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© 2003 International Monetary Fund

July 2003

Corrected: July 2003

IMF Country Report No. 03/208

United Kingdom: Financial Sector Assessment Program Technical Notes and Detailed Standards Assessments

These Financial Sector Assessment Program Technical Notes and Detailed Standards Assessments were prepared by a staff team of the International Monetary Fund, as part of the Financial Sector Assessment Program for the United Kingdom. They provide further detail and background to the Financial Sector Stability Assessment for the United Kingdom which was published in March 2003 (IMF Country Report No. 03/46). The views expressed in these documents are those of the staff team and do not necessarily reflect the views of the government of the United Kingdom or the Executive Board of the IMF.

The policy of publication of staff reports and other documents by the IMF allows for the deletion of market-sensitive information.

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Financial Sector Assessment Program

United Kingdom

Technical Note: Public Debt Management IN The United Kingdom

May 2003

Contents

• I. Introduction

• II. Objectives and Scope of Debt Management

• III. Transparency and Accountability

• IV. Institutional Framework

• V. Debt Strategy

• VI. Risk Management Framework

• VII. Developing and Maintaining an Efficient Market for Government Securities

• VIII. Overall Assessment

• Text Tables

• 1. Public Sector Net Debt

• 2. General Government Net Financial Liabilities for G-7 Countries

• 3. Distribution of Nominal Central Government Gross Debt by Instrument

• 4. Distribution of Gilt Holdings as of December 2001

• 5. Sterling Capital Markets

• 6. Secondary Market Turnover in Selected Sterling

• 7. 1997 Cross-Country Comparison of Government Bond Market Trading Volumes

• 8. Yield Curve Slopes in G-7 Countries

• 9. April 2002 PBR forecasts for the CGNCR

• Figures

• 1. Par Gilt Curves

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Financial Sector Assessment Program

United Kingdom

Technical Note: Systemic Liquidity Arrangements in the United Kingdom

May 2003

Contents

• I. Introduction

• II. Monetary Operating Procedures

• III. Sterling Money Market

• IV. Pound Sterling Foreign Exchange Market

• Text Tables

• 1. United Kingdom: Daily Shortage Forecast Errors

• 2. Sterling Money Markets

• 3. Distribution of Banks’ Wholesale Sterling Liabilities by Group of Banks at end-December 2001

• 4. Turnover of Sterling Money Market

• 5. Daily Liquidity Supplied by Bank of England

• 6. U.K. Banks’ Sterling Liquid Assets as of December 2001

• 7. Average Daily Global Trading in Pounds Sterling Relative to Other Currencies

• 8. Average Daily Trading in Pounds Sterling by Type of Transaction in April 2001

• Figures

• 1. Sterling Money Market, Bid Offer Spreads

• Boxes

• 1. Recent Reforms to Bank of England Monetary Operating Procedures

• 2. Prudential Supervision of Commercial Bank Liquidity Management

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Financial Sector Assessment Program

United Kingdom

Technical Note: Financial Stability Implications of London’s Role as a Global Markets Trading Center

May 2003

Contents

• I. Introduction

• II. London’s Attraction as a Global Trading Center

• III. Implications of Recent Trends in Global Market Structure

• IV. Potential Linkages for Transmitting Financial Risks Between Global and Sterling Financial Markets

• V. Potential Implications of London’s Global Market Activities for U.K. Financial Authorities

• VI. Concluding Observations

• Text Tables

• 1. U.K. Share of Cross-Border Interbank Claims in BIS Reporting Countries

• 2. Breakdown of U.K. Cross-Border Interbank Claims by Bank Nationality

• 3. U.K. Foreign Exchange Market Share of Global Foreign Exchange Trading Activity

