Examination of Witnesses (Questions 20
- 35)
WEDNESDAY 21 OCTOBER 2009
MR ROBERT
STHEEMAN, MS
JO WHELAN
AND MR
JIM JUFFS
Q20 Mr Tyrie:
What discussions do you have with the Bank of England before you
make gilt disposals, before you go out and sell gilts?
Mr Stheeman: Virtually none. I
mean, we clearly talk to the Bank of England on an operational
level, but there is no discussion between us and the Bank in terms
of what we would choose as a debt management strategy, in the
same way as the Bank would not seek to garner our views in terms
of, for instance, the way it carries out QE.
Q21 Mr Tyrie:
But they are the biggest investor of the lot. You have just given
the figures. You have regular meetings, do you not, with investor
groups at the moment to decide what maturities to issue, to find
out where the liquidity is in the market, and yet you are not
talking to the biggest buyer of the lot?
Mr Stheeman: I think if we were
to talk to the Bank about, if you like, the programme or even,
dare I say it, as we do with other investors, ask the Bank the
question, "What would you like us to issue?" If that
was to happen—and I can assure you it certainly does not
happen—I think the market would rapidly lose confidence
in, if you like, the conduct of both debt management policy and
possibly even monetary policy.
Q22 Mr Tyrie:
And they are not even sitting in on these investor group meetings?
Mr Stheeman: We have occasionally
invited them in the past. Recently they have not joined these
meetings but in the past more as an observer so they are aware
of what the investor conditions and views are, absolutely. As
I say, we talk to them on an operational level, but in terms of
trying to separate debt management policy and monetary policy,
both we and the Bank are very keen to try and maintain that separation.
Q23 Mr Tyrie:
You have described this extremely benign environment in which
the Government is taking the lion's share of what you are trying
to get out into the market. Not only is that going to stop, it
is going to go into reverse, is it not? The Government is going
to have to shift this stuff? So the pressure in the gilt market
is going to become very severe indeed at some future date. Yields
are going to rise, are they not, quite a lot?
Mr Stheeman: I fully accept that
and I would be the first to acknowledge that I would accept that
whenever the Bank decides both to stop QE and potentially even
to reverse it, we will find ourselves in a very different environment.
But it goes back to my point, and I completely agree with you,
I think yields will rise. I do not know by how much, but they
will rise. But at the same time, in fairness, that is ultimately
where the market and this efficient market mechanism that I was
referring to kicks in. If the market does its job well and efficiently,
then the price of the gilt that we are selling should be able
to adjust itself relatively smoothly, but that is absolutely key.
We are under no illusions about the challenge ahead!
Q24 John Thurso:
I wanted to ask about the Public Works Loan Board. Who would be
the best person to answer questions there?
Mr Stheeman: Any of us.
Q25 John Thurso:
Well, let me ask the question. The amount lent by the Public Works
Loan Board this last year is reported as being about 6 billion,
down from 10 billion the previous year. How much of that is through
early redemption interest rates causing a drop in lending?
Ms Whelan: We cannot really ascertain
exactly an amount that is related to a particular cause, but it
is worth noting that in that period interest rates changed quite
a bit and that probably led to some local authorities revisiting
their Treasury management strategies. We saw, for example, some
repayments of the long dated borrowing. There were, repayments
across the maturity sectors but mainly in the shorter dated and
in the longer dated, and at the same time I understand there was
a fall-off in the amount that local authorities had invested.
So potentially there were some alterations on both the asset and
liability sides of their balance sheets. When we process the loans
we are not mandated to ask exactly why they are doing it.
Q26 John Thurso:
The point behind this—I am sure you are aware of it—was
the Communities and Local Government Committee Report, which cited
the November 2007 chance in the rates, which meant that actually
it was too punitive for local authorities to repay, so they hung
onto the loans and then invested the surplus cash. Therefore,
when they all got stuck by being in banks in other countries,
there was more at risk because they had not repaid loans which
they might otherwise do and they called for some pretty urgent
review of that. Is that for you to push through?
