Enhancing the resilience of the gilt repo market

Summary

The purpose of this exploratory discussion paper (DP) is to probe the effectiveness and impact of a range of potential reforms to enhance the resilience of the gilt repo market. It has been developed in close consultation with the FCA, and with input from HM Treasury and the UK DMO.

The smooth functioning and resilience of government bond markets is fundamental to financial stability and the real economy. Given their role in financing government activity and as a benchmark for the pricing of other financial instruments, such as corporate bonds, government bond markets facilitate the provision of vital services, investment, and sustainable economic growth. Therefore, it is crucial to ensure that these markets are able to continue functioning during periods of stress and absorb, rather than amplify, shocks.

In turn, government bond repo markets are important to the resilience of government bond markets and, hence, to financial stability, given their role in facilitating the flow of cash and gilts across the financial system and as a source of funding for market participants’ leveraged strategies. Therefore, a range of jurisdictions and international bodies have placed increasing emphasis on identifying and mitigating vulnerabilities that may impact the functioning of those markets, in particular during stress. In 2022, the Financial Stability Board (FSB) report Liquidity in Core Government Bond Markets highlighted that, during the March 2020 ‘dash for cash’, limits to dealers’ intermediation capacity had prevented them from sufficiently expanding repo financing to counterparties, which exacerbated forced asset sales of government bonds. At the same time, recent analysis of various global government bond repo markets has found that collateral haircuts in non-centrally cleared markets are often zero or near-zero. This means they are unlikely to sufficiently mitigate counterparty credit risk, especially in stress, and can allow for the build-up of high levels of leverage. While leverage, when used prudently, can support liquidity, investment, and sustainable economic growth, high or poorly managed levels of leverage can generate sudden, sharp increases in margin or collateral calls (and thus demand for liquidity) which cannot always be fully anticipated by market participants or for which they may be poorly prepared. Taken together, these dynamics could generate imbalances in the demand and supply of liquidity during stress. In turn, this could pose a risk to the functioning of government bond cash and repo markets, with potential consequences for the real economy given the role of these markets in underpinning the funding of businesses, households, and the government.

In response to these findings as well as the continued growth of government bond and repo markets, authorities globally are exploring and, in some cases, implementing measures to enhance the resilience of those markets. For example, in 2024, the US Securities and Exchange Commission (SEC) mandated central clearing for most repo and cash US Treasury transactions by mid-2027, to mitigate systemic risks from non-centrally cleared transactions, support orderly market functioning, and enhance transparency. In addition, earlier this year the FSB published recommendations to mitigate risks from leverage in non-bank financial intermediation (NBFI), including in government bond markets, recommending that authorities consider policies such as greater central clearing and minimum haircuts or margins in non-centrally cleared repo markets.

In the UK, improving the resilience of market-based finance (MBF) and in particular of core sterling rates markets^{footnote [1]} is a key priority for the Bank of England (the Bank) and the Financial Policy Committee (FPC). In its July 2025 Financial Stability Report, the FPC highlighted that the resilience of core sterling markets, such as the UK government bond (‘gilt’) cash and repo markets, is vital to ensure the financial system can absorb, rather than amplify, shocks, thereby underpinning sustainable economic growth.

Enhancing UK government bond repo market resilience is a critical plank of that work. In normal times, the gilt repo market plays a critical role in ensuring the functioning of the gilt market and in supporting wider UK financial stability and the real economy. By facilitating secured short-term borrowing and lending using gilts as collateral, the gilt repo market supports the flow of cash and gilts across the financial system and allows market participants to effectively perform liquidity and collateral management. A well-functioning gilt repo market also enhances the liquidity and resilience of the cash gilt market, thereby supporting government financing, the transmission of monetary policy, and sustainable economic growth. During periods of market stress, a resilient gilt repo market helps mitigate the risk and impact of disorderly deleveraging and fire sales by providing stable funding to market participants, supporting broader financial stability and maintaining investor confidence. Therefore, it is essential that the gilt repo market is better equipped to self-stabilise against a range of severe but plausible shocks, with public authorities only intervening in the event of extreme shocks that threaten financial stability, given the risks to public finances such interventions entail.

UK authorities have already taken a number of steps to address vulnerabilities in the gilt repo market. For example, in March 2023 the FPC set out a resilience standard for LDI funds to limit the potential for liquidity demand from their leveraged gilt repo positions from spilling over into disorderly sales of gilts. Additionally, the Bank has launched the Contingent Non-Bank Repo Facility (CNRF) to enable eligible counterparties to borrow against gilt collateral from the Bank in the event of severe dysfunction in the gilt market that threatens financial stability arising from shocks that temporarily increase NBFIs’ demand for liquidity. The Bank’s system-wide exploratory scenario (SWES) also illustrated how actions taken by UK authorities and market participants have improved gilt and gilt repo market resilience to shocks, but further work is required given other risks to core markets highlighted by the exercise. In particular, the SWES underscored how limits to balance sheet capacity and counterparty credit risk concerns can prevent dealers from extending repo lending to their counterparties in stress.

This DP represents a further step in the exploration of the findings and recommendations of international workstreams, building also on our experience from previous episodes of stress and the SWES. It seeks market participants’ early views on potential measures to improve the resilience of the gilt repo market in stress, focusing on greater central clearing of gilt repo and minimum haircuts on non-centrally cleared gilt repo transactions (Section 3). It also seeks views on a broader range of other potential initiatives (Section 4).