• 4. U.K. Foreign Exchange Turnover by Transaction Type and Currency

• 5. London Stock Exchange

• 6. Geographical Distribution of Reported OTC Derivatives Turnover

• 7. U.K. OTC Derivatives Transactions by Instrument in 2001

• 8. Major British Banking Groups’ Share of Selected Global OTC Markets in 2001

• Boxes

• 1. Risk Transfer Markets in the U.K

• 2. The London Clearing House (LCH)

• 3. U.K. Authorities’ Role in Supervising Global OTC Markets

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Financial Sector Assessment Program

United Kingdom

Technical Note: The Institutional Framework for U.K. Financial Stability Policy

May 2003

Contents

• I. Introduction

• II. Focus, Accountability, and Coordination in the United Kingdom Context

• III. FSMA and the FSA

• IV. The Bank of England’s Financial Stability Role

• Boxes

• 1. The FSA’s Risk to Our Objectives Framework

• 2. The Further Development of Insurance Supervision in the U.K.

• 3. The Bank of England’s Financial Stability Report

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Financial Sector Assessment Program

United Kingdom

Detailed Assessments of Standards and Codes

May 2003

Contents

• List of Acronyms and Abbreviations

• I. Basel Core Principles for Effective Banking Supervision

  • A. General

  • B. Information and Methodology Used for the Assessment

  • C. Institutional and Macroprudential Setting—Overview

  • D. General Preconditions for Effective Banking Supervision

  • E. Recommended Action Plan and Authorities’ Response to the Assessment

• II. IAIS Insurance Core Principles

  • A. General

  • B. Information and Methodology Used for Assessment

  • C. Institutional and Macroprudential Setting—Overview

  • D. General Preconditions for Effective Insurance Supervision

  • E. Principle-by-Principle Assessment

  • F. Recommended Action Plan and Authorities’ Response to the Assessment

• III. IOSCO Objectives and Principles of Securities Regulation

  • A. General

  • B. Information and Methodology used for Assessment

  • C. Institutional and Macroprudential Setting, Market Structure

  • D. General Preconditions for Effective Securities Regulation

  • E. Principle-by-Principle Assessment

  • F. Recommended Actions and Authorities’ Response to the Assessment

  • G. Authorities’ Response

• IV. CPSS Core Principles for SIPS and Central Bank Responsibilities in Applying the CPs—NewCHAPS

  • A. General

  • B. The Functioning of the NewCHAPS System

  • C. Main Findings—Summary

  • D. Recommended Actions and Authorities’ Response to the Assessment

  • E. Authorities’ Response

• V. IMF’s MFP Transparency Code—Transparency of Monetary Policy

  • A. General

  • B. Information and Methodology Used for Assessment

  • C. Institutional and Market Structure—Overview

  • D. Practice-by-Practice Assessment

  • E. Recommended Action Plan and Authorities’ Response to the Assessment

• VI. IMF’s MFP Transparency Code—Transparency of Payment Systems Oversight and Other Financial Stability functions of the Bank of England

  • A. General

  • B. Information and Methodology Used for the Assessment

  • C. Institutional and Market Structure—Overview

  • D. Practice-by-Practice Assessment

  • E. Recommended Action Plan and Authorities’ Response to the Assessment

• VII. MFP Transparency Code—Transparency of Financial Policies (Financial Services Authority)

  • A. General

  • B. Information and Methodology Used for Assessment

  • C. Institutional and Market Structure—Overview

  • D. Practice-by-Practice Assessment

  • E. Recommended Action Plan and Authorities’ Response to the Assessment

• VIII. Compliance with CPSS/IOSCO Recommendations for Securities Settlement Systems

  • A. Introduction

  • B. Institutional and Market Structure

  • C. Description of Regulatory Structure and Practices

  • D. Information and Methodology Used for Assessment

  • E. The Assessment of the Observance with RSSS—The CREST System

  • F. Recommendation-by-Recommendation Assessment

  • G. The Assessment of the Observance with RSSS—The CMO System

  • H. Recommendation-by-recommendation assessment

• IX. Assessment of Anti-Money Laundering and Combating the Financing of Terrorism

