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Mechanisms for Financial Markets

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New essays on are announced on twitter. It is expected that tweets will be infrequent.

Contents: • Government Debt (also see Research at Work); • Money Markets and the Implementation of Monetary Policy; • The Euro, and Foreign Exchange; • Financial Stability; • Also.

Government Debt

Research at Work

At Société Générale the author wrote about government debt. Some of these essays might be of interest to readers of these pages (of course there were also trade recommendations of less durable consequence).

• The forthcoming fifty-year gilt, the 4Q55, 9th July 2012
Once upon a time, a half-century gilt was new and scary — a review of what was said in ’04 and ’05.

• Super-longs: an early response, 8th June 2012
A reply to the DMO’s Super-long and Perpetual Gilts: A Consultation Document of 25th May 2012.

• The 100Y gilt: The Chancellor agrees, 14th March 2012
A super-long gilt, which should be semi-strippable, would be good, but a perpetual would not. Also see near-contemporary comment in the FT: Mr Osborne’s plan for a super-long bond; A century of gilt; and No forever debt please, we’re British.

• The Magpie Yield Curve Model at SG, 1st March 2012
A yield-curve model so stable that it computes analytic partial derivatives of the parameters (i.e., of the location of the error minimum) with respect to the input prices.

(Added August 2015: available for sale is an implementation of the Magpie model, made to a very high standard of Excel craftsmanship. It is intended to be used of itself, and also to be used as the prototype and calculation-checker for a re-implementation in a high-speed language. If interested, contact the author.)

• The end of the war, 3rd January 2012
War Loan might be called in late February 2012 [it wasn’t, but was in December 2014] for both economic and political reasons. The effect on the 15+ indices could be slightly messy.

• Please, only one more long, 21st December 2011
There is an upper limit to how many different long bonds there should be, and there are twice as many long gilts as this. If the UK DMO is to issue a new long, it should be ≥2070, and ideally a new 100-year: “if in the next decade there is to be another long conventional gilt, we hope that the authorities choose a maturity of Monday 7th December 2111.”

UK £ default is not only unlikely, it is de facto impossible
The power to print the numéraire in which the debt is denominated really matters.

Conventional gilts, ≥1946
An imperfect list of static information of conventional gilts maturing since WW2.

Gilts: linkers and perpetuals and floaters
An imperfect list of static information of linkers and perpetuals and floaters, including variable-rate stocks.

Moody’s downgrade of the Bank of England is a nonsense
The BoE can issue £, almost costlessly. Indeed, the debt, the having a balance at the BoE, is payment—the BoE can’t default.

Gilts: no more temporary WI security
As was recommended on some 8⅓ years before, and in a letter 17.6 years before the announcement.

Conventional gilt auctions: errors in the results; and an information leakage
Gilt auction results contain arithmetic errors about bid quantities; and also leak—seemingly unintentionally—information about the distribution of bids.

CPI-linked Gilts: Not Yet
Reply to DMO consultation document sent in a personal capacity, but it also doing duty as the reply of Société Générale. National Statistics are in the process of building CPIH, a variant of CPI that includes housing costs. It might be that the Department for Work and Pensions will adopt this as the statutory inflation measure for pensions. It might be that this will become the variable targeted by the MPC. If these were to happen, the (premature) issuance of CPI-linked gilts would be regretted. Hence the DMO should wait.

22nd January 2060: two errors, one traditional, one new
The UK DMO has announced the sale of a new gilt maturing 22nd January 2060. There are two errors in this choice of maturity date: one traditional, one new.

An Open Letter to the Commercial Secretary to the Treasury: Trouble Coming, Easily Avoided, and HMT’s reply to that letter, with the author’s response to that reply
How to avoid an accident in the gilt market that could contribute to a rating downgrade.

On the Punishment of Lonely Bidders
The uncovered gilt auction on 25th March 2009 emphasises the importance of the DMO using an auction mechanism that does not punish lonely bidders.

Auctionettes: slightly better handling of tied bids
Publishing the scaledown could be a slight leak of information about the distribution of bids at an auctionette. This information should be hidden.

Methods for Distributing Gilts: A Reply, and also a presentation of the reply given at the DMO on Friday 6th February 2009
The UK DMO asked whether there are other methods, or improved methods, by which gilts could be distributed. This reply argues for improving the auction mechanism, and for selling short-dated calls on long-dated gilts.

Bund Auctions: A better mechanism, and Auktionen von Bundesanleihen: Ein besserer Mechanismus
Several of the Deutsche Finanzagentur’s auctions have been uncovered. A better auction mechanism would cure the problem, as described in the letter to the Deutsche Finanzagentur, and, in German, in the letter to members of the German Bundestag’s Budget Committee.

