The Bank of England (BoE) published a discussion paper on potential measures to enhance the resilience of the UK government bond (gilt) repo market, developed in close consultation with the UK Financial Conduct Authority (FCA) and with input from HM Treasury and the UK Debt Management Office (DMO).
Government bond markets are central to financial stability and to the provision of vital services, investment, and sustainable economic growth. Within that, the repo market plays an essential role in underpinning the smooth operation of government bond markets.
The Bank’s System-wide Exploratory Scenario (SWES) underscored the importance of ensuring sufficient capacity in repo markets to support the resilience of government bond markets and enhance financial stability.
A range of jurisdictions are exploring and, in some cases implementing, measures to enhance the resilience of their government bond repo markets. In the US, the Securities and Exchange Commission (SEC) mandated central clearing for most repo and cash US Treasury transactions by mid-2027 to mitigate systemic risks from non-centrally cleared transactions and support orderly market functioning. In addition to domestic work, the Financial Stability Board (FSB) continues to co-ordinate a broad agenda of international work to mitigate risks to core financial markets.
The discussion paper focuses on two possible options:
- Greater central clearing of gilt repo has the potential to provide benefits including through enhancing dealer balance sheet efficiency, reducing counterparty credit risk, and mitigating risks from the disorderly unwind of highly leveraged, concentrated positions.
- Minimum haircuts or margins on non-centrally cleared gilt repo may also help reduce counterparty credit risk and mitigate risks from the most highly leveraged positions.
The paper considers additional options that may bolster the resilience of the gilt repo market. These could be implemented as alternatives to, or alongside greater central clearing or minimum haircuts, such as greater public and private counterparty disclosures.
Sarah Breeden, deputy governor for Financial Stability, said in a statement: “It’s essential that market-based finance and core sterling rates markets absorb rather than amplify shocks to ensure the financial system continues to provide vital services to the real economy even during periods of stress. We’ve already taken meaningful steps towards addressing vulnerabilities in the gilt repo market, but it is important that we continue to explore reforms. This DP will allow us to progress our thinking on several key potential options.”