Supplementary Methods of Distributing Gilts

Transcription

1 Supplementary Methods of Distributing Gilts The ABI s Response to the DMO s Consultation Document Introduction 1. The ABI is the voice of the insurance and investment industry. Its members constitute over 90 per cent of the insurance market in the UK and 20 per cent across the EU. They control assets equivalent to a quarter of the UK s capital. They are the risk managers of the UK s economy and society. Through the ABI their voice is heard in Government and in public debate on insurance, savings, and investment matters. General Comments 2. ABI Members are major investors in the gilts market as well as in other securities the markets for which are dependent on a well-functioning gilts market. The pensions and annuity market is large, reflecting the size of the funded pensions sector in the UK, and is likely to continue to grow over time as life expectancy in retirement increases and as developments in the pensions savings, for example through the introduction of Personal accounts. With the closure of many DB pension schemes to further accrual there is considerable activity in the deferred annuity buyout market as schemes elect to crystallise liabilities and new entrants to the pensions buy-out sector become established. This has given an added impetus to careful matching of liabilities with fixed interest investments when this was not typically the case for the entitlements of scheme members pre-retirement. However, regulatory pressures across the board continue to encourage relatively close matching of liabilities. 3. The liabilities of the pensions and annuity sector are typically of long duration and becoming longer. A proportion of these liabilities are index-linked as regards inflation and hence the functioning of the index-linked gilts market is of definite relevance to our Members as well as the market for conventional gilts of longer durations. The continued inversion of the yield curve at the long end is a disincentive to investors to acquire gilts. The interests of the investing institutions, of the underlying beneficiaries, and of the Government would seemed to be aligned in securing a better overall balance of supply and demand at the long end of the yield curve and in the index-linked markets. Our Members would welcome a commitment by the Authorities to address this while ensuring appropriate transparency to the market and thus promotion of market confidence and integrity. A better balance of supply and demand would also be likely to deliver the greater liquidity in the market that in turn would help the issuance market.

2 4. We would take the opportunity to point out the importance of the Government not adopting a narrow perspective in considering its long-dated liability pattern. There is sense in the Government helping the insurance sector to provide the type of products that will enable private sector solutions that have the potential to reduce the quantum of liabilities that would otherwise ultimately fall on the State. The availability of appropriate matching assets is crucial to the insurance industry s ability to provide practical assistance in this regard. 5. Institutional investors in the gilts market have been supportive of the efforts over recent years to ensure a healthy and transparent market and of the issuance procedures, predominantly through auctions, that have been adopted. They are, however, keenly aware of the dangers posed by the current difficulties in the financial system and the effect this may have on commitment by banks to make sufficient capital available to support risk-taking by the Gilt-Edged Market Makers that is necessary for the market as currently organised to operate on an efficient basis. It is unlikely that the investment flows of institutions can be made to accord with the timing of gilt auctions and hence direct participation in these by investors for the purpose of acquiring a large proportion of the securities they require is likely to pose significant market risk for them. Rather, our members believe it is the ability of GEMMs to participate actively in the gilt auction process based on their expectations of end-investor demand over the shorter term that is critical to making the auction system work effectively. 6. This consultation document is therefore timely and we welcome the opportunity to respond to it. We consider that at least some of the options for additional distribution should be pursued. There is a need for supplementary availability of gilts between the dates of auctions. It may be that this can best be achieved through the DMO itself to be open for direct business on a daily basis with some or all of the benchmark gilts up for auction. 2

3 Questions for Consultation ANNEX (a) Interaction between the pension sector and gilt issuance 1. Do pension sector respondents perceive that there are difficulties with acquiring gilts that arise as a result of the auction process? No. However, there is some support for the idea of single-price auctions for conventional gilts as for index-linked. 2. If so, what aspects of the auction process cause these difficulties and what do pension sector respondents view as the appropriate solutions which would facilitate their participation at auctions? This is a question on which the GEMMs are perhaps best placed to take a view. 3. Do pension sector respondents believe that a supplementary gilt distribution method or methods would more effectively meet their demand for gilts? If so, is there a particular supplementary gilt distribution method that would most effectively address the concerns of the pension sector? Yes, supplementary methods might help. (b) Potential advantages/disadvantages of introducing supplementary gilt distribution methods into the DMO s financing remit 4. Do respondents see merit in the Government introducing any supplementary gilt distribution methods for use as appropriate taking into account the quantum of financing to be raised in any year? On the whole we would like to see consistency of approach rather than tactical decisions being taken from year to year according to the size of issuance to be undertaken. 5. What do respondents regard as the potential draw-backs (if any) for the Government and for gilt investors of introducing a supplementary distribution method or methods? There should be none provided this is undertaken as part of a transparent system. (c) Preference between distribution methods 6. Do respondents have a preference for any particular supplementary gilt distribution method over other alternatives? We consider that a system of direct daily auctions should specifically be considered. 3

