Last Friday, I wrote to the UK Debt Management Office, the authority responsible for borrowing money on behalf of the UK government, asking for details of how the money was raised, and specifically where the money comes from.
I was very pleased to get a detailed reply from the DMO's press officer on Monday morning. Full marks for a prompt reply. Here's what I learned in response to my four main questions.
From the Eurostat database, I understand that between the end of 2009 and the end of 2014, UK public sector debt increased from roughly £ 975 billion to over £1600 billion
Question 1 : Can you confirm that the £625 billion of government borrowing over the last 5 years was all handled by the UK’s Debt Management Office?
1. The primary source of data on government borrowing and the public finances is published by the Office for National Statistics (ONS) in the monthly “Public Sector Finances” A link to the most recent edition is below. Annex PSA4 provides a time-series of UK public sector net debt (£1,500.2 billion in May 2015).
2. The UK DMO is an Executive Agency of HM Treasury responsible for government debt and cash management. It borrows from the financial markets via of sales of marketable sterling securities primarily gilts, (UK Government bonds with maturities out to beyond 50-years) and Treasury bills (short term money market instruments with initial maturities of one-, three and six months). Other parts of government, in particular National Savings and Investments (NS&I), borrow via sales of non-marketable securities, primarily from the public
3. The table below shows gross gilt sales in cash terms by the DMO for the previous five financial years and those currently planned for 2015-16
4. The table below shows end financial year stocks and the net contribution to financing from sales of Treasury bills for the previous five financial years and those currently planned for 2015-16
On your website you give a list of 28 primary participants that are involved in purchasing UK government gilts and bonds.
Question 2 : Can you confirm that these 28 players are the only ones that currently are involved in purchasing treasury bonds?
5. The 28 financial institutions you list are Treasury bill primary partcipants - financial institutions that have agreed, subject to their own due diligence, to bid at Treasury bill tenders on behalf of investors. These firms also provide secondary market dealing levels for Treasury bills. These are the only institutions who can currently bid directly at the DMO’s weekly Treasury bill tenders.
6. A separate page on our website, lists those 21 financial institutions (18 wholesale and 3 retail) who are recognised by the DMO as Gilt-edged Market Makers (GEMMs). These are the only institutions who can currently bid directly at the DMO’s gilt auctions. The DMO also sells gilts via syndication. Only wholesale GEMMs can apply to become Lead Managers on gilt syndications. We appoint four Lead Managers on each transaction and bids from investors and the other wholesale GEMMs (who act as Co-lead Managers on such transactions) must be submitted via the Lead Managers.
7. In both of the above cases, once a primary participant or a GEMM has bought securities from the DMO they can sell them to third parties of their choice in the secondary markets. We do not have access to information on such transactions.
I have not been able to find any information on your site concerning which of the 28 primary dealers are the most active. In France, the Agence France Tresor (effectively the equivalent of the DMO) doesn’t provide full details, but they do give a ranked list of the most active players at the end of each year. For example, this is list for AFT primary dealers in 2014
- 1 BNP Paribas
- 2 Société Générale
- 3 Crédit Agricole
- 4 Barclays
- 5 HSBC
- 6 Natixis
- 7 Nomura
- 8 Morgan Stanley
- 9 Royal Bank of Scotland
- 10 Crédit Suisse
8. The DMO does not publish information on the individual performance of GEMMs.
My understanding is that although the 28 primary dealers working with the DMO are the ones that buy the bonds, they will typically sell the bonds on to other actors, including pension funds and insurance companies. Again, the AFT doesn’t provide very detailed information about who is currently holding French Government debt. However, they do provide a breakdown here that shows
- 64.3% are held by "Non-resident investors"
- 19.7% by French Insurance Companies
- 9.8% by French Credit Institutions
- 1.8% by French UCITS 'Undertakings for Collective Investments"
- 4.4% by "Other” French
Question 4: Can the DMO provide equivalent information about the holders of UK government debt?
9. Data on the sectoral breakdown of gilt holdings is collected and published (with a three month lag) by the ONS. We publish their data on our website. Please see the link below
I have a number of comments on these replies.
First, it looks like the short term treasury bills can be safely ignored, because they provide very little net funding. It's clearly the bonds (i.e. Gilts in the UK) that are the real way for borrowing money.
Second, I now have a complete list of the 18 GEMMs that are the only agencies permitted to purchase UK goverments gilts. Note that they are all Commercial Banks
- Barclays Bank plc
- BNP Paribas (London Branch)
- Citigroup Global Markets Limited
- Credit Suisse Securities
- Deutsche Bank AG (London Branch)
- Goldman Sachs International Bank
- HSBC Bank PLC
- JP Morgan Securities PLC
- Lloyds Bank plc
- Merrill Lynch International
- Morgan Stanley & Co. International plc
- Nomura International plc
- Royal Bank of Canada Europe Limited
- Royal Bank of Scotland
- Santander Global Banking & Markets UK
- Scotiabank Europe plc
- Societe Generale Corporate & Investment Banking
- UBS Limited
Third, it looks as if there is no way to find out which of these Banks actually provided the £625 billion because "The DMO does not publish information on the individual performance of GEMMs."
Fourth, the European Primary Dealers Handbook provides some further details about how the gilt sales take place. Specifically it states that in the case of the UK DMO "the maximum permitted allocation for any single bidding institution is currently set at 25% of the nominal amount on offer". This presumably means that it would theoretically be possible for just 4 banks to buy up the total amount on offer at a particular auction.
Finally, I wonder whether the UK DMO can distinguish between purchases made directly on behalf of a third party (such as pension funds and insurance companies), and purchases made by a Bank that are only transferred at a later date? I think that this distinction is very important because when a Bank that has GEMM status buys gilts using money provided by a third party such as a pension fund or insurance company, there is no question of money creation. In contrast, if a Bank that has GEMM status purchases gilts for its own use, it could potentially involve money creation, because (as the Bank of England reported last year) Banks effectively create money when they make loans. It is therefore conceivable that gilt purchases by GEMMs could involve an effective expansion of the money supply by commercial banks.
I also suspect this entire system would be easy to rig by the 18 banks. The European Primary Dealers Handbook says "GEMMs are the only institutions eligible to submit a competitive bid directly to the DMO. This means that all other market participants wishing to bid at a gilt auction must route their order through a GEMM which, while not permitted to charge for this service, may use the information content of that bid to its own benefit".
I may be naive, but this suggests that the 18 banks could inform each other of all the prices being proposed, and decide to make bids themselves that are just better. That way they can potentially pick up the entire stock themselves. But of course, since the UK DMO provides no information about who actually buys the gilts, such rigging would be invisible.
I've asked the nice man at the UK DMO some additional questions concerning these issues, and will let my readers know what he replies. Stay tuned......