WEDNESDAY 16 FEBRUARY 2000

MR MIKE WILLIAMS, DR PAUL MILLS and MS JO WHELAN

  300. If that is not the objective is there a way of making you more arm's length in the cash market as you are in the gilt market?
  (Mr Williams) Apart from the Treasury bill issuance aspect, for most of our dealing during the day—different issues arise at the end of the day when we have to make sure the accounts balance and much of the market is less involved in that—we are effectively operating as an arm's length body and not seeking to use any privileges that might flow from our public sector position. That is a policy choice on our part which we have set out in our documentation.

  301. You can see why your competitors, if that is the right word to use, might feel threatened by this?
  (Mr Williams) I agree entirely and, as I said earlier, I quite understand their reservations. They have built up successful businesses.

  302. Partly as in one mode, as you indicated earlier, you said, "We are ordinary commercial people and should be allowed to have our own secrets and operate as cut-throat commercial operators."
  (Mr Williams) As I say, we will not be a cut-throat operation because that is not what we are trying to do. It is true that we will have regard to value for money. We will have choices when faced to manage a few billions, hundreds of millions or whatever, we will have choices about whether to deal bilaterally or have a mini-tender. We will have choices if it is borrowing whether to do it as a bill issue or repo. We will have choices about the maturity at which we operate. We will essentially be making those choices in the way other people do in the interest of managing the flows that we have to face not on that day but with regard to the flows we have to face.

  303. One last question on this. Given the hybrid nature of your role, is not the onus on you to be more open than perhaps you are prepared to be with your potential competitors and to have greater discussions and closer relationships?
  (Mr Williams) I am fully open in terms of discussions and relationships and I am very happy to talk about these issues.

  304. They do not see it in that way, as you know.
  (Mr Williams) As I said, I am slightly surprised that they do not see it that way. I think that is a reflection of the commercial uncertainty, but it is only commercial uncertainty. We have tried to set out what we are going to do both in a broad sense and in our Operational Notice in a quite detailed way. We have agreed all the legal processes which a wide range of counterparties.

  305. Just on that point, they say that you have not even defined who the counterparties are.
  (Mr Williams) Again, I do not think we would be expected to. The Bank of England does not publish that.
  (Dr Mills) Can we just explain why that is so. The Bank of England does not publish its list of counterparties. We would not want there to be inappropriate signals given in that if we had an official list of who we were dealing with in the money markets and a bank came on to it, there might be a quasi regulatory kudos of, "I am dealing with the government and the government will be having exposure to me, and they will not let me fail." Conversely, if they decide to leave the list there might be an adverse signal given that does not have any reality to it. Hence both the Bank and we have chosen not to publish the list of who we are dealing with.

  306. I think I am right that you said earlier on that you have written to all of your counterparties.
  (Dr Mills) We have got a list.

  307. But you are not telling anybody.
  (Dr Mills) It is not a published list.

  308. Presumably they know they are on it.
  (Dr Mills) The individual banks know but each bank does not know who else is on the list.

  309. That seems very strange.
  (Dr Mills) What other bank in the market would have published its lists of counterparties?

  310. But you are not a real commercial undertaking.
  (Mr Williams) As we said, the Bank of England does not publish its list.
  (Ms Whelan) May I add to that. You are talking about us as if we are competitors in the central core of the market. I think the role we are really taking is not so much a competitor in the central core of the market, we are more a user of the market and the commercial relationship is that you might expect to see with a customer in the core of the market, in which case there would not be any discussion about which other users or counterparties they were using.

  311. I am sure we accept that your motives are benign and indeed you have other objectives, but in terms of the competitors, which they see themselves to be, you are potentially taking away business from them.
  (Mr Williams) Not really. Potentially perhaps, but we are dealing with a large cash flow. There have been a lot of complaints over the years about there not being sufficient firms in the market to help the liquidity. We are taking this lumpy sum away from the Bank of England, which deals with these things in a completely different way, and we are able to deal with it directly in the market place.

  312. Can we come finally to the way your actions interact with the actions of the Bank and the Treasury. We have seen the timetable you have set out for ad hoc tenders in your Operational Notice of 6 January. There presumably has not been an Operational Notice since then?
  (Mr Williams) There has not been.

