Bank of England sets out options for tighter gilt repo rules

The Bank of England set out proposals on Thursday for tighter regulation of British government bond repo markets, which banks and other financial institutions use to temporarily convert their gilt holdings into cash.

The BoE's Financial Policy Committee said in November that it wanted to strengthen the market which came under stress in 2022 when British government bond prices slumped following then prime minister Liz Truss's "mini-budget".

"It's essential that market-based finance and core sterling rates markets absorb rather than amplify shocks," BoE Deputy Governor Sarah Breeden said on Thursday alongside a discussion paper setting out possible new regulations.

One option is to require greater central clearing of gilt repos to reduce the danger of one side of a deal failing to pay up and limit risks "from the disorderly unwind of highly leveraged, concentrated positions".

The BoE said that the United States' Securities and Exchange Commission had already ordered central clearing for most repo and cash transactions in U.S. Treasuries by the middle of 2027.

Another option would be for the BoE to set minimum risk margins or "haircuts" for gilt repo transactions that were not centrally cleared.

Breeden said the BoE wanted initial feedback from the financial industry and the public by November 28 before it considers its next steps with other British authorities and conducts a more detailed consultation.