Greater central clearing has the potential to provide well-established benefits in terms of dealer balance sheet efficiency and counterparty credit risk reduction, thus enhancing the resilience of repo lending in stress. In addition, margining practices employed in the centrally cleared market could help limit the build-up of highly leveraged and concentrated positions, thereby reducing the financial stability risks associated with their disorderly unwind. However, these benefits must be weighed against any potential impact that greater central clearing may have on market functioning and liquidity in the cash gilt and gilt repo markets, as well as other financial stability considerations, including potential liquidity pressures during periods of market volatility arising from the reactive nature of margin practices in centrally cleared markets. Minimum haircuts (or margins) on non-centrally cleared gilt repo transactions may also provide counterparty credit risk reduction and partially mitigate risks from highly leveraged strategies, but these must also be weighed against their potential impact on the cost of trading.

For both measures, there are important interlinkages between policy design choices, financial stability, and the potential impact on market functioning during normal market conditions, which this DP intends to explore. The two measures could also be complementary or implemented as part of a wider package of initiatives to maximise their effectiveness in enhancing the resilience of the gilt repo market.

This DP also explores some other potential measures to enhance the resilience of the gilt repo market and it invites feedback on any measures that could effectively alleviate constraints to the expansion of gilt repo lending in a stress, in addition to greater central clearing and minimum haircuts in non-centrally cleared transactions. For example, measures to support more prudent management of liquidity and counterparty credit risk, such as private counterparty or public disclosures, may support market confidence and liquidity supply during stress. The DP notes the ongoing debate internationally about the potential impact of the leverage ratio on dealer balance sheet capacity and wider market functioning. However, given the need to consider the wider microprudential and financial stability implications associated with resilient dealer balance sheets, this DP does not explore potential structural changes to the UK leverage ratio framework.

The Bank will continue to develop its thinking on potential policy tools to bolster the resilience of the gilt repo market in consultation with other UK authorities and welcomes input on the questions in this DP by 28 November 2025. After receiving and considering the responses, the Bank will publish a feedback statement and will continue to engage with the industry on potential measures. Any potential, prospective changes in this area would be announced and implemented with adequate notice and sufficient implementation periods to ensure that all market participants have sufficient time to input into the design of and prepare for any proposed changes.

1: The systemic importance of the gilt repo market

1. Given the systemic importance of government bond and repo markets and their continued growth and evolution, jurisdictions and international bodies have placed increasing emphasis on monitoring the functioning of these markets, as well as identifying and assessing potential risks and, when needed, taking actions to enhance their resilience. In the UK, improving the resilience of MBF, including core sterling markets, is a key priority for the Bank and the FPC. Within this ecosystem, the gilt market is fundamental to the broader UK financial system and real economy given its role in financing government activity, as a benchmark for the pricing of other financial instruments, such as corporate bonds, and in regulatory requirements such as capital or liquidity standards. Given this, enhancing the resilience of the gilt market is central to the Bank’s financial stability strategy.

2. In turn, the gilt repo market – in which market participants borrow and lend cash against gilt collateral – is critical to financial stability in its own right as well as to the functioning of the cash gilt market. The gilt repo market serves several important functions in supporting the functioning and stability of the financial system: it facilitates the flow of cash and gilts, offers a low-risk and liquid option for investment and liquidity management, and supports market participants’ cash management as well as the functioning of the derivatives and collateral markets by enabling market participants to carry out activities such as gilt investment, hedging, and collateral transformation. In providing these functions, the gilt repo market underpins the functioning and liquidity of the cash gilt market. A well-functioning gilt repo market also supports the transmission of monetary policy across the financial system as it is one of the key channels through which the Bank manages short-term interest rates.

2: Policy context and gilt repo market resilience

3. Across jurisdictions, analysis of previous stress episodes in core government bond cash and repo markets such as the March 2020 ‘dash for cash’ has shown that dynamics in government bond repo markets can generate risks to market functioning and financial stability. Evidence shows that market volatility is often associated with increased demand for liquidity from market participants, often to meet margin calls or redemptions or to absorb de-risking and deleveraging flows. At the same time, evidence from past stresses suggests that, during periods of high volatility, traditional liquidity providers such as banks may be limited in their ability or willingness to intermediate in cash government bond and repo markets, including to provide liquidity via gilt repo.^{footnote [7]} Such demand-supply imbalances could trigger behaviours that amplify market stress. For example, an inability to roll over gilt repo borrowing may force market participants to sell gilts, potentially triggering fire sale dynamics. Reductions in the availability of additional repo lending may also prevent investors from accessing the financing needed to take advantage of stressed prices, which in turn impedes market-stabilising forces. In the past, these behaviours have had disruptive implications for the cash gilt market and the real economy and, in extremis, required central bank interventions to mitigate threats to financial stability, with the associated potential risk to public finances.

4. Market participants bear the primary responsibility for managing the liquidity risks they face, and well-functioning markets play an important role in this by effectively redistributing liquidity across the financial system. However, authorities also have a mandate to pursue policies to ensure that severe but plausible shocks are absorbed, and not amplified, by the system of market-based finance. In its 2023–26 Medium-Term Priorities, the FPC set out three main pillars for policy work to build resilience in MBF: limiting the demand for liquidity rising unduly in stress; increasing the resilience of liquidity supply in stress; and considering potential central bank liquidity backstops (Figure 1). This DP mainly focuses on issues in the second pillar relating to the resilience of liquidity supply, but also explores how potential policy tools might mitigate risks from sharp increases in liquidity demand in stress, such as those generated by highly leveraged, concentrated positions.