Ms Whelan: It is partly for us
and we have actually got a consultation letter out currently which
is being put forward by the Debt Management Office and the PWLB
together acting rather on behalf of the Treasury. The whole thing
is governed really by a piece of statute about the National Loans
Fund, which says that the National Loans Fund must not lend at
a loss and in the statute it sets out a certain methodology that
can be used that will accord with that statute provision. That
allows us, or requires us really, to compute the notional government
borrowing rate at the time we make advances. So the methodology
that has been in place for a while now is consistent with that.
What we are currently consulting on is whether it would be acceptable
to stakeholders to slightly change the operational process for
that, which we would hope might allow the costs to be slightly
lower in future, but we do need to see what the results of the
consultation are as to whether people will find it operationally
straightforward to do it according to the way we have suggested
it might be done.
Q27 Mr Brady:
How worried are you that there might be uncovered auctions in
the future?
Mr Stheeman: I would have to logically
expect that at one point there will be an uncovered auction. I
don't know when that will be. I think I probably said exactly
the same thing a year ago, so I apologise, but it is in the nature
of the market that from time to time you will have an uncovered
auction. My concern, as I said, I think then, is always around
the notion that potentially there is something structurally wrong
in the remit which would suggest potentially that we are facing
not just one uncovered auction but maybe several. Were that to
happen, then I will be slightly more concerned, but having said
all of that, I do tend occasionally just to point out the auction
process, what it is, what it tells you about demand at a certain
time, and it really only tells you about demand at the moment
you hold the auction, at 10.30 on any given day. I always think
it is worth recalling that, for instance, last year, for whatever
reason, I think Germany experienced something like ten or so what
has been referred to as "technically" uncovered auctions,
yet no one suggested fundamentally that there was a problem there
with selling Bunds or that there was anything other than a view
that German Government Bonds represented the best possible asset
in their market. So I am not that concerned, but I would be concerned
if it was a sign that the distribution mechanism is not functioning
efficiently. I always come back to that point, I know, but that
is absolutely key from our perspective.
Q28 Mr Brady:
When you had the uncovered auction last year you just do not feel
that that was the case, that there was structural bargaining?
Mr Stheeman: I think one of the
main reasons for the uncovered auction in March was the volatility
that we were experiencing in the market at that time and volatility
indeed is something which the market does not like because it
impact especially on the risk appetite of our primary dealers,
of the Germans, the gilt edge market-makers, and if their risk
appetite is diminished, that indeed is something which we are
not so happy about, but that is one of the reasons why we have
introduced also these supplementary issuance licences this year.
Q29 Mr Brady:
Are you planning future syndicated auctions, and if so can you
say a word about what the cost of that is as opposed to the cost
un-syndicated?
Mr Stheeman: So far we have had
the planning assumption this year for this current financial year
that we will be doing a total of 25 billion in syndicated auctions.
We have completed three so far and the fourth is actually occurring
today. We have syndicated a new 50 year conventional gilt seven
billion in size, so we have done a very large part of the 25 billion
programme in total. The costs have been to date, I think, just
over £36 million, which have been paid in fees, including
today's syndicated auction that is just over another 15 million,
so it is just a bit above 50 million in total this year, so far.
Q30 Mr Brady:
How does that compare with the cost of unsyndicated?
Mr Stheeman: The costs of mainly
auctions? That is a very, very good question. We do not know.
We have to guard against the notion that auctions are a cost-free
way of issuing debt. They are not. We can easily end up paying
sometimes quite large concessions through the auction programme.
The big difference between auctions and syndications is that the
cost that we are paying for syndications is explicit. We are actually
paying them out in hard fees. I am sorely tempted to say that
syndication from time to time is potentially a more cost-effective
way of issuing large amounts in one go and thereby reducing the
number of auctions that we have to hold and thereby reducing arguably
the risk premium, whatever that is, that the primary dealers might
be charging us in that process.
Q31 Mr Brady:
When is it appropriate to hold a mini-tender and how many of them
have there been this year?
