SMF Collateral Eligibility: What the BoE’s 2026 Changes Mean for UK Bank Liquidity Pools and Returns

ByOfficer

Last updated: June 2026

A pre-positioned collateral pool is only worth what the Bank of England will lend against it. On 11 June 2026 the Bank changed the rules on SMF collateral eligibility: what counts, how it is graded, and how it is valued under the Sterling Monetary Framework. When a UK bank’s treasury and reporting teams stop reading the same eligibility list, two things can go wrong at once. The firm may overstate the liquidity it could raise at the Bank in stress. The PRA110 point is narrower: CP5/26 says central bank facilities are currently excluded from use as a monetisation channel in PRA110 submissions under the Granular LCR framework, and the PRA proposes to remove the PRA110 monetisation actions reporting requirement once final rules are made.

The Sterling Monetary Framework, or SMF, is the set of facilities through which the Bank supplies sterling reserves and liquidity insurance to banks, building societies and broker-dealers. Collateral eligibility decides which assets a participant can lodge against those facilities, at what haircut, and in which collateral set. The 11 June 2026 market notice, titled “Changes to collateral eligibility in the Sterling Monetary Framework”, sets out three tranches of change that take effect across June and October 2026.

The timing matters, because these changes land alongside the PRA’s wider liquidity rethink in CP5/26. Together they make collateral pre-positioning a stronger supervisory and internal-liquidity-control input, but they do not by themselves create a new collateral reporting line.

Related reading: Liquidity Reporting: LCR, NSFR and ALMM Explained

What the SMF collateral eligibility changes actually do

The market notice groups its changes by effective date rather than by asset class, which is the order a reporting team should map them in.

  • From 19 June 2026: separate index-linked haircut schedules apply to eligible sovereign bonds; bonds issued by G10 and Australian regional and local governments, and by qualifying development and policy banks, become eligible as Level B collateral; and the minimum credit rating for G10 government-guaranteed agency bonds and for major US housing-related securities falls to broadly equivalent to AA- from broadly equivalent to AAA.
  • At the end of June 2026: a new interactive web form replaces the ABS-CERT template for participants requesting eligibility for asset-backed securities and covered bonds.
  • From 31 October 2026: all eligible corporate bonds move into the Level B set, ending the old split between Level B and Level C for corporates, with bonds of issuers that derive revenue from thermal coal mining excluded, and a revised corporate bond haircut schedule.

Eligibility is a gate, not a guarantee. An asset still has to be pre-positioned, risk-assessed and haircut by the Bank before it can support any drawing.

How the Bank’s collateral levels work, and why the level matters

The SMF sorts collateral into three sets by how reliably each asset can be sold in stress. Level A is the most liquid, built around high-quality sovereign debt. Level B is normally liquid: a wider band of sovereign, supranational, agency and private-sector debt, plus the highest-quality asset-backed securities. Level C holds the least liquid assets, including own-name securitisations and pre-positioned loan portfolios.

The set drives the haircut and, at the Discount Window Facility, the fee. The Bank’s fixed Discount Window pricing is set by collateral set, reported at 15 basis points for Level A, 25 basis points for Level B and 50 basis points for Level C. So moving eligible corporate bonds into Level B from 31 October 2026 is not cosmetic. The DWF fee follows the collateral set, and the Bank separately says its revised corporate bond haircut methodology will reduce the base level of corporate bond haircuts, with new haircuts and relevant add-ons taking effect from 31 October 2026.

SMF eligibility is not the same thing as liquidity buffer eligibility. A corporate bond that becomes Level B collateral does not thereby become a high-quality liquid asset for the UK liquidity coverage ratio. The HQLA test in the UK Liquidity (CRR) Part is a separate gate, and most SMF-eligible corporate bonds still sit outside Level 1 HQLA.

Lower rating thresholds and the thermal coal carve-out

The rating change is the part that quietly widens the pool. From 19 June 2026 the minimum credit rating for G10 government-guaranteed agency bonds, and for securities issued by Fannie Mae, Freddie Mac and the Federal Home Loan Banks System, falls to broadly equivalent to AA- from broadly equivalent to AAA. Those government and policy-bank bonds must meet the Bank’s settlement requirements and be of broadly AA- quality to qualify as Level B on the same date.

