Source · Select Committees · Public Accounts Committee
Recommendation 3
3
Acknowledged
Outline steps to address information gaps for identifying unlawful activity in gilt sales.
Conclusion
The Treasury and the DMO lack the information needed to better identify unlawful activity and understand the risks posed by overseas investors, potentially reducing the value for money from future gilt sales. In May 2023, the Competition and Markets Authority (CMA) provisionally found that, between 2009 and 2013, five major banks unlawfully shared competitively sensitive information, potentially impacting the DMO’s gilt auctions. Collusion is illegal and while it is not the DMO’s responsibility to police the behaviours of auction participants, it needs to put measures in place so it can monitor and minimise harmful behaviour, including the collection of information that could help unearth unlawful activity in a timely manner. The current measures, such as blind bids, might not be sufficient given the alleged unlawful activity took place nearly 15 years ago and was not identified at the time, with the DMO apparently unaware some of its auctions may have been manipulated. Similarly, the Treasury and the DMO hold limited information on the ultimate owners of UK debt held by overseas investors, which makes up around 25% of UK debt – the second highest in the G7. There is a lack of consensus on the potential risk this creates. For example, the Office for Budget Responsibility (OBR) see overseas holders of UK gilts as more sensitive to market movements compared to domestic investors as they prioritise higher returns over longer-term investments. Meanwhile, the DMO considers foreign investors to be an important part of its diverse investor base. Recommendation 3A: The Treasury, together with the DMO, should write to us, within two months of the conclusion of the CMA’s investigation, outlining what steps they will take to address the information gaps around identifying potentially unlawful activity, including: • The changes the Treasury will make to its gilt selling process in response to the CMA’s investigation; • Undertaking a formal review of the DMO’s gilt selling proce
Government Response Summary
The government agreed but stated it currently lacks visibility of underlying gilt owners. It committed to reviewing sovereign bond ownership data from other countries to learn from their approaches, rather than detailing immediate steps to address information gaps or change gilt selling processes.
Government Response
Acknowledged
HM Government
Acknowledged
The government agrees with the Committee’s recommendation. Recommendation implemented Overseas investors play an important role in maintaining the diversity of the gilt investor base, ensuring that underlying demand for UK debt remains strong, changes in gilt supply can be met smoothly, and borrowing costs can be minimised in line with the debt management objective. A diverse investor base ensures that government is not overly reliant on any one type of investor. Overseas investors include a range of different types of investors, who each have different incentives to buy and trade gilts. This includes foreign central banks, where the role of sterling as a reserve currency has increased. It also includes funds which may originate from the UK but are domiciled abroad. It is therefore not the case that appetite for gilts from all overseas investors will be perfectly correlated or that they are all inherently riskier than domestic investors. The gilt market is a large and liquid market with an independent rate setting body. There is no reason to believe that global investors’ strategic allocation will change while the underlying instruments continue to represent diversification and meet liquidity requirements. While UK gilts are registered instruments, they are mostly held in nominee accounts, with intermediaries passing on any gilt principal or coupon payments to the underlying beneficial holder who may be domiciled elsewhere. The government currently has no visibility of the underlying beneficial owners of gilts. This data limitation is not uncommon across jurisdictions; however, the department will review the sovereign bond ownership data available to other countries to consider if there is anything it can learn from their approaches.