PRIMARY GILTS DEALERS NEED NOT BUY AT AUCTIONS
Primary dealers in U.K. Government gilts
will not be required to underwrite the government's offering of
its securities when the first auctions begin in Mid-May, the
Bank of England said.
    In an official notice released today, the Bank said "There
will be no formal or informal underwriting arrangement for the
auctions but the Bank encourages all gilt-edged market makers,
as part of their commitment to the market, to participate
actively in the auction process."
    The Bank was originally believed to have favoured requiring
the dealers to underwrite auctions, which are patterned after
those in the U.S. Treasury market.
    However, the Treasury was believed to have baulked at the
request by the 27 market makers for an allotment commission
which would discourage the largest institutional investors from
placing orders for new stock directly through the Bank of
England, thus denying primary dealers some of their best
customers. Commission would have been passed along to customers
who did place orders via the primary dealers, making it less
expensive to buy through them than to go directly to the Bank.
    Market sources said the Bank had, in its discussions with
the dealers about the upcoming auctions, agreed that the
allotment commission was reasonable if the dealers had a
concurrent commitment to buy at the auction regardless of
market conditions.
    Indeed, the Bank and the gilts dealers are believed to be
disappointed that the Treasury has not agreed to go along with
the plan. However, in its paper, the Bank suggested that any
conditions applied for the first few auctions may be abandoned
or modified in future sales of gilts if they prove inefficient
or unwieldy.
    Among other items in the document, the Bank said its first
auction will consist of up to 1.25 billion stg in conventional
short-dated stock and have a maturity of seven years or less.
    Subsequent auctions to be held in the 1987-88 financial
year would first be of up to one billion stg of long-dated
stock having a maturity of 15 years or longer and then of up to
one billion stg of medium dated stock of seven to 15 years in
maturity.
    The remainder of the gilt-edged funding program would be
met by traditional tap offerings of stock via the government
broker.
    To protect the buyers of the newly auctioned stock, the
Bank has agreed to establish a so-called fallow period, a
28-day period during which it agrees not to issue any new stock
of the same type, and it will not necessarily resume selling
the stock once the fallow period expires.
    In the event that prices offered for the stock to be sold
are substantially out of line with market conditions, the Bank
will agree to take the stock onto its own books.
    The bank would then be free to sell the stock during the
fallow period but not at a price below the minimum tender
price.
    The Bank also said that at least initially, auctions will
be alloted on a bid price basis, a system under which bidders
are allotted stock at the price which they bid.
    However, the Bank said it reserves the right to limit any
money market maker from buying more than 25 pct of a single
auction. The Bank is widely believed to be concerned about
preventing a single market maker from cornering a stock to
drive the price up.
   The Bank has repeatedly signalled its intention to prevent
dealers from cornering the market in a stock, issuing
additional stock, on occasion, to end a market shortage.
    The Bank has also agreed to publish information about the
auction results as soon as possible after the sale is complete,
which is widely expected to be on the same day.
    Information to be released will include the amount of stock
allotted in terms of both competitive and non-competitive bids,
and the highest, lowest and average price of the successful
bids.
 REUTER
