 15 years to 20 years (long) to “free up additional headroom to purchase gilts” equally across the maturity sectors (BoE MPC 2020b, 9). In this context, “headroom” refers to “the amount of gilts that [the BoE] can purchase without exceeding self-imposed limits” (HoL EAC 2021, 28). To summarize: the BoE intends for the BEAPFFL to purchase gilts equally across three residual maturity buckets: three to seven years (short), seven to 20 years (medium), and 20 years (long) (BoE MPC 2020b).

Corporate bond purchases. BEAPFFL may purchase corporate bonds with the following features:

• Conventional senior unsecured or secured, unsubordinated debt;
• Bonds rated investment grade by at least one major rating agency and subject to the BoE’s assessment process;
• Cleared and settled through Euroclear and/or Clearstream;
• Minimum amount in issue of GBP 100 million;
• Minimum residual maturity of 12 months; no perpetual debt;
• At least one month since the security was issued; and
• Admitted to trading on the official listing of a European Union stock exchange, or, at the BoE’s discretion, listed on a multilateral trading facility operated by a stock exchange regulated in the European Economic Area. (BoE 2020c) 

Complex, nonstandard, convertible, and exchangeable bonds are not eligible (BoE 2020h). BEAPFFL normally accepts bonds with “Spens clauses,” meaning that early redemption pays outstanding principal and forgone interest or principal payments discounted according to the redemption yield of a similar gilt. BEAPFFL does not normally purchase corporate bonds with callable features—except for standard par call options within three months of maturity (BoE 2020f; BoE 2020h). If a finance subsidiary wishes to participate in the program, the BoE normally requires the parent company to guarantee its securities (BoE 2020h). The BoE publishes a full list of eligible securities on its website (BoE 2021g).

The BoE attempts to avoid overinfluencing one sector or company by spreading corporate bond purchases across eligible issuers and sectors (BoE 2020h). The BoE tries to restrict CBPS assets to investment-grade bonds issued by companies that make “material contributions,” through employment or revenue generation, to the British economy (BoE 2020h, 6). The list of eligible issuers does not include firms that the BoE regulates—such as banks or insurance companies.

On June 4, 2020, the BoE expanded the list of eligible corporate debt to include bonds with three months to maturity par call features (BoE 2020f). Though the MPC does not explain the adjustment in its June 17 meeting minutes, it may have been to reduce debt loads (BoE MPC 2020c). An Organisation for Economic Co-operation and Development report notes that callable bonds allow the issuer to redeem the bond before maturity, so issuers are incentivized to refinance during lower-interest-rate environments to reduce debt cost (Isaksson, Çelik, and Demirtaş 2019). At the same meeting, the MPC voted to increase its target stock of gilt purchases but not corporate bonds^FNThough the MPC did not have explicit language about the omission of corporate debt from its second round of COVID-19 asset purchases, the June 17 minutes offer details on high corporate credit demand, stabilization of credit conditions for firms, the UK government’s other corporate financing facilities, and already-indebted firms’ desires to seek other methods for raising capital (BoE MPC 2020c). At the same meeting, the MPC decided to slow the weekly volume of asset purchases because liquidity conditions improved and offered to raise the volume of weekly purchases if conditions worsened again. (BoE MPC 2020c).

On November 5, 2021, the BoE pledged to “green” the CBPS, reflecting the central bank’s secondary commitment to an economy-wide transition to net-zero carbon emissions by 2050 (BoE 2021k). The BoE aimed to reduce the CBPS’s carbon footprint by:

• Setting portfolio targets on net emissions and weighted average carbon intensity;
• Limiting eligible issuers to companies who comply with UK climate governance measures and excluding debt issuances related to coal mining activities;
• Tilting purchases toward strong climate performers and away from weak performers, using scorecards that incorporate emissions data, reductions efforts, climate disclosure, and third-party verification of firms’ emissions targets; and
• Escalating eligibility requirements as data and metrics improve and divesting when company performance fails to meet the BoE’s climate standards.

There were no haircuts applicable to the APF.

There were no interest rates applicable to the APF.

There were no fees applicable to the APF.

There was no term applicable to the APF.

There were no other restrictions applicable to the APF.

There are no relevant regulatory changes directly applicable to the APF. In October 2017, the BoE’s PRA excluded central bank reserves from its calculation of banks’ leverage ratio, following a recommendation by the BoE’s Financial Policy Committee (BoE PRA 2017, 5). From their calculation of capital requirements, firms subject to the UK leverage ratio excluded deposit-matched central bank claims denominated in the same currency and the same or longer maturity (BoE PRA 2017, 5). The measure is meant to prevent the leverage ratio from interfering with any monetary policy action leading to an increase in central bank reserves (BoE PRA 2017).

There was no international coordination applicable to the APF.

On February 2, 2022, the MPC voted unanimously to reduce its stock of gilt and corporate bond purchases by refraining from reinvesting maturing assets, and it pledged to fully unwind the CBPS via asset sales through the end of 2023 (BoE MPC 2022). At the same meeting, the MPC requested BoE staff to design a corporate bond sales program within three months and prior to the start of sales. Governor Bailey suggested that the BoE would only consider active sales of gilts once the Bank Rate has risen to at least 1% and that the BoE would keep open the possibility of future asset purchases if warranted by economic conditions (Bailey 2022). Through asset maturation alone, the BoE expects the APF’s gilt portfolio to decrease by GBP 70 billion in 2022 and 2023, an additional GBP 130 billion in 2024 and 2025, and the remainder by the end of 2071, as shown in Figure 4 (BoE MPC 2022).

At its February 2022 meeting, the MPC emphasized high 12-month inflation readings, low unemployment, and slow output growth (BoE MPC 2022). Prior to 2022, BoE officials suggested that any reduction in the APF would likely occur after the Bank Rate had been raised and market functioning had normalized (BoE MPC 2021). MPC minutes suggest that gilt and corporate bond markets had largely stabilized by mid-June 2020. On February 2, 2022, the MPC voted to raise the Bank Rate by 25 bps (BoE 2021i; BoE MPC 2020c; BoE MPC 2022). No matter the timing of unwinding, the MPC had vowed to stop reinvestment as its first step, providing a predictable and gradual path to the BoE’s balance sheet reduction (BoE MPC 2021).

At the onset of the asset purchases in March 2020, the MPC’s meeting minutes omitted language about potential dates for ending purchases or downsizing the BEAPFFL’s holdings, though the BoE pledged in June to coordinate any reduction in the APF with the DMO (Bailey 2020c; BoE MPC 2020b). When the MPC voted to increase the stock of purchases in June 2020, committee members expected to finish the purchases around the turn of the year (BoE MPC 2020c). After the MPC voted for a third increase to the APF in November 2020, they expected purchases to be completed around the end of 2021 (BoE MPC 2020d).