Mr Stheeman: I think we aim to
hold about one once a month. Effectively mini-tenders are nothing
more than small auctions. They are mini-auctions. They tend to
be in general roughly half the size of an auction. We introduced
them for the first time a year ago when the remit was suddenly
increased, primarily as a way also, as with syndication, of focusing
on long-dated conventional and index-linked issuing because demand
sometimes is not always as big as a full auction size that we
are trying to get away. The demand can actually be slightly smaller
but it does not mean that it is not there and it does not mean
that we are not keen to tap into it. So very often a lot of the
stresses in the market if a particular bond might be regarded
by the market as in very short supply we are able to address that
demand by the mini-tender process.
Q32 Mr Brady:
Have top-up auctions been successful in 08-09 and 09-10?
Ms Whelan: I think so, very much
so, and what we have tried to do there effectively is introduce
a mechanism to incentivise bidders at auction by allowing them
the option to take up to 10% of their allocation at the clearing
price on the same day but a few hours later, at two o'clock. As
you would expect, the success can generally be measured, in terms
of whether they take it up, as to whether the price is either
above or below where it was at the time of the auction. If it
is below, obviously the take-up will be very low, but we also
think that the primary measure of success is actually just to
incentivise bidding. We need to have, if you like, eager bidders
at the auction and the top-up facility is one way of trying to
achieve that.
Q33 Mr Love:
I want to come back to the question you were asked by Mr Tyrie
in relation to quantitative easing. While I take on board the
point you made for you to act in concert in some way alongside
the Bank of England would be seen very negatively by the marketplace,
but it is important that you have a well-functioning market and
therefore I wonder if any consideration has been given by the
Debt Management Office to whether there needs to be some arrangements
made for when the quantitative process reverses?
Mr Stheeman: That is an entirely
legitimate process and you are probably very much aware that the
Governor of the Bank has said on numerous occasions that when
it comes to any disposal of their gilt holdings that they will
be actually coordinating and talking to us in that process, and
you would expect that on an operational level we will certainly
be doing that. I completely agree with the premise of your question.
Neither we, nor the Bank, nor the Treasury, or anyone in the authorities
has any interest at all in seeing, if you like, a disorderly market
or anything which is going to upset the market and the Bank has
made that very clear. So we will be talking to them in detail
about that.
Q34 Mr Love:
I was just going to say that. You indicated earlier on that you
have not had any discussions at all with the Bank, as I understood
the response you gave. Surely now is the time to be at least exploring
what will happen when this process reverses itself?
Mr Stheeman: As I say, on an operational
level we will certainly be doing that, but what I am talking about
now, if you like, is the operational side and I think the Bank
would not be very keen to send a signal, or for us to send a signal
that we are, if you like, contemplating a change in direction
as far as the Bank is concerned in terms of what they are doing.
But when the time comes, I am sure that we will be talking to
them in quite a bit of detail. If I could just make one point
there. As an example of the cooperation which we have with the
Bank, what I describe as operational cooperation, you may be aware
that the Bank lends out part of its gilt portfolio that they have
purchased through us into the market in order to help facilitate
the repo market, and that has been something which the market
has welcomed very much indeed. So I thin it just underlines how
conscious the Bank is of avoiding disruption to the market.
Q35 Chairman:
When you came last year we expressed some concern about the capacity
of your office to handle this increased workload. I see from your
Annual Report that your staff numbers have not in fact gone up.
Have you got enough people?
Mr Stheeman: I think we do for
the moment. We are a lean organisation and I am quite happy actually
that we stay that way. Just so that you know, the Annual Report
obviously goes until the end of March. At that time we had the
resources and obviously I think we had approximately 90 staff
members. That is probably now close to about 110, 115, to be precise
about 113, so it actually has gone up and, as you will expect,
always when you start adding resources there is always a lag in
terms of actually getting the right people in place in time. But
we have had discussions with the Treasury about the resources.
We have received the resources that we have requested and we requested
more resources, also financial resources, and we have received
those.
Chairman: Good. All right. As you know,
we are on a tight timetable today so we are going to leave it
there. If we have further questions we will follow them up in
writing, but I would like to thank you and your colleagues for
appearing today.
| 
