What Is a Government Broker?
A government broker is a senior British securities broker in the market for U.K. government gilts. The government broker is authorized to purchase and sell government gilt securities in the primary market and on the London Stock Exchange.
Understanding Government Brokers
Prior to 1986, Mullens & Co. served as the primary government broker. In 1986, the Bank of England opened its gilt-edged division as part of the Big Bang agreement, which changed the operational activities for trading gilts.
The Big Bang created massive market upheaval on the London Stock Exchange by abolishing fixed commission rates for stockbrokers and doing away with exchange rules that established a formal division between brokers and "jobbers" or wholesalers. The London securities market was in large part modernized and has since become a major force in the globalization of financial markets.
Modern-Day Government Brokers
After 1986, a key change in the gilt market was the classification for government brokers, which widened. Government brokers became required to have a special license and took on the name gilt-edged market makers (GEMM).
Gilt-edged market makers are authorized to deal in the issuance and trading of gilt-edged securities. GEMMs must obtain a gilt trading license from the Bank of England for trading gilts. The license provides access to operational government reporting and the authorization for trading gilts. Licensed GEMMs can trade both of the two types of gilts known as conventional and indexed.
GEMMs participate in both the primary issuance of gilts and the secondary trading market. The U.K. Debt Management Office (DMO) has specific obligations that GEMMs must meet, including quotas for primary issuance and participation expectations in trading. The DMO’s obligations and expectations are detailed in the “GEMM Guidebook: A Guide to the roles of the DMO and Primary Dealers (GEMMs) in the UK Government Bond Market.”
The DMO is tasked with the daily management of the U.K.’s government gilt debt including the holding of primary issuance auctions for debt securities. Conventional gilts are the simplest of the two gilt offerings. Conventional gilts are also the greatest outstanding and as such the largest liability of the DMO. Index-linked gilts make regular payments accounting for inflation. The DMO promises to pay gilt holders coupons and principal at maturity.
Any individual or institutional investor can purchase gilts from the DMO or in the secondary market. Gilts are issued in 100-pound units. Bidders in primary issuance can buy through a GEMM as an intermediary or they may register as a member of the DMO’s Approved Group of Investors for direct purchases. In secondary market gilt dealings, GEMMs are market makers for gilt debt trading.
Pension funds are one of the most active buyers of gilts in both the primary and secondary markets. Individual investors are also active, choosing gilts for their steady income and low-risk characteristics.