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Gilt Market

Gilt Strips

Background

“Strips” is the acronym for Separate Trading of Registered Interest and Principal Securities. The Official Gilt Strips Facility was introduced in the UK on 8 December 1997. A comprehensive background paper by the Bank of England on the Gilt Strips Facility can be foundPDFhere.

“Stripping” a gilt refers to breaking it down into its individual cash flows which can be traded separately as zero-coupon gilts. For example, a three-year gilt will have seven individual cash flows and, therefore, seven strips: six (semi-annual) coupon payments (referred to as coupon strips) and a principal repayment (referred to as the principal strip). Gilts can also be reconstituted from all of the individual strips.

Strippable gilts

Currently, all strippable gilts are conventional fixed coupon instruments. There are two series of strippable gilts; the first, paying coupons on 7 June/7 December, became strippable in December 1997. The second, paying coupons on 7 March/7 September, followed in April 2002. The DMO has no current plans to make gilts strippable that are issued on the more recent conventional gilt series (introduced in October 2009 and paying coupons on 22 January/22 July).

A newly issued gilt on the relevant coupon series is not declared strippable until a sufficient amount of the gilt has been issued in order to maintain liquidity in both the stripped and unstripped formats – for recent issues this has been a minimum of £5 billion (nominal) in issue.

Information about which gilts are strippable is available from the gilts in issue section of this website. A list of all gilt strips is available here. The DMO has no current plans to make any changes to the eligibility criteria for gilts to be strippable. Should the DMO decide to change the eligibility criteria, it would make an appropriate announcement setting out any changes and giving the market an appropriate amount of notice.

Data on gilt stripping activity are available on this website and are updated on a weekly basis.

Strips in the money markets

Gilt strips are eligible in Deliveries By Value (DBVs) used as collateral in the Bank of England’s daily money market operations. In addition, the Bank of England accepts strips as eligible securities in intra-day repos for liquidity in the Real Time Gross Settlement (RTGS) programme. Further details can be found here.

Fungibility

The extent of fungibility between gilt strips is summarised below:

  • Principal strips derived from the same strippable gilt are fungible with each other.
  • Principal strips derived from different strippable gilts, even where those principal strips are payable on the same date, are not fungible with each other.
  • Principal strips are not fungible with coupon strips, even where the coupon strips mature on the same day as the principal strips.
  • Coupon strips payable on the same day are fungible with each other in cases where they are derived from the same strippable gilt.
  • Coupon strips payable on the same day are also fungible with each other in cases where they are derived from different strippable gilts.

Further information on strips fungibility can be found in the STRIPS section of the Information Memorandum entitled “Issue, Stripping and Reconstitution of British Government Stock”.

Strips market participants

Only Gilt-edged Market Makers (GEMMs), Her Majesty’s Treasury and the Bank of England may strip and reconstitute gilts.

Until August 2011, GEMMs were expected to make effective two-way prices on demand to any client, at all times and in any conditions in all gilt-edged stocks including strips.

The obligation to make prices in strips was removed in August 2011, reflecting the low level of market activity since the inception of the strips facility in 1997. The general market making requirement was replaced by a Strips Market Participants List. GEMMs could elect to be added to this list, indicating to end investors that they are prepared to offer a dealing service in strips. Nevertheless, parties seeking prices in strips or wishing to strip or reconstitute gilts may approach any GEMM for these services.

The DMO indicates on its website which GEMMs have elected to be members of the Strips Participant List. A list of them can be found at Strips Market Participants. The DMO has no target or minimum for the number of GEMMs that elect to become Strips Market Participants.

Taxation of strips

Information on the tax treatment of gilt strips can be found in the Taxation of gilts section of the website.

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