Figure 1: The FPC’s 2023–26 Medium-Term Priorities to remediate vulnerabilities in market-based finance

5. The Bank and the FPC have already taken a number of meaningful steps towards addressing these pillars, including:

• In March 2023, the FPC set out a resilience standard for LDI funds. The September 2022 LDI episode demonstrated how LDI funds’ leverage, which had been predominantly generated via gilt repo, could result in market dysfunction when combined with poor risk management practices. In response to the material risks posed to UK financial stability by the sector, the FPC set out a steady-state framework for LDI resilience in March 2023, to ensure that LDI funds could meet margin and collateral calls without engaging in asset sales that could trigger feedback loops. Since then, LDI funds have maintained higher levels of resilience in line with the FPC’s framework as well as the requirements set out by European National Competent Authorities (NCAs) in their own macroprudential policy frameworks for liability-driven investment funds. Continued progress has also been made on operational and governance processes in LDI funds (including as a result of FCA guidance), which had exacerbated liquidity pressures on the sector during the stress. This has helped limit the potential for liquidity demand from LDI funds to spill over into gilt sales, thereby enhancing the resilience of the underlying cash gilt and gilt repo markets, including in the face of recent episodes of market volatility.
• In early 2025, the Bank’s CNRF opened for applications from eligible insurance companies, pension funds, and LDI funds (ICPFs). The purpose of the CNRF is to address severe dysfunction in the gilt market that threatens UK financial stability arising from shocks that temporarily increase NBFIs’ demand for liquidity, for example via margin calls on derivatives. When activated by the Bank if it judges there to be a threat to financial stability from market-wide dysfunction, the CNRF provides backstop liquidity by lending cash against gilts to participating ICPFs.

6. In addition, other work conducted by the Bank helps support gilt repo market resilience and the delivery of its financial stability objective. For example, the Prudential Regulation Authority’s (PRA’s) Fixed Income Financing Review identified a number of shortcomings in firms’ counterparty risk management processes and margining arrangements. The subsequent Dear CRO letter asked firms to consider the adequacy of their counterparty risk management controls and limit frameworks and underscored the importance of firms setting margin requirements and haircuts on non-centrally cleared repo exposures in line with prudent risk management principles rather than solely on the basis of commercial pressures. In addition, the Bank is currently transitioning to a repo-led operating framework for supplying central bank reserves (as described in its December 2024 discussion paper and subsequent feedback statement). The design of the framework aims to minimise market distortion by delivering the appropriate balance between liquidity provision directly through the Bank’s facilities and indirectly through core private markets, whose resilience in normal times and stress is critical for monetary and financial stability.

7. Efforts to enhance government bond repo market resilience are progressing in other jurisdictions. In the US, for example, the SEC has mandated central clearing for most repo and cash US Treasury transactions by mid-2027 to mitigate systemic risks from non-centrally cleared transactions, support orderly market functioning, and enhance transparency. Earlier this year, the Australian Council of Financial Regulators supported industry-led efforts to introduce central clearing in the Australian government bond and repo markets where benefits outweigh the costs, recognising its potential to enhance efficiency and financial stability. In late 2024, the European Systemic Risk Board (ESRB) explored the potential for incentivising greater central clearing of European government bond cash and repo markets to improve the functioning and resilience of these markets.

8. Potential vulnerabilities and actions to enhance the resilience of government bond markets have also been highlighted by recent international work, including two notable recent FSB initiatives:

• In 2024, the FSB published policy recommendations to enhance the liquidity preparedness of NBFIs for margin and collateral calls in derivatives and securities markets, focused on liquidity risk management practices and governance, liquidity stress testing and scenario design, and collateral management practices. The FPC welcomed this work in its November 2024 Financial Stability Report, underscoring its importance in ensuring NBFIs are able to manage their liquidity appropriately. In this context, in March 2024 the FPC also welcomed the FCA’s consultation paper on improving transparency for bond and derivatives markets, which could provide market participants with useful information to enhance their liquidity preparedness and reduce the risk of sudden, sharp rises in liquidity demand during periods of stress.
• Earlier this year, the FSB also published policy recommendations to enhance the ability of authorities and market participants to monitor and mitigate risks from leverage in NBFI. Repo markets are an important source of leverage for market participants, but this leverage can create financial stability risks and have destabilising effects on the real economy, particularly in the case of highly leveraged, concentrated, and crowded positions in core government bond markets.

9. This DP represents a further step in exploring some of the findings and recommendations from these international workstreams, and how these could be appropriately implemented in the context of the gilt repo market. In the remainder of this section, we set out key vulnerabilities in the gilt repo market which may impede the expansion of liquidity provision in stress (paragraphs 10–20) or generate undue increases in liquidity demand from NBFIs (paragraphs 21–24) and explore how they could ultimately pose a threat to UK financial stability.

