The Bank of England (BofE) has announced that applications are now open for the Contingent Non-Bank Financial Institution (NBFI) Repo Facility (CNRF), which will lend to pension schemes in times of severe gilt market dysfunction to help maintain financial stability.

The BofE previously outlined the initial design for the CNRF in July 2024, as part of its work to expand the tools available when severe dysfunction threatens UK financial stability.

The new facility, which will only be activated during episodes of severe gilt market dysfunction, will lend to participating insurance companies, pension schemes and liability driven investment funds to help maintain financial stability.

In particular, CNRF eligibility is targeted at insurance companies, defined benefit (DB) pension schemes and liability driven investment funds as these are major holders of gilts and may be exposed to material risk of gilt sales during shocks.

The collateralised lending facility will give cash in return for gilts, and pricing will be determined at the point of activation.

The BofE confirmed that there will be an annual fee set at £8,000 for the facility, which is intended to recover the ongoing running costs.

It also confirmed that, to maximise effectiveness, firms need to hold more than £2bn gilts alongside meeting other eligibility criteria.

BofE executive director for markets, Vicky Saporta, highlighted the launch of the new facility as a "significant step forward" in the BofE's efforts to deal with future episodes of gilt market dysfunction.

"Having the ability to lend to eligible non-bank financial institutions in times of severe market stress means we are better equipped to protect financial stability for the benefit of households and businesses throughout the UK," she continued.

"To ensure its effective design and implementation, the bank had welcomed views from firms and industry bodies on the first-of-its-kind facility for the UK."

Pensions Lifetime Savings Association (PLSA) director of policy and advocacy, Zoe Alexander, added: "The PLSA strongly welcomes this facility and has been consulted by the Bank during its development.

"It will provide greater reassurance to defined benefit pension schemes, and their members, that they will be able to obtain liquidity during periods of market dysfunction”

Association of British Insurers (ABI) interim director of regulation, David Otudeko, also welcomed the tool, stating that it will be a "helpful emergency liquidity tool to be used during periods of severe market dysfunction only, that could temporarily increase demand for liquidity".

Brightwell CIO, Wyn Francis, also suggested that the BofE could look to broaden the scope of the tool in future.

“In times of market stress, having the right tools in place that are easily accessible and can be activated at short notice is imperative for the industry," he continued.

“The introduction of this innovative facility by the BofE will be a helpful addition for pension schemes and other non-bank financial institutions that play an increasingly important role in the financial system.

“Looking ahead, the BofE could consider broadening the scope of the tool to other core markets, including UK credit.”

---