Bank of England expands SMF collateral rules and revises haircuts

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BoE expands SMF collateral rules

Highlights

Bank of England will broaden SMF collateral eligibility from 19 June 2026 to include G10 and Australian regional and local government bonds, and qualifying policy banks’ debt as Level B collateral.
The minimum credit rating for G10 government-guaranteed agencies and major US housing-related securities drops to AA- from AAA, while all eligible corporate bonds become Level B collateral from 31 October 2026, excluding those linked to thermal coal mining.
From 19 June 2026, index-linked haircut schedules will be applied to sovereign bonds, and from 31 October 2026, the corporate bond haircut framework will have lower base levels and add-ons for higher climate risk exposure.

Framework changes and implementation dates

As reported by the Bank of England, the central bank is widening eligible collateral in the SMF to include a broader range of debt from government-linked entities that are not explicitly sovereign-guaranteed. Bonds issued by G10 and Australian regional and local governments, along with development and policy banks that meet the Bank's settlement requirements and are of broadly AA- credit quality, become eligible as Level B collateral from 19 June 2026.

The Bank is also lowering the minimum credit rating threshold for G10 government-guaranteed agency bonds and for securities issued by Freddie Mac, Fannie Mae and the Federal Home Loan Banks System to broadly equivalent to AA- from broadly equivalent to AAA. For corporate bonds, the Bank is confirming that all eligible securities in this category are classified only as Level B collateral in the SMF, ending the split between Level B and Level C.

It is also excluding bonds from corporates that derive revenue from thermal coal mining, while leaving other corporate bond eligibility criteria unchanged. Those corporate bond classification and exclusion changes take effect on 31 October 2026.

At the end of June 2026, the Bank is launching a new interactive website form for SMF participants requesting eligibility for Asset-Backed Securities and Covered Bonds. The form replaces the current ABS-CERT template and is intended to reduce the amount of information requested without changing overall transparency requirements.

Risk management impact for market participants

The Bank is introducing separate index-linked haircut schedules for eligible sovereign bonds, including gilts as well as other Level A and Level B sovereign collateral. It says the more granular approach better aligns haircuts on conventional and index-linked securities with their differing valuation drivers and risk profiles, while helping provide stability in firms' drawing capacity across the economic cycle.

These index-linked sovereign haircut changes take effect from 19 June 2026. The Bank also states that it retains the right to apply additional haircuts to any individual security at any time, including collateral already delivered in an outstanding transaction.

For corporate bonds, the Bank is revising the methodology used to calculate haircuts, with updated levels to be published when the changes are implemented. It says the revised framework reduces the base level of corporate bond haircuts, but allows add-ons for issuers in sectors exposed to financial risks linked to the economy's adjustment toward net zero, with those changes taking effect from 31 October 2026.

Our earlier article on Heathrow Funding Limited’s new EUR500 million class A senior secured bond outlined the terms of the 4.375% notes due June 2039 and how the issue fits into the group’s wider multi-currency financing programme. We also highlighted that leverage remains the key sensitivity for the credit profile, with net debt/EBITDA thresholds shaping the outlook and investor focus on balance-sheet trajectory.

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