Bank of England Seeks Feedback on UK Gilt Repo Market Reforms

The Bank of England is actively seeking feedback on proposed reforms to strengthen the resilience of the UK gilt repo market, a critical component for financial stability and the smooth functioning of government bond markets. The discussion paper, developed with input from the Financial Conduct Authority, HM Treasury, and the UK Debt Management Office, outlines two primary reform options: greater central clearing of gilt repo transactions to reduce counterparty credit risk and improve dealer balance sheet efficiency, and the introduction of minimum haircuts or margins for non-centrally cleared transactions to mitigate risks from leveraged positions. These reforms follow stress experienced in the gilt market during the 2022 turmoil linked to the Liz Truss mini-budget and are part of a broader international effort, with similar moves underway in the U.S. and coordination through the Financial Stability Board. The Bank’s System-wide Exploratory Scenario highlighted the importance of sufficient capacity in the repo market to prevent shocks from spreading throughout the financial system. The Bank is requesting initial feedback by late November before advancing to more detailed consultations with other authorities. Meanwhile, the Bank’s prior quantitative tightening policy, involving active gilt sales, has contributed to market volatility by increasing gilt supply amid limited demand from domestic and international investors.