For example, when in late 2004 the Bank announced our intention to introduce reforms, the European treasury department of one of the largest companies in the world wrote to me in the following terms: “I write to express our support and appreciation ….. The excessive volatility in the overnight market precluded high-quality issuers .. from participating. …The steps you are taking will surely increase the depth, stability and overall liquidity of the sterling money market.” That kind of support has been a great encouragement. In terms of risk management, many companies swap fixed-rate term borrowing (and other cash flows) into floating-rate. This can be into a six or three-month LIBOR rate of interest, or into a stream of payments linked to the overnight money market rate. In the UK, the Overnight-Index-Swap market has developed rather less than its counterpart in the euro area, which is used by large non-financial companies. One obstacle seems to have been the intra-day volatility in the sterling market, which has entailed uncertainty about the spread between the average overnight rate on any particular day (as measured by the Sterling Overnight Rate Index Average, or SONIA) and the rate actually paid on overnight cash at different times during the day. Many market participants believe that if the reforms introduced yesterday significantly reduce intra-day volatility, the sterling OIS swap market will grow, making it a more useful risk management tool. The evidence of corporate treasurers as placers of short-term money is more concrete.
For a few years now, UK companies’ domestic operations have been producing surplus cash flows: £ or  2  BIS Review 47/2006  about 1% of GDP, in 2005. The counterpart has, of course, been an accumulation of financial assets. A lot of that has gone in to the money markets – in particular, holdings of call-deposits with banks (Chart 4) and investments in money market funds. In placing that liquidity, you should be in a position where you need to negotiate only the spread paid relative to a stable money market rate, not the underlying rate itself. Our overhaul of the system should deliver that. By taking the noise out of the sterling money markets, we aim to achieve greater stability and greater transparency. That won’t revolutionise your businesses, but I trust that it will bring a welcome reduction in the avoidable uncertainties you confront. Business risk management and pension-scheme uncertainties At an aggregate level, the recent financial management of the company sector has, in fact, posed some puzzles about your assessment of uncertainty and risk. This has been important to our understanding of what is going on in the money markets, and indeed financial markets more generally, as part of the backdrop to our role of promoting monetary and financial stability. The surplus cash flows I described earlier, in the context of your treasury management, are a product of UK cash profits having exceeded, by some margin, business investment (Chart 5). The same is true across the G7 economies as a whole.