The Bank of England has now opened applications for its Contingent NBFI Repo Facility (CNRF). The facility will enable non-banks such as DB pension schemes, LDI funds and insurers to access cash following an increase in demand for liquidity during times of severe market stress.
The CNRF is intended to address the kind of severe disruption in the UK gilt market that arose during the "LDI crisis" in September 2022, where demand for cash – largely driven by pension schemes' efforts to meet collateral requirements - led to an unprecedented spike in gilt yields and emergency gilt purchases by the Bank. The facility is contingent upon activation by the Bank at its discretion during such market conditions, and cash will be provided under a loan arrangement in exchange for a transfer of UK gilts as collateral. The facility can be accessed directly by eligible non-bank financial institutions, unlike other central bank repo operations which are open only to banks or certain investment firms.
The Market Notice published by the Bank on 28 January includes the contractual documentation as well as operational procedures for applicants. Applicants will usually be required to hold a market value of £2 billion in gilts initially, although this is subject to annual review. They must also meet regulatory prudential requirements where applicable or otherwise provide evidence of financial health equivalent to an investment grade rating. There is an annual fee of £8,000 for participation.
Eligible schemes and funds should consider now whether they wish to complete the onboarding process, so that they can seek to use the facility in the case of future activation. As part of that process, applicants will be required to commission legal opinions covering enforceability of their obligations under the terms and conditions of the facility, the operational procedures and other ancillary documents.
If you are interested in applying to join the CNRF, we would be pleased to discuss the onboarding process and the preparation of suitable legal opinions. Please feel free to speak to any of the team listed below, or your usual Travers Smith contact.
