at which the auction will clear. but in the iltrs there are two clearing prices, one for each of the two types of collateral. and there will be pairs of clearing rates which ensure that the total amount lent in the operation equals the amount on offer. these pairs of possible clearing rates can be derived from the bids, and the resulting “ frontier ” can be converted into a “ demand schedule ” mapping the difference between the two clearing rates ( known as the stop - out spread ) against the proportion of the auction that would be allocated to wider collateral ( and hence by implication, narrow collateral ) in each case. this concept is best understood using a simple example. consider table 1 below, which shows hypothetical bids from six counterparties. three of the bids are against the narrow collateral set ( n ) and the remaining three are against the wider set ( w ). at the end of the auction, the bids within each set are ranked from those with the highest spread to those with the lowest spread, as shown. for simplicity of exposition, assume that there are no paired bids, and that the bank has committed to supply £100mn in this operation. the most systematic way to construct the demand curve is to start at the top left corner solution where all the funds are allocated against narrow collateral ( bidders 4, 5 and 6 all have their bids filled ). the clearing spread would be the lowest accepted bid on the narrow collateral : 10bps and that would dictate the uniform price. 16 now assume that 99 % is allocated to narrow ( conveniently 1 % is equal to £1mn in this example ), and 1 % to wider collateral. the clearing spread for the narrow set would remain 10bps ( bidder 6, as the cheapest narrow bidder, would be allotted only £9mn against his bid for £10mn ). the clearing spread for wider collateral would be 19bps ( £1mn would be allocated to bidder 1 ). that results in a stop - out spread ( the difference between the clearing spreads for wider and narrow collateral ) of 9bps. the stop out spread remains at 9bps until the point at which £10mn is allocated to the wider set. at that point, bidder 6 is no longer filled, and the clearing spread on the narrow set rises to 12bps. bidder 1 receives £10mn out of the £30nm he has bid, and so the clearing spread remains

markets, such as quoted bid - ask spreads, are in line with historical standards, volume - based measure have deteriorated. in us and uk government bond markets, turnover ratios have declined materially since pre - crisis. in corporate bond markets, average large trade sizes have fallen. us corporate bond dealer inventories are over six times less than before the pre - crisis period and sterling and us corporate bond inventories have been steadily declining since 2011. bank of england financial stability report, box 2, december 2015 all speeches are available online at www. bankofengland. co. uk / speeches it is also less clear now that other investors like pension funds and insurance companies would come in to stabilise a falling market in the way that they may have done in the past. a bank of england - led study in 2014 found evidence that in some instances, insurance companies and pension funds might indeed act pro rather than counter - cyclically in a severe episode of stress, selling into a falling market. it is of course difficult to gauge the probability of a stress event leading to a self - reinforcing downward spiral of redemptions and forced asset sales. the bank of england has developed simulation models that give an indication of the point at which liquidity would break down and such effects could set off. these are only simulations. but given that we are paid to think about what could happen – what is unlikely but plausible – there is enough here to be of concern to macroprudential authorities. this concern is the backdrop to the fsb ’ s recommendations on asset managers that iosco published in february this year. from the bank of england ’ s point of view, the most important recommendations are around fund liquidity and ensuring that the liquidity offer matches the investment profile of the fund. iosco is also taking forward the fsb recommendation to develop better and more consistent leverage metrics for investment funds. the financial policy committee of the bank of england has also commissioned work on non – bank leverage. leverage, as we know, is usually somewhere at the bottom of a banking crisis and the last episode was no exception. leverage is perhaps the core necessary element of the banking business model. but when it gets out of hand it stokes up the boom phase in the financial cycle and can leave banks with insufficient resources to cope with the correction, so amplifying the bust phase of the cycle. it also, as i have noted, amplifies market corrections as leveraged investors are forced to sell when credit