The Bank of England (BoE), supported by the PRA and FCA, is reshaping the UK’s liquidity landscape. The central bank is moving away from a system of abundant reserves towards a repo-led, demand-driven framework. This shift is designed to support monetary control, financial stability, and operational efficiency in a post-quantitative easing environment.
At the heart of this transition are the indexed long-term repo (ILTR) and short-term repo (STR) facilities. These tools are now central to how firms access liquidity. The ILTR, which offers six-month funding against a wide range of eligible collateral, has been recalibrated to reflect its expanded role. As of June 2025, the BoE increased the reserves available per ILTR auction from £25 billion to £35 billion, with a larger portion available at minimum spreads. A gentler upward-sloping supply curve has also been introduced to ensure spreads rise gradually, encouraging competitive but predictable participation.
The STR, introduced in 2022, continues to offer weekly seven-day funding against high-quality collateral such as UK gilts. Together, these facilities are designed to replace passive liquidity holdings with active, market-based liquidity management.
What this means for firms
The implications of this transition are significant. In a repo-led environment, funding costs are no longer fixed. They fluctuate based on collateral quality, market conditions, and auction outcomes. This introduces a new level of complexity (and opportunity) into liquidity planning that requires specific actions.
Incorporate strategically marginal repo costs into pricing models
Static assumptions about funding costs are no longer viable. Pricing models must reflect real-time ILTR spreads and collateral haircuts to ensure accurate cost projections and competitive pricing.
Recognise the impact of collateral quality on funding access
High-quality liquid assets (HQLA) such as Level A collateral will attract lower spreads, while lower-grade assets may result in higher costs or limited access. Firms must reassess their collateral pools and focus on optimising them accordingly.
Integrate auction outcomes into funding strategies
ILTR and STR results should inform short-term funding decisions. Treasury teams need the tools, real-time analytics, and expertise to interpret auction dynamics and spread forecasting, and adjust strategies in real time.
Develop operational readiness across systems and teams
Engaging with BoE facilities requires more than policy updates. It demands integrated systems, tested processes, and cross-functional coordination between treasury, risk, operations, and cross-departmental systems.
Risks of inaction
Firms that delay adapting to this new framework face growing risks. Liquidity shortfalls are a real possibility, especially during quarter-end volatility or periods of market stress. Without eligible collateral or operational access to the BoE’s facilities, firms may be forced to rely on more expensive market funding — or worse, face funding gaps.
The financial cost is only part of the picture. Regulatory expectations are rising, and the PRA has made it clear that firms must be operationally ready to engage with the BoE’s liquidity tools. Failure to do so could be viewed as weaknesses in governance frameworks and risk management, potentially attracting supervisory scrutiny.
Turning compliance into competitive advantage
By replacing idle cash with repo-eligible HQLA, firms can improve balance sheet efficiency and enhance their liquidity coverage ratios. Diversifying funding sources through regular ILTR and STR participation reduces reliance on volatile interbank markets and strengthens resilience.
Perhaps most importantly, early adopters will be better prepared for future stress events. Familiarity with BoE operations ensures faster, more confident access to central bank liquidity when it matters most.
BoE’s new SWES exercise focuses on liquidity stress
What firms should do now
Firms can no longer remain in observation mode; the focus must now turn to implementation. This includes:
- reviewing and updating liquidity policies to reflect the new repo-led framework
- testing operational readiness, including dry runs of ILTR participation and validation of collateral eligibility
- upgrading systems to support real-time collateral optimisation and auction participation
- training treasury and risk teams to interpret ILTR and STR dynamics and adjust funding strategies accordingly.
This isn't simply a one-off compliance exercise, it’s a strategic shift that requires sustained attention and investment. Institutions that embed repo operations into their liquidity strategy now will be better positioned to navigate future market conditions with agility and confidence.
The BoE has set a clear direction and as reserve balances continue to decline and repo operations become the norm, firms must evolve their liquidity management practices. Those that do will not only meet regulatory expectations but also gain a strategic edge in a more dynamic and competitive funding environment.
For tailored guidance on preparing your institution for the BoE’s evolving liquidity framework, including business and operational readiness as well as collateral strategy, contact Ramesh Parmar.