Two checks follow, both cutting against a relaxed reading. A lower rating floor does not mean a lower haircut: these assets still carry Level B haircuts, and an agency security that newly qualifies is not the equivalent of a gilt. The screen to add to a corporate bond pool this year is the thermal coal carve-out, because it turns on the issuer’s revenue source, not on the bond’s rating. A pool treated as uniformly eligible could miss it. The check belongs before 31 October 2026, not after.

Index-linked gilts get their own haircut schedule

From 19 June 2026 the Bank applies separate index-linked haircut schedules to eligible sovereign bonds, gilts included, rather than reusing the conventional schedule. The stated reasoning is that index-linked and conventional securities respond to different valuation drivers, so a single schedule mis-states the risk on one of them.

For a firm that pre-positions linkers, the haircut on an index-linked gilt and on an otherwise comparable conventional gilt can now diverge. The trap is stale internal valuations. A collateral system that still maps every gilt to one haircut curve can misstate the headroom on the index-linked leg, which flows straight into the contingent liquidity a firm thinks it holds.

Where this lands in your liquidity returns

This is the part that turns a markets notice into a reporting question. Pre-positioned collateral is contingent liquidity. It is the borrowing a firm could raise at the Bank without selling anything, and it underpins the operational readiness inside firms’ liquidity adequacy work, the ILAA, the UK counterpart to the process reporting teams know from our ICAAP and ILAAP explainer. Treating collateral mobilisation as a liquidity line is the same instinct behind the SRB’s liquidity and funding in resolution guidance for euro-area banks, though the UK return and the UK facilities differ.

UK banks report short-term liquidity risk on the PRA110 cash-flow mismatch return, the template that replaced FSA047 and FSA048 from 1 July 2019 and that the PRA uses for its Pillar 2 liquidity view. CP5/26, “Modernising the liquidity policy framework”, was published on 17 March 2026 with responses due by 17 June 2026. The PRA would stop requiring firms to complete the monetisation actions section of the PRA110, and would expect firms to be operationally ready to use central bank facilities, including pre-positioning sufficient collateral, testing access and confirming operational capability. The PRA proposes a phased approach, some elements applying once final rules are made and others 12 months later.

Two cautions apply before any team changes its return. CP5/26 is a consultation, not a rule, so until the PRA makes the rules the PRA110 monetisation actions section and existing expectations stand. The UK return is also its own animal: PRA110 is not the EU additional liquidity monitoring metrics, so a firm should not assume an EU group template or COREP mapping carries across to the PRA’s form.

The ABS-CERT template is being retired

Participants that pre-position structured finance know the ABS-CERT template. From the end of June 2026 the Bank replaces it with an interactive web form for eligibility requests covering asset-backed securities and covered bonds. The changeover risk is narrow but real: a firm with a covered bond or ABS eligibility request in flight could submit on the retired template. The check after the switch is simply which form the Bank now expects.

Frequently Asked Questions

When do the SMF collateral eligibility changes take effect?

In three tranches. The index-linked haircut schedules, the new government-linked eligibility and the lower agency rating floor apply from 19 June 2026. The interactive eligibility form replaces ABS-CERT at the end of June 2026. The corporate move into Level B, the thermal coal exclusion and the revised corporate haircut schedule apply from 31 October 2026.

Does a corporate bond becoming Level B make it HQLA for the LCR?

No. SMF eligibility and HQLA eligibility are separate tests. A bond reclassified into Level B still has to meet the HQLA criteria in the UK Liquidity (CRR) Part, and most SMF-eligible corporate bonds sit outside Level 1 HQLA. The reclassification changes what a firm can borrow against, not what it can count in its buffer.

What happens to corporate bonds linked to thermal coal mining?

From 31 October 2026 the Bank excludes bonds of issuers that derive revenue from thermal coal mining, while leaving other corporate eligibility criteria unchanged. A firm needs to screen its corporate pool by issuer revenue source, not by rating.

Do the lower rating thresholds reduce haircuts?

No. Lowering the minimum rating for certain G10 agency and major US housing-related securities to broadly equivalent to AA- from AAA widens what is eligible. Those assets still attract Level B haircuts.

How do the changes affect the PRA110 return?

The BoE notice does not itself change PRA110 instructions. It changes the collateral values and borrowing capacity that firms should reflect in internal liquidity MI, ILAA analysis and contingent funding assumptions. PRA110 monetisation reporting should remain aligned with current PRA requirements until CP5/26 is finalised.

