Minutes of Money Market Committee meeting – 20 June 2023
A member of the Committee provided a presentation on how the use, and levels, of haircuts in the repo market had developed in light of recent elevated volatility. It was noted that haircuts were usually determined by a Value-at-Risk (VaR) based model, typically with lookback periods of 2-10 years.
Given this, periods of significant volatility such as Autumn 2022 introduced a shock to the levels of haircuts applied to cleared transactions, which would persist for some time due to the length of look-back windows. In particular there was a difference between the haircuts applied for long-dated gilts in cleared DBV versus triparty structures, which had become more prominent following the VaR shock.
Banks often found it difficult to pass haircuts on in full to their clients, which had led to some rebalancing of business away from cleared transactions and some reorganisation of collateral between cleared, triparty and bilateral transactions to optimise between differing haircuts.
Some members suggested that a shorter lookback period, or even a minimum mandated haircut level, may alleviate some difficulties around rapid changes in haircut levels and the differing approaches between market segments.
The Committee agreed that the SLC sub-Committee should discuss this topic in more detail at an upcoming meeting.
The full minutes are available at https://www.bankofengland.co.uk/minutes/2023/june/money-markets-committee-minutes-june-2023