The Alternative Investment Management Association (AIMA), a hedge fund industry group, has cautioned the Bank of England (BoE) that proposed reforms to the gilt repo market could introduce new vulnerabilities and reduce liquidity during market stress. In a letter sent this month and reviewed by Reuters, AIMA expressed concerns that expanding central clearing in the market could expose investors to greater volatility and make funding markets less resilient in a crisis.
The BoE is consulting on measures aimed at making the gilt repo market more resilient, including expanding central clearing and introducing minimum haircuts on non-centrally cleared repo transactions. The reforms were prompted by past market stress episodes, such as the 2020 ‘Dash for Cash’ and the 2022 liability-driven investment crisis, which required central bank intervention. AIMA, however, argues that the proposed changes could alter hedge fund behavior, encouraging a shift from two-week repo financing to daily financing, which could leave funds more exposed to sudden funding condition changes.
AIMA’s letter, signed by its global head of markets, Adam Jacobs-Dean, suggests that the BoE should wait to assess the impact of similar reforms in the United States before implementing equivalent requirements in the UK. The US is preparing to introduce mandatory central clearing for Treasury repo transactions next year. The BoE has indicated that maintaining the existing framework without changes is not an option, but any reforms would likely take years to implement.
The debate highlights the growing importance of hedge funds in sovereign bond markets and the regulatory challenge of preventing leveraged investors from becoming forced sellers during market stress. According to BoE data, net borrowing in the gilt repo market stands at about £200 billion ($270 billion), with hedge funds accounting for approximately £85 billion. Changes to repo financing could have broader implications for gilt trading, market liquidity, and the cost of government borrowing.