A lack of natural writers of the options means that currently, a market for them doesn’t exist. However, the review said that the government may have the characteristics of such a writer and if it were to start issuing them, it would be helping to complete financial markets.
The report, however, said that although there may be a case for issuing the options, it would need to be consistent with the objective of minimising long-term cost subject to risk. It would also need to be made clear that issuing the options would substantially benefit markets. The report said that it is unclear that there is a significant unmet demand for longer-dated options.
The report stated that although there may be some benefits from issuing the option, “a substantial degree of uncertainty remains over the balance of advantage to the government”.
Detailed analysis of the decision will be available when the Debt Management Office publishes its annual review this summer.
The week on Risk.net, August 19-25, 2016Receive this by email