Discussion Initiated by Bank of England Regarding Potential Steps to Bolster the Stability of Gilt Repo Market
The Bank of England has published a Discussion Paper focused on strengthening the resilience of the UK government bond repo market. The paper, developed with the involvement of the Financial Conduct Authority, HM Treasury, and the UK Debt Management Office, explores potential measures to ensure the gilt repo market can fulfill its vital role in the UK financial system during periods of stress.
Sarah Breeden, Deputy Governor for Financial Stability, underscores the importance of market-based finance and core sterling rates markets absorbing shocks to ensure the financial system continues to provide vital services during periods of stress.
Government bond markets play a crucial role in financial stability, services provision, investment, and sustainable economic growth. The repo market, an essential component of these markets, underpins their smooth operation.
The Discussion Paper focuses on two possible options: greater central clearing of gilt repo and minimum haircuts or margins on non-centrally cleared gilt repo. These measures are designed to bolster the resilience of the gilt repo market and reduce systemic risks.
Various national financial regulators and central banks in different countries have implemented similar measures to strengthen the resilience of their sovereign paper repo markets. These initiatives often include enhanced collateral standards, improved transparency, and risk management practices. The Financial Stability Board (FSB) coordinates international efforts to reduce systemic risks in core financial markets by promoting regulatory consistency, facilitating information exchange, and issuing recommendations for authorities to improve market resilience globally.
The FSB continues to coordinate international work to mitigate risks to core financial markets. In the United States, for instance, the Securities and Exchange Commission has mandated central clearing for most repo and cash US Treasury transactions by mid-2027.
The Bank has already taken meaningful steps towards addressing vulnerabilities in the gilt repo market. The Discussion Paper will allow the Bank to progress its thinking on several key potential options for the gilt repo market. The Bank welcomes views and feedback from gilt repo market participants, the wider industry, and the public on how these options might benefit the gilt repo market and the wider financial system.
The Discussion Paper also considers additional options to bolster the resilience of the gilt repo market, such as greater public and private counterparty disclosures. These disclosures could provide valuable information to market participants, helping to improve the market's overall resilience.
The DP welcomes input on these and other potential measures to enhance the gilt repo market. By working together, the Bank hopes to ensure the gilt repo market remains robust and can continue to play its vital role in the UK financial system during periods of stress.
