Bank of England presses for gilt repo market regulation to curb crisis risks
British regulators are keeping pressure on the gilt repo market after past bouts of stress exposed how quickly liquidity can evaporate in government bonds during a crisis. Bank of England Deputy Governor Sarah Breeden says in remarks tied to a May industry conference that delaying action is not viable, even if some reforms will take years to implement.
Highlights
- Bank of England urges regulation of the £200 billion gilt repo market, with £85 billion tied to hedge funds, citing crisis liquidity risks.
- Research indicates central clearing could have reduced dealers' risk exposure by 40% in 2020, rising another 20% with standardised repo maturities.
- Bank of England acknowledges structural gilt market reforms remain vital for UK financial stability but expects industry resistance to delay full implementation by years.
Regulatory push and market vulnerabilities
As reported by Reuters, Breeden says "doing nothing is not an option" for regulating the British government bond repo market because it continues to pose a risk that bond trading dries up in a financial shock.Net borrowing in the gilt repo market totals about 200 billion pounds, or $270 billion, according to Bank of England data, with 85 billion pounds of that tied to hedge funds. The market is used both by traders seeking to profit from interest-rate moves and by investors turning bond holdings into temporary cash.
The Bank of England set out proposals last year for tighter oversight after it had to intervene in 2020 and again in 2022, first at the start of the COVID-19 pandemic and later after former Prime Minister Liz Truss' mini-budget. Breeden says some changes, including greater use of central clearing, will likely take years rather than months because of industry resistance.
Implications for the UK financial sector
Research cited by Breeden shows that broad use of central clearing would have reduced dealers' risk exposure by 40% in 2020 at the start of the pandemic. That reduction would have increased by a further 20% if gilt repos had more standard maturity dates, she says.The comments highlight the Bank of England's view that structural reforms in the gilt market remain important for financial stability in the UK, even if implementation is gradual. Breeden's remarks are based on a speech she gives to the International Capital Market Association industry conference in May.
In our earlier article, we examined investor expectations that the Bank of England could slow or pause sales of long-dated gilts under its quantitative tightening programme as strains in the gilt market build. We noted that weak demand at the long end and elevated long-term yields were pushing the BoE to consider shifting sales toward shorter maturities, raising wider questions about how QT can proceed without adding to market fragility.
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