2.1: Characteristics of the gilt repo market

10. Government bond repo markets, including the gilt repo market, are heavily reliant on dealer intermediation. This means that overall intermediation capacity within the gilt repo market, and thus liquidity supply, is dependent on dealers’ ability and willingness to lend, including during periods of stress. As such, dealers play a critical role in maintaining financial stability within the banking sector, the wider market and, ultimately, the broader UK economy. Repo dealers operate within risk limits set in line with their individual institutions’ risk management frameworks, which reflect business strategy and risk appetite. These limits (expressed in various forms such as Value-at-Risk (VaR), potential future exposure, notional limits, or individual counterparty exposure limits) help ensure that repo activity is aligned with institutional and prudential constraints.

11. Notwithstanding the importance of prudent risk limits, there is evidence that, in stress, desk-level and other limits can impede dealers’ ability to expand their liquidity provision to NBFIs. In aggregate, this may constrain the overall provision of liquidity via repo lending, at a time when demand is also likely to increase.

Counterparty credit risk and liquidity provision in stress

12. In the context of the gilt repo market, the SWES final report flagged how counterparty credit concerns are a key issue preventing banks from extending additional gilt repo lending to existing and new counterparties in stress. Several banks participating in the exercise reported that, in the face of heightened uncertainty, they would take action to reduce the risk involved in lending to clients via repo, with many banks applying higher haircuts on repo and reducing the tenors they were willing to offer. In addition, while most banks were willing to roll existing repo financing to their clients in the scenario, many were reluctant to extend additional repo lending. At the same time, some NBFIs reported that they would be likely to seek additional repo borrowing as a result of the shock.

13. According to SWES findings, this behaviour was exacerbated by the fact that banks’ haircuts were, for the most part, set at zero percent at the onset of the stress. Indeed, in the SWES, banks that reported deliberately setting haircuts at conservative levels in good times were less likely to increase haircuts during the stress than other banks. The predominance of zero or near-zero collateral haircuts in the non-centrally cleared repo market was highlighted in the November 2024 Financial Stability Report showing that more than half of the outstanding stock in the non-centrally cleared segment of the gilt repo market was conducted at zero haircuts, as well as in the findings of the PRA’s Fixed Income Financing Review, which noted that haircut-setting was being driven by competitive pressures rather than prudent risk management by firms. These haircut practices are not unique to the gilt repo market: according to a 2025 European Central Bank (ECB) Macroprudential Bulletin and research by the US Office of Financial Research, approximately 70% and more than half of non-centrally cleared government bond repo transactions are conducted with zero haircuts in the euro area and the US, respectively.

14. The current practice of applying near-zero haircuts in the non-centrally cleared gilt repo market may be evidence of market failure and lead to under-collateralisation even in relatively stable market conditions. This practice increases counterparty credit risk and makes it more likely that dealers might reduce their gilt repo lending in stress to remain within their existing credit risk appetite. While such behaviour may reflect prudent risk management at individual institution level, these individual behaviours can collectively result in an overall reduction in the provision of liquidity to the NBFI sector in stress.

15. The impact of counterparty credit risk concerns was evidenced during the global financial crisis (GFC), during which financial institutions became highly risk-averse due to fears of cascading counterparty defaults. This risk aversion led to a reduction in lending and borrowing activities, as institutions were reluctant to transact with counterparties whose creditworthiness was uncertain. Market participants also engaged in fire sales as funding markets dried up and counterparty risk concerns increased, which further depressed asset prices, exacerbated liquidity shortages, and constrained balance sheet access (Sarkar (2009), Shleifer and Vishny (2011) and Gregory (2012)).

Balance sheet capacity and liquidity provision in stress

16. Regulatory requirements are an important factor affecting repo desk-level limits, and therefore they impact dealers’ ability and willingness to extend additional lending via repo in stress. Among regulatory requirements, the leverage ratio broadly requires that banks hold a certain amount of capital based on the total non-risk weighted size of the assets on their balance sheet. As such, the leverage ratio represents a key tool in limiting the build-up of leverage in the banking system, enhancing the resilience of financial institutions, reducing the likelihood of destabilising deleveraging episodes, and supporting the broader resilience of the financial system. However, its design also means that the leverage ratio can act as a disincentive to increasing exposures which attract low capital charges in the risk-weighted framework, such as gilt repo activity.

17. There is evidence that banks have been adjusting to the impact of the leverage ratio on their repo activity through greater use of balance sheet netting, both via bilateral netting and greater use of central clearing (Bank for International Settlements (BIS) (2017), also evidenced in Chart E above). This has helped support gilt repo market functioning in normal times.

18. Research on the impact of the leverage ratio on liquidity provision in the gilt repo market during periods of quantitative easing has found that the leverage ratio supports the provision of liquidity during stress, as it prompts banks to become less leveraged and hence enter stresses with greater balance sheet capacity. On the other hand, there is also empirical evidence that the leverage ratio, and the way it is translated into individual repo desk-level limits, may constrain liquidity provision in the gilt repo market in stress when heightened demand for dealer intermediation can make existing desk limits more binding. This is particularly the case when the additional repo activity is not nettable for leverage ratio purposes. This can limit the additional repo lending dealers are able or willing to extend to their clients. Internationally, a BIS (2021) report on the lessons of the Covid-19 pandemic for the Basel reforms noted that, during the pandemic, the substantial increase in capital and liquidity held by banks as a result of those reforms enabled the banking system to remain resilient to the shock, although there was also some evidence that the leverage ratio requirements may have reduced banks’ incentives to intermediate in core markets. This is one of the reasons why US authorities recently consulted on potential changes to the Enhanced Supplementary Leverage Ratio (eSLR, significantly higher than the UK leverage ratio) requirements in the context of supporting US Treasury market liquidity.

