The Bank of England is consulting on proposed reforms — such as requiring increased central clearing — to boost the resilience of the U.K. government bond market.
The central bank issued a discussion paper seeking feedback on possible measures to enhance resilience in the so-called gilt (government bond) repo market during periods of elevated stress.
The paper focuses on two potential approaches: increased central clearing, and imposing minimum haircuts or margins on non-centrally cleared transactions to curb counterparty risk and reduce the threat of a disorderly unwinding of highly leveraged positions.
It also seeks feedback on how to design and implement these measures to strengthen the market, and to identify the possible costs of the approaches.
The paper considers other options too, such as enhanced disclosure requirements that could bolster market resilience.
“It’s essential that market-based finance and core sterling rates markets absorb rather than amplify shocks to ensure the financial system continues to provide vital services to the real economy even during periods of stress. We’ve already taken meaningful steps towards addressing vulnerabilities in the gilt repo market, but it is important that we continue to explore reforms,” said Sarah Breeden, deputy governor for financial stability at the Bank of England, in a release.
The central bank said its proposals, developed in consultation with the U.K.’s Financial Conduct Authority (FCA) with input from HM Treasury and the U.K. Debt Management Office, come amid the global Financial Stability Board’s (FSB) efforts to mitigate risks in core financial markets, and the U.S. Securities and Exchange Commission’s (SEC) move to mandate central clearing for most repo and cash U.S. Treasury transactions by mid-2027.
The deadline for feedback is Nov. 28.