Is the PRA110 monetisation actions section already gone?

Not yet. The proposal sits in CP5/26, open for responses until 17 June 2026. It is a consultation, not a rule, so firms should continue to complete the return as currently required until the PRA finalises it.

What replaces the ABS-CERT template?

An interactive web form for eligibility requests covering asset-backed securities and covered bonds, launching at the end of June 2026 and intended to reduce the information requested.

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Key Takeaways

  • The 11 June 2026 SMF market notice changes collateral eligibility in three dated tranches across June and October 2026, not in one switch.
  • From 31 October 2026 all eligible corporate bonds sit solely in Level B. That lowers the Discount Window fee for corporate bonds that would otherwise have been Level C, while corporate bonds already treated as Level B keep the same Level B fee. The Bank’s revised corporate bond haircut methodology separately reduces the base haircut.
  • SMF eligibility is not LCR eligibility: a bond that becomes Level B collateral does not become HQLA for the UK liquidity coverage ratio.
  • The lower rating floor for G10 agency and major US housing-related securities widens eligibility from 19 June 2026 but keeps Level B haircuts, and thermal coal issuers are excluded from 31 October 2026.
  • Separate index-linked haircut schedules from 19 June 2026 mean a single gilt haircut curve can misstate headroom on linkers.
  • CP5/26 proposes to drop the PRA110 monetisation actions section and clarify central bank facility readiness, but it is a consultation, not yet a rule, and the ABS-CERT template is replaced by an interactive form at the end of June 2026.

Sources and References

  • Bank of England, Market Notice, “Changes to collateral eligibility in the Sterling Monetary Framework” (11 June 2026): https://www.bankofengland.co.uk/markets/market-notices/2026/june/collateral-eligibility-in-the-smf-11-june-2026
  • Bank of England, Eligible collateral (SMF collateral levels and haircuts): https://www.bankofengland.co.uk/markets/eligible-collateral
  • Bank of England, Summary tables of haircuts for Bank lending operations, current PDF dated 14 April 2025; BoE market notice says haircut documentation will be updated as each 2026 change takes effect: https://www.bankofengland.co.uk/-/media/boe/files/markets/eligible-collateral/summary-tables-of-haircuts-for-bank-lending-operations.pdf
  • Bank of England, Market Notice, “Update to Discount Window Facility pricing” (27 March 2026): https://www.bankofengland.co.uk/markets/market-notices/2026/march/update-to-discount-window-facility-pricing-market-notice-27-march-2026
  • Bank of England, “Resilience and readiness across the Sterling Monetary Framework” (Bank insights, 2026): https://www.bankofengland.co.uk/bank-insights/2026/resilience-and-readiness-across-the-sterling-monetary-framework
  • Bank of England Market Operations Guide: Our tools: https://www.bankofengland.co.uk/markets/bank-of-england-market-operations-guide/our-tools
  • Prudential Regulation Authority, CP5/26, “Modernising the liquidity policy framework” (17 March 2026): https://www.bankofengland.co.uk/prudential-regulation/publication/2026/march/modernising-the-liquidity-policy-framework-consultation-paper
  • Bank of England / PRA, PRA110 reporting template and instructions, Q and As: https://www.bankofengland.co.uk/-/media/boe/files/prudential-regulation/regulatory-reporting/banking/pra110-reporting-templates-and-instructions-q-and-as-v6.pdf
  • Bank of England / PRA, Pillar 2 liquidity: https://www.bankofengland.co.uk/prudential-regulation/publication/2016/pillar-2-liquidity

What to reconcile before 19 June 2026

The work this notice creates is reconciliation, not interpretation. Pull the current pre-positioned pool, map every line to its collateral set on the post-19 June basis, flag any corporate line moving to Level B in October and any thermal coal issuer that will drop out, and split the gilt haircuts into conventional and index-linked. Then update internal liquidity MI, ILAA analysis and contingent funding assumptions for the revised collateral values, while keeping PRA110 monetisation reporting aligned with the current PRA110 requirements until the PRA finalises CP5/26.

Disclaimer: The information on RegReportingDesk.com is for educational and informational purposes only. It does not constitute legal, regulatory, tax, or compliance advice. Always consult your compliance officer, legal counsel, or the relevant supervisory authority for guidance specific to your institution.

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