The Bank of England has launched a consultation on measures to make the UK’s government bond (“gilt”) repo market more resilient, in consultation with the FCA and with input from the Treasury and UK Debt Management Office.
The move comes after 30-year gilt yields rose to 5.75% this week – the highest level since 1998.
The repo market, where financial institutions borrow cash in exchange for government bonds, plays a crucial role in the smooth running of the financial system. But regulators are concerned it may be vulnerable to shocks, especially during periods of market stress.
Other countries have already begun tightening rules. In the US, for example, the Securities and Exchange Commission (SEC) mandated central clearing for most repo and cash US Treasury transactions by mid-2027 to reduce risks and improve stability.
The Bank of England’s new Discussion Paper (DP) sets out two main ideas for strengthening the UK market:
- 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 Bank is seeking feedback on how these options could be practically designed and implemented to strengthen the gilt repo market.
The DP also 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.
Following feedback on the DP, the Bank will consider next steps in consultation with other UK authorities.
Sarah Breeden, deputy governor for financial stability at the Bank of England, said: “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.
We welcome views and feedback from gilt repo market participants, the wider industry, and the public on how these options might deliver benefits for the gilt repo market and the wider financial system.”
Ben Seager-Scott, chief investment officer at Forvis Mazars, commented: "As is almost always the case, there is no single reason for the current gilt weakness, but Treasury policy is certainly a major contributory factor. Firstly, on the broader context, there is a general concern that globally we may be facing both higher structural inflation and greater uncertainty around government policy, especially emanating from the US, which is pushing longer-maturity bond yields up around the world. From a global perspective, what is worrying investors particularly at the moment is the continued attacks by the White House on the Federal Reserve’s independence and the risk that short-term interest rates are pushed down which, much like the waterbed analogy goes, just ends up pushing long-term interest rate expectations (and therefore bond yields) higher.
“However, there is also a UK-centric element, which we see in the sharper moves in UK government bonds and also renewed weakness in sterling, and this is very much related to Treasury policy and the upcoming Budget. The UK finds itself in a fiscal bind again: productivity is falling, the employment outlook is looking weak and inflation is looking pretty sticky. The government came to power saying it had tough decisions to make, but from a fiscal point of view we haven't really seen any. Attempts to rein in spending don't appear to have come to much and the government hasn't been clear about how it will raise the magnitudes of tax revenue needed to meet the gap. What we are seeing now is a warning shot from the bond vigilantes that the government cannot once again just look to borrowing to plug the hole. The government naturally hopes that growth will fix this fiscal hole - but hope is not a strategy and the bond market is showing its impatience."
