Bank of England keeps heat on gilt repo market after pushback

The Bank of England is keeping the gilt repo market on notice, warning that a hands-off approach is untenable even after finance firms pushed back against tougher rules for a market that helps fund trades in UK government bonds. Deputy Governor Sarah Breeden said “doing nothing is not an option,” in remarks published Friday that revived the central bank’s case for reforms such as more central clearing and tougher risk margins on non-cleared trades.[0]

The issue is not a niche plumbing dispute. Net borrowing in gilt repo totals about £200 billion, with roughly £85 billion tied to hedge funds, Reuters reported. The market lets investors raise cash against gilts and enables leveraged bets on interest-rate moves; in calmer periods it adds liquidity, but in stress it can become a channel for forced selling.[0] The Bank’s July Financial Stability Report said hedge funds had cut net gilt repo borrowing from about £100 billion to around £85 billion after recent volatility, but that borrowing remained high by historical standards and still reflected leveraged relative-value trades.bankofengland

The Bank has been building the regulatory case for nearly a year. Its September discussion paper argued that gilt repo resilience matters because government bonds anchor borrowing costs across the economy, and said reforms could include greater central clearing and minimum haircuts on non-centrally cleared transactions.bankofengland In an April feedback statement, the Bank said respondents broadly accepted the resilience goal but worried that mandates or blunt haircut floors could raise funding costs, shift activity elsewhere and hurt liquidity; the Bank said it still viewed further action as necessary and plans a fuller policy update in early 2027.kfgo

The debate is partly about who absorbs losses when markets lurch. The Bank says near-zero haircuts can allow leverage to build cheaply and can leave dealers more reluctant to lend in a shock. Industry participants counter that central clearing could create cash-margin pressures and concentrate risk. The Financial Stability Board has warned that government-bond repo markets can transmit stress through leverage, concentrated positions and sudden liquidity imbalances, citing the 2020 “dash for cash” and the 2022 gilt-market turmoil.reuters

The policy path will also intersect with the Bank’s separate review of bank leverage rules. Banks have argued that easing those rules could increase demand for gilts and reduce public borrowing costs, while former regulators warn that loosening capital constraints could weaken the alarm system built after the financial crisis.fsb The Bank has already opened a contingent repo facility for insurers, pension funds and liability-driven investment funds, but its latest message is that emergency backstops are not a substitute for making the market itself harder to break.bankofengland