  • A. General

  • B. Detailed Assessment

  • C. Assessing the Criminal Justice Measures and International Cooperation

  • D. Assessing the Preventive Measures for Financial Institutions

  • E. Specific Criteria for the Banking, Securities, and Insurance Sectors

  • F. Description of the Controls and Monitoring of Cash and Cross Border Transactions

  • G. Ratings of Compliance with FATF Recommendations, Summary of Effectiveness of AML/CFT efforts, Recommended Action Plan and Authorities’ Response to the Assessment

• Text Tables

• 1. Detailed Assessment of Compliance of the Basel Core Principles

• 2. Summary Compliance with the Basel Core Principles

• 3. Recommended Action Plan with Respect to the Basel Core Principles

• 4. Gross Direct U.K. Sourced Premium Revenues

• 5. Insurance Sector Asset Allocation, end-1999

• 6. Holdings of U.K. Securities 1998

• 7. Detailed Assessment of Observance of the IAIS Insurance Core Principles

• 8. Summary Observance of IAIS Insurance Core Principles

• 9. Recommended Action Plan to Improve Observance of IAIS Insurance Core Principles

• 10. Detailed Assessment of Observance of the IOSCO Objectives and Principles of Securities Regulation

• 11. Summary Observance of the IOSCO Objectives and Principles of Securities Regulation

• 12. Detailed Assessment of Observance of CPSS Core Principles for SIPS and Central Bank Responsibilities in Applying the CPs—NewCHAPS

• 13. Summary Observance of CPSS Core Principles and Central Bank Responsibilities in Applying the CPs—NewCHAPS

• 14. Detailed Assessment of Observance of MFP Transparency Code—Monetary Policy

• 15. Summary Observance of IMF’s MFP Transparency Code—Monetary Policy

• 16. Recommended Plan of Actions to Improve Observance of IMF’s MFP Transparency Code Practices—Monetary Policy

• 17. Detailed Assessment of Observance of MFP Transparency Code—Financial

• 18. Summary Observance of IMF’s MFP Transparency Code—Monetary Policy

• 19. Recommended Plan of Actions to Improve Observance of IMF’s MFP Transparency Code Practices—Monetary Policy

• 20. Detailed Assessment of Observance of IMF’s MFP Transparency Code—Financial Policies (FSA)

• 21. Summary Observance of IMF’s MFP Transparency Code—Financial Policies (FSA)

• 22. Summary Observance of CPSS/IOSCO Recommendations for Securities Settlement Systems—CREST

• 23. Detailed Assessment of Observance of CPSS/IOSCO Recommendations for Securities Settlement Systems—CREST

• 24. Recommended Actions to Improve Observance of CPSS/IOSCO—CREST

• 25. Summary Observance of CPSS/IOSCO Recommendations for Securities Settlement Systems—CMO

• 26. Detailed Assessment of Observance of CPSS/IOSCO Recommendations for Securities Settlement Systems—CMO

• 27. Recommended Actions to Improve Observance of CPSS/IOSCO—CMO

• 28. Detailed Assessment of the Criminal Justice Measures and International Corporation

• 29. Detailed Assessment of the Legal and Institutional Framework for All Financial

• 30. Detailed Assessment of the Banking Sector Based on Sector-Specific Criteria

• 31. Detailed Assessment of the Insurance Sector Based on Sector Specific Criteria

• 32. Detailed Assessment of Securities Sector based on Sector Specific Criteria

• 33. Description of the Controls and Monitoring of Cash and Cross Border Transactions

• 34. Ratings of Compliance with FATF Recommendations Requiring Specific Action

• 35. Summary of Effectiveness of AML/CFT Efforts for Each Heading

• 36. Recommended Action Plan to Improve the Legal and Institutional Framework and to Strengthen the Implementation of AML/CFT Measures in Banking, Insurance and Securities Sectors

List of Acronyms and Abbreviations