Gilt Asset Swaps: DMO Should Profit, Who pays wins: a reply to Mark Capleton, and Gilt Asset Swaps: Stheeman’s Reply
Rather than selling long gilts at swaps+40bp, the UK Debt Management Office should sell short-dated gilts, and pay fixed on the forward-starting swap. The Royal Bank of Scotland then published its own recommendation, slightly different, to which the second essay replies; Robert Stheeman, Chief Executive of the DMO, then commented, to which the third essay replies.

US Treasury Bonds: fewer and larger
A letter sent to the US Senate Committee On Finance in August 2007.

A Better Auction Mechanism, And Why Governments Should Sell Futures Rather Than Debt
The mechanism by which governments sell debt at auction imposes unnecessary risks on primary dealers, who charge for these risks by bidding less. A better mechanism would break an auction into a series of auctionettes, thus increasing the authorities’ revenue. Further, selling a specially designed futures contract would reduce dealers’ balance sheet usage, again increasing revenue, and would also permit the authorities to match cash inflows with cash outflows.

Bonds: too many; too small
Governments should improve the liquidity of existing securities by re-opening them, rather than create new securities.

Letter to the FT: Three ways the US Treasury could repair the bonds market
Following press reports of the US authorities’ attempts to deter mischief in the US Treasury repo market, a letter summarising what the Treasury ought to do was sent to and published by the Financial Times.

Some elementary thoughts on the maturity at which a government should borrow
Soverign governments should issue long-dated debt, as doing so stabilises the macro economy, provides information to the issuer about demand for assets, and provides benchmarks for private-sector issuers. The situation is more complicated for EMU-zone governments.

Reply to UK DMO’s consultation about a new design of index-linked gilt
A reply to the consultation paper, published by the UK’s Debt Management Office on Friday 7th September 2001, that asked “whether to adopt a new design for new issues of index-linked gilts”.

Reply to UK DMO’s consultation about an ultra-long gilt
In December 2004 the UK Debt Management Office asked whether it should issue a new ultra-long gilt, perhaps of 50 years maturity, and perhaps amortising. This reply argues that it should issue very long-dated, but not amortisers.

Official Intervention In The ‘Specials’: the original suggestion; response to the DMO’s consultative document; and commentary on the DMO’s decision
Individual government debt securities are sometimes subject to a ‘squeeze’, in which the security becomes very expensive to borrow. This can be caused by one or some market participants gaining control of most of one security, allowing these participants to extract a ‘monopoly rent’ from others. In August 1996 this author suggested a non-discretionary repo-switch mechanism that would enhance the efficiency of government debt markets by deterring would-be squeezers. In September 1999 the UK’s Debt Management Office consulted about a similar mechanism, announcing the results of that consultation in February 2000.

The Dutch Sequential Auction
In February 1999 the Dutch State Treasury Agency consulted Primary Dealers about an auction mechanism, the Dutch Sequential Auction, which seems to have been inspired by the ‘auctionette’ mechanism. The following summarises that suggested mechanism, and the objections to it raised in a letter sent by the author on 25th February 1999.

Switch Auctionettes
The UK Debt Management Office is planning switch auctions, in some form, to convert old illiquid non-benchmarks into larger more liquid benchmarks. These switch auctions would be more efficient (allowing a larger proportion of the source stock to be switched at more favourable terms) if the switch auctions were to be broken into a number of switch auctionettes, as described herein.

The 30-year Mbono: recommendations
Reply to the Mexican Ministry of Finance and Public Credit’s questionnaire about a new 30-year Mbono.

The statement issued by Her Majesty’s Treasury on 29 May 1985
Gilts prospectuses refer to “the statement issued by Her Majesty’s Treasury on 29 May 1985”, not otherwise available online, and hence reproduced on

The Exponential Yield Curve Model, Wiseman, 1994, is obsolete—don’t use it
The exponential yield curve model (1994) is obsolete. Instead please use and refer to The Magpie Yield Curve Model, 1998.

Money Markets and the Implementation of Monetary Policy

Physically Delivered Lɪʙᴏʀ: the road not taken
A better solution to the Lɪʙᴏʀ problem, but alas I couldn’t persuade regulators to show thir interest.

Libor, buttered side down
The US authorities want Libor to be fixed using alternative rates “anchored in observable transactions”. But, despite the authorities’ current interest in a transactions-derived Libor, it wouldn’t fix the problems, and might make them worse.

Libor: the authorities can be radical
Libor is whatever the British Bankers’ Association says it is. That allows very radical reform of Libor, without damaging existing contracts.

The Old Lady’s defence: Stigma at +25bp; Many prices for collateral; and The strange case of the zero
Comment on the BoE’s recent description of its implementation of monetary policy, which introduced new stigma, and her failure to rebut a safer alternative.

Unwinding £ Quantitative Easing: the BoE Should Sell Calls
Some possible means of unwinding quantitative easing could worsen market disruption. Selling gilts by selling short-dated call options would avoid this, and is easily done.

The BoE Should Announce The Votes With The Decision
The BoE’s MPC should announce, with the monetary policy decision, the votes of the committee members.