Risks from highly leveraged, concentrated positions

19. Zero or near-zero collateral haircuts in dealer-to-client gilt repo mean that NBFIs can build up substantial levels of leverage at little cost. The FPC has previously noted that leverage in the gilt repo market, measured via net repo borrowing by hedge funds, has been increasing since the start of 2024, with a small number of hedge funds accounting for 90% of net borrowing. These hedge funds use repo borrowing to pursue a range of strategies, including RV trading. LDI funds are also large net borrowers in gilt repo and use leverage to purchase long-end gilts to hedge long-dated liabilities to pensioners (Box A). As described in the FSB’s final report on leverage in NBFI, the build-up of highly leveraged, concentrated positions could lead to large or unexpected liquidity demands from collateral or margin calls, potentially resulting in fire sales and amplifying stresses. These dynamics were at play during both the March 2020 ‘dash for cash’ (in the form of the unwind of US Treasury cash-futures basis trades) and the LDI episode in September 2022.

20. In addition, factors such as interconnectedness, concentration, and liquidity imbalances in the NBFI sector could further amplify vulnerabilities related to leverage and magnify market disruptions during stress. For example, large and concentrated risk exposures, held either by a single NBFI or collectively by a set of entities with similar investment strategies, may generate financial stability risks if these entities are forced to deleverage in a market that cannot absorb sales in an orderly manner.

Margin procyclicality and liquidity pressure on NBFIs

21. The collection of initial margin (IM) in centrally cleared and non-centrally cleared markets acts as an important safeguard by ensuring that exposures are adequately collateralised. The models that underpin the calibration of IM levels are, by design, responsive to changes in market conditions and therefore can have procyclical features. In general, these dynamics are more prevalent in centrally cleared markets but also apply to non-centrally cleared markets and are exacerbated when IM is held at low levels during normal times. For these reasons, UK regulations mandate that central clearing counterparties (CCPs) seek to limit procyclicality in their margin models using a suite of tools which could include applying margin buffers, applying higher weights to stressed observations, or utilising a floor.

22. While this feature of CCP margin models ensures that CCPs are prudently collateralised in the event of a member default, previous analysis has highlighted the benefits of greater transparency in CCPs’ initial margin models and gaps in market participants’ understanding of and preparedness for CCP IM calls. Sudden, sharp increases in IM can result in further pressures on NBFIs to source eligible collateral or cash during periods of high volatility, when repo activity is likely to be constrained, amplifying market stress.

23. The potential impact of margin procyclicality on NBFIs’ liquidity demand can be exacerbated by inadequate cash buffers to meet variation margin (VM) calls in stress. VM is designed to ensure that contracts are marked-to-market and, by convention, is posted in cash in the centrally cleared market, though it can be posted in cash or securities in the non-centrally cleared market. This practice may increase the cash liquidity needs of market participants who are net cash borrowers in the centrally cleared gilt repo market if they face significant increases in VM calls in stress. These dynamics were also a factor noted in HM Treasury’s call for evidence on pension scheme arrangements’ (PSA) exemption from the over-the-counter (OTC) derivatives clearing mandate: respondents suggested that, had the exemption not been in place at the time of the September 2022 LDI episode, there would have been more pressure on the cash gilt and gilt repo markets as pension funds would have sought to liquidate assets to post VM in cash.

24. In the non-centrally cleared gilt repo market, transaction-level data from UK SFTR suggests margins (in the form of haircuts) have risen in a procyclical way in previous stress events. The impact of a sharp increase in haircuts or margins in stress can be exacerbated when margins are held at zero percent, or very low levels, in normal times, since market participants may be less prepared to meet sudden and substantial margin calls when they arise. This was most notable in the LDI episode, during which haircuts on gilt repo extended to pension and LDI funds rose sharply from their usual zero or near-zero levels. While this provided additional protection to lending banks from a counterparty credit risk perspective, it exacerbated funding and liquidity pressures on those banks’ counterparties, which were already under strain from ongoing volatility. The SWES identified a similar dynamic of procyclically rising haircuts, with many banks reporting they would increase the haircuts on their gilt repo lending rapidly following the onset of the stress, though the exercise’s final report also noted that most NBFIs were able to meet the additional liquidity demands.

3: Potential measures to enhance gilt repo market resilience

25. This DP seeks views on the effectiveness of potential measures designed to mitigate the risks described in Section 2 and enhance the resilience of the gilt repo market. It is exploratory in nature and welcomes input on whether specific measures, or combinations of measures, could support market resilience and financial stability, without imposing undue costs on the market. The measures under discussion include greater central clearing of gilt repo, as well as minimum haircuts on non-centrally cleared gilt repo transactions, which are described in this section.

3.1: Potential financial stability benefits and costs of greater central clearing of gilt repo

26. Central clearing is a process through which a CCP steps in between the original parties of a transaction. As a result, the CCP assumes the obligations of both sides, becoming the buyer to every seller and the seller to every buyer. This effectively eliminates counterparty credit risk between the original parties, as parties face the CCP rather than each other.

