In a recent letter, the Managed Funds Association (MFA) urged the Bank of England (BoE) to encourage greater voluntary central clearing of bilateral gilt repo transactions. MFA recommended steps to expand clearing access and reduce structural barriers, while stressing that a mandatory clearing requirement is premature.
“A stable gilt repo market helps keep borrowing costs low for the UK government, businesses, and households,” said Jillien Flores, MFA chief advocacy officer, in a statement. “Voluntary central clearing will strengthen resilience without increasing costs or pushing activity out of the market. Smart, proportionate reforms will help ensure the gilt market remains deep, liquid, and a cornerstone of global finance.”
Central clearing of bilateral repos reduces counterparty credit risk, improves transparency for regulators, and increases market capacity by lowering balance sheet and capital costs for dealers. These benefits depend on expanding access so a broader range of market participants can clear their trades. A voluntary approach, paired with stronger infrastructure and “done-away” clearing, will strengthen the market.
The scale of the UK gilt market continues to evolve and imposing a mandatory clearing mandate at this time would disproportionately raise costs, limit participation, and concentrate activity among fewer firms—all to the detriment of market liquidity.
MFA outlined several areas where the Bank of England can reduce barriers and encourage greater adoption of voluntary central clearing, including:
- Address capital and accounting barriers: Revise capital requirements and accounting rules that make clearing costly for dealers and clients.
- Improve operational efficiency: Implement pre-trade credit checks and robust close-out provisions to reduce risk and streamline clearing processes.
- Enable cross-margining: Allow firms to offset margin requirements across products, which lowers costs and encourages broader adoption.
- Expand access through “done-away” clearing: Ensure indirect participants can clear trades executed with third parties, preserving anonymous trading and reducing fragmentation.
MFA also cautioned against requiring mandatory haircuts on non-centrally cleared repos. Such measures would ignore offsetting transactions that reduce risk, deviate from longstanding market practices, and impair liquidity. Firms should retain flexibility to apply proportionate, risk-based margining tailored to their counterparties and strategies.