The Old Lady’s Untruthful Accounts: Another Fine Mess
The BoE ‘adjusted’ its 2009 accounts to hide the loans to HBOS and RBS.

On Quantitative Easing
Quantitative easing, or unconventional monetary policy, has multiple objectives, several of which could be done better, or could be done by the finance ministry.

The Bank of England: a step closer towards its own monetary policy, and Short-term ‘draining’ operations and the nature of reserves
The Bank’s decision to remunerate reserves heralds a deep change in the Bank’s understanding of the nature and purpose of the implementation of monetary policy.

The Implementation of Monetary Policy: The Next Attempt
Letter to Paul Tucker, in response to a Bank of England consultation, explaining that the model underpinning central banks’ implementation of monetary policy is broken.

Letter to the FT: Libor is both high and low (“Some confusion over Libor levels”)
Not everything is the fault of the British Bankers’ Association.

Letter to the FT: Libor suggestion doubly mistaken
Replacing BBA Libor rules with those of Euribor wouldn’t fix the problems with the fixings.

The possible stigmatisation of UK Treasury Bills
A comment on the BoE’s Special Liquidity Scheme.

Implementing Monetary Policy
Paper presented at LSE FMG conference on 30 January 2008.

Article in Central Banking: The pretend market for money
Why do central banks implement monetary policy in such a needlessly complicated manner?

The BoE’s implementation of monetary policy: dangerous false signals and confused collateral
Addendum to earlier article in Central Banking.

The Euro, and Foreign Exchange

A Defaulting Eurozone Country Can Print Euros
The legal structure of TARGET2 allows a defaulting country to help itself to counterfeited euros.

Blue and Red and Incredible
Still no explanation of how, starting from here, a “Common European Bond” can work.

A “Common European Bond”
A “Common European Bond” is: dysfunctional dog’s breakfast, the mess being temporarily hidden only by an absence of detail; and an Important Big Idea, rather like the euro itself.

Letter to the FT: EMU really is a locked door
Letter published 29th March 2010, explaining how expensive it would be for Greece to leave EMU.

A Market-Based Exchange Rate Mechanism
Governments should reduce volatility in the foreign-exchange markets by committing themselves to frequent and regular auctions of short-dated physically-delivered FX options. Sale of an appropriately designed exotic option would further smooth the stabilisation.

Round EMU Conversion Rates
The currencies of the first wave of EMU entrants entered EMU at inconveniently non-round conversion rates. This need not be the case for subsequent entrants, who should prefer conversion rates which are round, and which have round inverses.

The end of EMU: legal ramifications, and Romano Prodi’s amazing interview with The Spectator
EMU isn’t necessarily permanent, but the demise of the former national currencies (Deutschmarks, Dutch guilders, French francs, etc) is permanent. However, if a country that left EMU wanted to make difficulties for those that remained, it could do so.

The end of EMU: How Germany Might Leave
A loophole in the Maastricht Treaty allows a eurozone country to create a new central bank that controls the monetary policy of a new currency, all without being in breach of the Maastricht Treaty.

The end of EMU: How the Germans could leave
If the people of a eurozone country want a new currency, and the government doesn’t provide, then the private sector can, and doing so would be highly profitable.

Financial Stability

CoCo Credibility: add some randomness
Mandatorily converting a randomly-chosen 4% of CoCos each year would compel investors to believe that conversion can happen, and give them experience of it happening.

EU5: outstanding debt, current instruments
The November 2010 statement of the EU5 in Korea suggests that the grave problems caused by fungibility have not been considered.

Pre-cooked wind-down plans: every unhappy bank might be unpredictably unhappy in its own way
Pre-cooked wind-down plans have merits, but may well not survive contact with actual insolvency.

Paul Tucker’s Difficult Questions
Excellent questions, most of which are fiercely difficult. Surely the BoE could fund some academic research?

Financial Stability Reviews
A reverse-date-ordered list of central-bank published financial stability reviews, complete(ish) up to end-2005. Please would a central bank take on the job of maintaining this list?


The BoE and secrecy: two terrible decisions, and one excellent
The BoE is proposing to publish the minutes with the announcement, imposing an impossibly high secret-keeping burden, and giving itself difficulties with late-breaking news. The BoE wants to publish the transcripts of debates: please answer Hansen, McMahon, and Prat. But publishing more of its history is an excellent plan: please, more and more and more and not less.

Scotland, independence, the pound, and the debt
Any likely monetary arrangement for an independent Scotland will be costly. The yes campaign should be honest about those costs.

Pay: Efficiency Is Also Important
On bankers, academics, and Vintage Port.

On The Plotting of Yields
When plotting yields, the best x axis to use is ‘true’ tenure, being Macaulay-Weil convexity divided by Macaulay-Weil duration.

Rotting of links: DMO versus BoE
In December 2017 both the UK DMO and the BoE rotted most incoming links. The BoE did it worse. Both could and should have websites that are more robust, with links that are effectively permanent.

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