27. The presence of a CCP simplifies the complex web of transactions that exist between counterparties, as illustrated in Figure 2. This allows participants to ‘net’ their exposures across the CCP’s ecosystem, reducing their counterparty exposures, as well as providing operational efficiencies that come from streamlining and standardising settlement processes. Post-GFC, mandatory central clearing in many OTC derivatives markets has promoted financial stability in those markets by making derivatives markets simpler and safer.

Figure 2: A complex ‘web’ of bilateral exposures is reduced to a simpler network through a CCP

Footnotes

• Source: The Bank of England's approach to cost benefit analysis.

28. To collateralise their exposures, CCPs require clearing members to post pre-funded resources. These mainly take the form of collateral to cover potential future exposures that could materialise due to adverse market moves in a scenario where the CCP has to close out the portfolio of a defaulted clearing member. At LCH Ltd., the only CCP currently offering central clearing of gilt repo through its RepoClear service, IM is recalibrated at least daily by the CCP based on members’ positions to withstand 99.7%^{footnote [8]} of historical five-day market moves. In addition, the CCP can apply margin add-ons for factors like concentration and credit risk. Together, IM and margin add-ons act as a first line of defence against potential losses following a member’s default. In addition to margin, members are also required to contribute to a mutualised default fund, calibrated to withstand the simultaneous default of the two members to which the CCP has the largest exposures under extreme but plausible market conditions.

29. In addition to pre-funded resources, clearing members are also required to exchange VM on a daily basis to offset changes in market value of the contracts held at the CCP. The exchange of VM is common practice in both centrally cleared and non-centrally cleared transactions. In centrally cleared markets, VM is paid in cash and then the CCP pays it out to the relevant ‘in the money’ participant, returning the liquidity to the market quickly.

30. The adoption and use of central clearing in government bond repo markets varies considerably across jurisdictions due to differences in market structure, regulation, and trading and clearing infrastructure. In the US, by mid-2027 almost all UST repo transactions will be centrally cleared due to the SEC’s central clearing mandate, from approximately 20-30% in 2022.^{footnote [9]} In Japan, over 60% of outstanding Japanese government bond repo is voluntarily centrally cleared at the Japan Securities Clearing Corporation.^{footnote [10]} In the euro-area government bond repo market, over 60% of outstanding repo transactions are centrally cleared, with large variations across euro-area countries (eg, 72% in Italy, 27% in Sweden and zero in 12 other euro-area jurisdictions).^{footnote [11]}

31. In the gilt repo market, 23% of gross outstanding transactions are currently voluntarily centrally cleared at LCH Ltd., which is authorised and supervised by the Bank,^{footnote [12]} through its RepoClear service. CCPs in the UK are regulated in line with international standards: the Principles of Financial Markets Infrastructure, implemented via the UK Onshored European Markets Infrastructure Regulation, which holds CCPs to robust standards in terms of their financial and operational resilience. The Bank is currently consulting on its CCP rulebook, which looks to maintain the same high standards.

32. Currently, LCH Ltd.’s RepoClear service offers a direct clearing model, mainly for banks and securities dealers, and sponsored clearing models for a subset of non-bank counterparties. Under the RepoClear service’s sponsored clearing model, the non-bank counterparty becomes a sponsored member with the support of a sponsoring agent, ie a bank who is already a direct member of the CCP. This sponsoring agent facilitates the payment of margins from the non-bank to the CCP and contributes additional resources on behalf of its clients, including the client’s contribution to the default fund. In the case of guaranteed sponsored membership, the sponsoring bank is also required to guarantee to cover losses incurred beyond the non-bank's prefunded resources in case of the non-bank’s default.

33. This section of the DP aims to explore the potential for greater central clearing to enhance the resilience of the gilt repo market. This DP does not make assumptions about the share of the market that would need to be centrally cleared to realise financial stability benefits, how long it would take to reach that level, which specific central clearing access model would be developed by one or more CCPs clearing gilt repo, or how greater central clearing would be achieved. However, the Bank is aware that there are interdependencies between the benefits and costs of central clearing, including from a financial stability perspective, and the way in which central clearing is implemented and used by market participants. We welcome views from market participants on how this could work in practice and what the costs and benefits would be.

Netting benefits and dealer intermediation capacity

34. The role of central clearing in enhancing dealer intermediation capacity has been widely noted by the academic literature and policymakers (eg, Duffie (2020) and the Inter-Agency Working Group on Treasury Market Surveillance (IAWG) 2021 report). Under central clearing, if a dealer transacts a repo with one counterparty and a reverse repo with another counterparty, it would substitute exposures to the CCP for the original separate (bilateral) counterparty exposures. Subject to conditions,^{footnote [13]} the dealer could then net the repo (a liability) against the reverse repo (an asset) for regulatory and accounting purposes. This multilateral netting reduces the number and size of individual exposures, lowering the risk each dealer has to account for on their balance sheet. In turn, this means that dealers can hold less capital against these exposure profiles or make alternative use of the balance sheet that may be available against existing capital levels. While netting in the non-centrally cleared market serves the same purpose and is actively used by dealers, netting efficiencies are generally greater with central clearing, given the presence of one single counterparty (the CCP).

35. Recent literature has sought to quantify these potential benefits. Baranova et al (2023) find that comprehensive central clearing could have increased the stock of nettable gilt repo by £75 billion on an average trading day before the March 2020 ‘dash for cash,’ equivalent to 9% of all outstanding gilt repo at the time. This stock of nettable gilt repo would have risen to £81 billion on an average day during the ‘dash for cash.’ In terms of freeing up balance sheet, the move to comprehensive central clearing would have reduced the leverage ratio impact of gilt repo by 40% in aggregate for a sample of GEMMs.

