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Details of the new CNRF facility intended to provide stability in illiquid markets

BOE
  • The new facility - the CNRF (Contingent NBFI (Non-Bank Financial Intermediary) Repo Facility) is to expected to be open from Q4-24 to supply cash to pension funds, insurance companies and LDI funds - to help avoid liquidity-driven episodes such as the 2020 "dash for cash" and the 2022 LDI issues where there was forced selling of gilts in illiquid markets.
  • Effectively pension funds and insurance companies will be able to exchange gilts as collateral for cash rather than being forced to sell them. The hope is that by the time a liquidity event has normalised, either the fund will no longer need to sell the gilt or a fire sale will have been avoided. And hence through limiting fire sales, a "doom loop" of falling prices triggering more sales - and the process becoming circular can be avoided.
  • Pricing is to be "flexible", terms are expected to be 1-2 weeks (by which time hopefully liquidity has been restored) while collateral will be limited to gilts (conventional, linker, strips).
  • The Bank does note there are limitations from this facility and that "there may remain circumstances in which central bank lending may not entirely mitigate the most severe liquidity shocks and address the most severe gilt market dysfunction."
  • "In parallel to the development of the CNRF, the Bank is exploring how to design a facility that would enable broader access, to include more ICPF counterparties and reach a broader set of NBFIs that are relevant to the functioning of UK core markets." NB: ICPF = Insurance companies and pension funds.
  • Note that this the precursors to this facility were discussed by then ED for Market at the BOE, Andrew Hauser, at an MNI Connect event last year - see the text of that speech here.
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