What is the nature of the SLS?

There seems to be some confusion about exactly what risks the Bank of England is taking in the Special Liquidity Scheme. Here's my understanding: it is a two way repo of ABS for gilts. Effectively since the gilts are liquid, the ABS is pledged as collateral against a term loan, and the proceeds of that loan are then used to buy gilts which are delivered to the ABS holder. The loan is due and payable regardless of the value of the ABS. If the ABS decline in value, the Bank has the right to (and presumably will) demand more collateral, and failure to post that collateral is a default event. If the counterparty does not repay the loan (by delivering gilts or paying cash? that part is not clear to me but it doesn't matter much) the Bank can perfect the collateral it has and sell it. Any proceeds above and beyond what is necessary to repay the loan belong to the originator counterparty (or at this point their creditors). Any deficit is an unsecured claim against the counterparty.

The Bank is therefore bearing default-contingent market risk: risk on the value of the collateral contingent on default of the counterparty. It only suffers if the counterparty defaults AND if the value it can realise on selling the collateral is not sufficient to make good the loan. This is a real risk since marking the collateral is difficult - so knowing where it could be sold is not straightforward. Moreover since there are various grace periods the collateral may fall in value between the failure of the counterparty to post additional margin and the eventual liquidation of the collateral. Still, it is not a big risk unless the collateral is very illiquid and/or rather small haircuts are taken.