36. In the cash US Treasury market, Fleming and Keane (2021) find that central clearing of all outright trades would have lowered dealers’ daily gross settlement obligations by roughly 60% in the weeks ahead of the ‘dash for cash,’ and by nearly 70% during the peak of the ‘dash for cash’ period. The authors also note that the estimated netting benefits of market-wide central clearing would be greater if repo transactions were taken into account. By contrast, Bowman et al (2024) examine the potential leverage ratio benefits of central clearing of both US Treasury cash and repo markets, finding that expanded central clearing would have a relatively limited impact (on the assumption of a partially cleared US Treasury repo market). This finding may reflect the fact that there is already greater adoption of central clearing by NBFIs and balance sheet netting by dealers in US markets compared to UK ones.

Reduced counterparty credit risk and liquidity supply

37. Central clearing seeks to reduce counterparty credit risk for market participants via several channels, with the extent of the benefits depending on the clearing model deployed and the CCP’s regulatory requirements. As outlined in paragraphs 27–28, multilateral netting reduces dealer banks’ counterparty exposures, while members’ prefunded resources and the predetermined CCP default process (the ‘default waterfall’) aim to absorb losses which may arise from the simultaneous default of the two clearing members to which the CCP has the largest exposures under extreme but plausible market conditions. This level of collateralisation and the default process aim to limit potential losses for the non-defaulting counterparty (relative to the level of protection offered by the current practice of zero or near-zero haircuts in non-centrally cleared markets) and the risk of contagion should one member default on its obligations. In the unlikely event that these prefunded resources are not sufficient, however, the CCP has access to other loss allocation or position balancing tools which could allocate any remaining losses among members.

38. These centralised default management processes reduce the risk of a disorderly unwind or transfer of defaulted members’ positions, potentially reducing the market impact of the default. Furthermore, the centralisation and transparency of default management within CCPs could mitigate uncertainty during periods of market stress and potentially reduce the first-mover advantage of dealers’ withdrawal from liquidity provision in expectation of further defaults. Therefore, central clearing allows repo dealers to reduce their counterparty credit risk and generate further headroom with respect to internal credit limits, with the additional capacity potentially deployable into further repo activity, including in stress.

Mitigating risks from highly leveraged positions

39. As noted in Section 2, a significant share of collateral haircuts in the non-centrally cleared gilt repo market are currently zero or near-zero. This allows market participants to build-up highly leveraged, concentrated positions by borrowing in the repo market against government bond collateral, which, if not properly managed, could pose risks to financial stability. Therefore, and in line with the FSB’s recommendations on leverage in NBFI, there is merit in exploring the potential for central clearing to mitigate financial stability risks from leveraged, concentrated strategies which could trigger forced asset sales and amplify market dysfunction.

40. Greater central clearing may increase the price of high levels of leverage in the form of higher margin requirements, making it more costly for market participants to build and maintain highly leveraged positions. Broadly, two channels might contribute to this effect. First, if the cost of margin were to increase, this could decrease the profit of leveraged positions and therefore of arbitraging discrepancies in pricing between financial instruments. Second, margin costs, to the extent these are fully met by the NBFI client, could place a limit on the re-use of repo collateral and therefore limit the maximum degree of leverage achievable via repo (not accounting for other factors, such as liquidity requirements). It is likely, however, that the ceiling to the build-up of leverage created by CCP margin costs would be binding only for the most highly leveraged counterparties, or in other words those market participants with the greatest potential to undertake destabilising asset sales during stress.

41. In addition, CCPs can impose margin add-ons for concentrated positions (eg, if the collateral portfolio includes a significant market share of a specific instrument or a set of instruments) or credit risk. This would act as a further disincentive to the build-up of highly leveraged, concentrated positions, although this is dependent on whether the central clearing model grants the CCP visibility of NBFI clients’ positions. Finally, greater transparency and more robust default management processes at the CCP could also help mitigate financial stability risks from defaults of leveraged participants, as described earlier in this section.

42. Ultimately, we expect that the impact of CCP margin requirements on NBFI leverage would depend on the amount of margin that NBFIs are required to post to the CCP and the clearing model deployed by the CCP (for example, whether the clearing model requires the NBFI client to post margin or whether these costs can be met by the sponsoring bank).

Impact on cost of trading and market liquidity

43. Given that central clearing (or, as discussed later, minimum haircuts) could increase the price or decrease the availability of leverage, it may therefore also impact the cost of trading in both stable and stressed market conditions. For example, if margin levels were high or firms were highly leveraged, margin requirements might increase the cost of trading and therefore affect the profitability of some market participants’ trading strategies. Some of these strategies, such as RV trading, play a key role in the functioning of the gilt repo and cash gilt markets by providing liquidity and facilitating price discovery.

44. The consequences of higher repo trading costs on market participants’ behaviours are uncertain. For example, market participants engaged in cash-futures basis trading may require greater compensation to arbitrage differences in pricing between bonds and corresponding futures, resulting in wider spreads, but the impact may be smaller for participants with offsetting centrally cleared gilt repo and reverse repo (such as strategies that involve arbitraging between different bonds) where margins are likely to be lower due to netting. In general, we expect the impact may be largest for market participants with directional repo positions such as pension schemes and LDI funds, who take positions in longer-dated gilts to hedge long-dated liabilities for pensioners and therefore are likely to incur greater margin costs under central clearing. However, these participants are generally much less leveraged than, for instance, hedge funds pursuing RV strategies.