4 7. For any distribution method preferred by respondents, what do they see as the benefits both for the gilt market and for the Government as issuer of gilts? We suggest that direct daily auctions should, in providing the main users of the gilts market a facility that would be valued by them, reduce risk in the system, uncertainty to investors and to GEMMS, and thus be likely to reduce issuance costs to Government. 8. If respondents have a preference for a particular supplementary distribution method how do they see that method being implemented in practice? We think the details should be consulted on with market participants. (d) Potential size of gilt issuance using supplementary distribution methods 9. What range of issuance sizes (relative to equivalent auctions) could take place via a supplementary distribution method in a way that would be successful for both the market and the Government as issuer? We think such issuance should account for a minority portion of total issuance with the quantity of stock distributed by auction at the long end of the maturity spectrum being held at roughly the same level as now. 10. Would a supplementary distribution method be more likely to allow successful issuance in large size (relative to auctions of equivalent maturity/type)? On balance we see the supplementary distribution methods being better suited to smaller issuance with the larger being better dealt with through the auction system. (e) Range of instruments capable of successful issuance via supplementary distribution methods 11. Do respondents have views on which types of gilts/maturities it would be most appropriate to issue via supplementary distribution methods (e.g. should usage of supplementary distribution methods be limited to issuance of long-dated conventional and/or index-linked gilts)? Long-dated and index-linked stocks should be the priority though we see no particular objection to extending supplementary methods across the maturity spectrum. 12. Should usage of supplementary distribution methods be limited to new issuance rather than re-openings of existing gilts? No, we do not think it need be limited to new issues. 4

5 (f) Appropriate degree of pre-commitment by the Government 13. Do respondents have views on the extent to which the Government would need to pre-announce specific operations/a programme of issuance using a supplementary distribution method or methods? The broad parameters of any bespoke operations would need to be preannounced but there is sense in preserving a degree of flexibility to respond to emerging market preferences. (g) Timing and frequency of usage 14. How frequently do respondents consider that a supplementary distribution method could be used (bearing in mind auctions remain the preferred means for issuance)? We have suggested that daily operations be considered. In any event, we consider that reducing the gaps between issuance windows and agree that periodic structured auctions should remain the priority. 15. The Government will continue to publish an annual auction calendar in the DMO s remit. How should supplementary operations be included in the gilt auction calendar (if at all)? This will depend on the methods chosen. (h) Scheduling of operations 16. How much flexibility should the DMO have around the scheduling of operations using supplementary distribution methods? Some flexibility would be sensible. However, a regular pre-determined pattern would avoid difficulties here. 17. Does the appropriate degree of scheduling flexibility depend on the type of supplementary distribution method used? If so, respondents are invited to comment on this point for different types of supplementary operation. We have no specific comment to make. (i) Lead time for implementation 18. What would be the lead times that primary dealers and gilt investors would need before issuance via a supplementary distribution method took place within ? We do not see any need for delay. 5

6 (j) Mini-tenders 19. If respondents have a preference for the establishment of mini-tenders for ongoing use in the DMO s remit, what do they see as the key benefits? They have the potential to allow the DMO respond efficiently to pockets of demand along the yield curve without having a significant impact on the risk profile of the market and indices. 20. Do respondents see any improvements that could be made to the approach the DMO has used to mini-tenders during and, if so, what improvements would respondents recommend? A somewhat greater formality as to parameters such as size, lead-time from announcement to auction would be helpful and appropriate if mini-tenders are to have an on-going role. 21. If respondents think that use of mini-tenders as a financing operation should be discontinued, what are their reasons? We have not heard any arguments being advanced within our membership for discontinuing these. 30/01/09 [m:\inv\mmck\response\dmosmdgde08 6