  313. One of the things emphasised to us is the importance of your finishing your Exchequer cash management early enough in the day to allow the banks to get on with what they are doing. Are you confident that you can do that?
  (Mr Williams) We will certainly try and do the best we can in the first part of the day because that is when the market is most liquid. However, as you know, we receive our forecast of the Exchequer provision, which is the biggest element of the sum we are dealing with, during the day and that can change sometimes quite significantly in the course of the day. If it changes we will have to manage the numbers we are given, which may not be possible in the first part of the day. While we certainly have the intention of doing what we can in the first part of the day—

  314. There could be days when the cash management is not finished by the middle of the day?
  (Mr Williams) Almost certainly. This has been the position, of course, for a long time but at the moment it is reflected in changes in the sums that the Bank has to offer to the market during the day.
  (Dr Mills) That is why we and the market are so keen to get the forecasts as accurate as possible and as quickly as possible and the Treasury have worked on that for a long time and are increasing their efforts.

  315. I was going to come to that. Are you confident that the departments themselves have sufficient cash flow management to make this system work successfully?
  (Mr Williams) We would like the departmental forecasts to be much better. Our colleagues in the Treasury, whose responsibility this is, have instituted a programme of penalties and incentives to try and seek to improve the departmental forecasts. At the same time we are also, through the Bank of England, seeking to get much better close to real-time information on the movements across departments' accounts at the Bank of England and those two things together I would hope and expect will improve the position, but it will inevitably be some time before it is as good as we and the market would like it.

  316. If we look at the new arrangements from the Bank's point of view, they will not have the cash flow any more when they come to implement the repo rate. Do you envisage any problems there? What would the DMO view be, for example, if they found it difficult to implement that rate?
  (Mr Williams) I do not think there will be problems. There will be some movements in the money market that the Bank will itself manage, in particular changes in demand for note and coin which will give the Bank room for manoeuvre. Also we have come to an arrangement with the Bank whereby we will, if asked by the Bank, issue an additional tranche of Treasury bills as part of the weekly structured issue, the proceeds of which we will deposit directly in the Bank and that will help the Bank to generate the shortage that they need in order for the process of relieving that shortage to manage the short-term interest rates. In doing this, of course, we will make clear to the market when we are issuing a tranche of Treasury bills on behalf of the Bank that that is indeed what we are doing.

  317. How will you share market intelligence with the Bank? Have you set up a channel for that?
  (Mr Williams) There are a number of channels. I mentioned the Treasury representative on the Monetary Policy Committee. The Bank also attends the DMO's quarterly consultation meetings with the gilt market and investors. Certainly we will have a very close relationship in managing the flows right at the end of the day and that flows in part from the arrangements we set up whereby we can inform the Bank of any residual sums, this is essentially after the markets close, that they have to manage and in some circumstances they may be able to manage that in their final operations, and partly from the arrangements that flow from the Bank's responsibility for providing us with banking services and the management of the accounts to balance the flows at the end of the day.

  318. Is your market intelligence as good as the Bank's?
  (Mr Williams) I believe so. In the nature of the relationship talking on a day-to-day basis with the sterling market, we will be talking to most of our counterparties most of the time because that is the basis on which you can then do business with them.

  319. Can I finally ask you about your own status and your own independence. There has been a lot of continuing discussion in this building about the independence of the Bank. Do you see a situation where you could be trusted with the key decisions on the annual gilt financing rather than the Treasury? Why should you not do it?
  (Mr Williams) If I may say so, that is the sort of question that goes rather beyond my remit. Essentially because of the interactions with the wider fiscal policy, that Paul has described, to establish an agency that is not in any sense answerable to the wider ministerial decisions, or not guided by those decisions, would be a huge policy change and I think one that probably goes much, much further than anywhere else in the world. I say this, but the arrangements in Germany are shortly to change and we do not know what is going to happen there. When it comes, as it were, closer to the detail, one could envisage different institutional arrangements. We heard earlier about Chinese walls and bricks and mortar walls where we are completely independent. At the moment I am quite comfortable with the arrangement we have whereby we are part of the Treasury but have day-to-day operational independence and it is seen by the market, and of course it is important, whatever institutional arrangements, to have that day-to-day independence.

  320. But, equally, the Treasury still has responsibility for determining the maturity dates and actual split between the various gilts.
  (Mr Williams) It has. We could come to our own views about what the government's portfolio of debt should be in terms of its structure. We would effectively then be making decisions about the balance between risk and return that we should be having on that portfolio. It is really then a question of whether that is a decision that should be taken by Ministers or by officials.
  (Dr Mills) Ultimately obviously debt service comes from taxpayers. Ministers have to approve the tax rates that will yield enough to service the debt. I would find it quite difficult for us to start making decisions independently of Treasury Ministers committing them to certain cash flows out to 30 years and then forcing them to set tax rates to meet them. I think you would get quite uneasy in Parliamentary accountability terms if that was the case.

  Chairman: Thank you very much indeed.