45. In addition, there are also costs that arise from setting up and maintaining the operational infrastructure required to centrally clear gilt repo. This may be particularly binding for smaller market participants and, if required to centrally clear, may lead them to consider economically equivalent alternatives to the gilt repo market to achieve their objectives.

46. At the same time, the impact of central clearing on market participation may be offset by some of the other benefits of central clearing discussed above. For example, expanded dealer intermediation capacity could be deployed in the gilt repo market, enhancing gilt repo and cash gilt market liquidity. Similarly, the reduction in operational frictions resulting from central clearing may enhance market liquidity, offsetting some of the potential impact of higher margin costs. As a result, the overall impact of greater central clearing on the cost of trading may be manageable in comparison to the benefits.

Liquidity demand from sharp increases in margin calls

47. As noted in Section 2, greater central clearing may generate liquidity pressures on market participants, particularly during periods of stress.

48. Since the ‘dash for cash,’ there has been substantial international work on margining practices in both centrally cleared and non-centrally cleared markets, and a focus of these has been enhancing CCPs’ IM model transparency to enable market participants to better prepare for margin calls.^{footnote [14]} Further work was also conducted by CPMI-IOSCO to highlight effective practices in streamlining processes for collecting cash VM in centrally cleared markets. In addition, the FSB has set out recommendations to enhance market participants’ ability to cope with sudden, sharp rises in liquidity demand from (both centrally cleared and non-centrally cleared) margin calls. The SWES showed that NBFIs were well-prepared to post more non-cash margin during the stress scenario. However, the possibility remains that greater central clearing in gilt repo could lead to an increase in liquidity pressures on market participants due to sharp increase in cash margin calls, which they would need to be prepared for.

Financial stability risks to CCPs from greater central clearing

49. The gilt repo market operates on a delivery vs. payment (DvP) basis,^{footnote [15]} and so any increase in central clearing volumes would increase potential liquidity risks to CCPs operating in this space. CCPs need to ensure they hold sufficient liquid assets to manage these risks and may rely on members to contribute to the total liquid resources held at the CCP, and so this could potentially result in greater liquidity demands on the wider financial system. Greater reliance on CCPs in this market would also increase the importance of operational continuity at the CCPs as the risks associated with an outage would also increase.

50. However, the high regulatory standards to which the Bank supervises CCPs can act as mitigants to these risks. CCPs in the UK are required by regulations to have sufficient financial and liquid resources to ensure they can meet the obligations that would arise in extreme but plausible market conditions that led to the default of the two clearing members to which they had the highest aggregate exposures. These requirements aim to provide confidence in the continuity of critical clearing services in stress and would scale in line with the increased volumes cleared at the CCP. The Bank also expects CCPs to meet new expectations of their operational resilience and continues to work closely with other authorities to promote the operational resilience of the broader financial system to mitigate the risk of disruption in core markets.

51. The risks outlined above may evolve if new CCPs were to enter the gilt repo market, as is expected to be the case in the US Treasury market following the announcement of the SEC’s central clearing mandate. The presence of multiple CCPs could incentivise greater innovation in access models and encourage participation from a broader range of market participants. However, having multiple CCPs operating in the same market may result in the fragmentation of repo positions across CCPs, reducing some of the financial stability benefits of central clearing, such as those from balance sheet netting, the prudent management of concentration risks, and centralisation of default management procedures.

52. Some of these risks may also apply to sponsoring banks. For example, if only a small number of banks were to offer clearing services to clients, the default of one sponsoring clearing member means that a large number of gilt repo market participants, such as sponsored clearing members, may be temporarily impacted or unable to continue participating in the market.

3.2: Central clearing model design, implementation, and implications for financial stability

53. While this DP makes no assumptions around specific central clearing models, we expect that many of the financial stability costs and benefits of greater central clearing are contingent on the design and set-up of the CCP clearing model. For example, a gilt repo clearing model which does not prescribe the extent to which NBFI clients pay margin to the CCP (as is currently the case in the US Fixed Income Clearing Corporation, where margining is negotiated bilaterally between clearing members and their clients) may limit some of the financial stability benefits, such as the potential reduction in highly leveraged, concentrated positions via higher margin costs. At the same time, flexibility on margin pass-through to NBFI clients may also mitigate some of the potential impact of central clearing on the cost of trading for NBFIs, and therefore on underlying market liquidity and pricing. As another example, under a direct clearing access model such as the existing sponsored access model available at LCH Ltd.’s RepoClear service, the CCP may have greater visibility of the build-up of concentrated, leveraged positions at both member and market level, allowing it to apply add-ons as warranted by the degree of risk; under other clearing models, where client positions are aggregated into a single ‘omnibus’ client account, this may not be possible. The design of the clearing model may also impact the banking regulatory treatment of cleared repo positions that banks facilitate, impacting balance sheet netting benefits. Furthermore, in a central clearing model where sponsoring banks guarantee the settlement of their clients’ trades, the reduction in counterparty credit risk is less significant compared to other models. This is because the sponsoring bank continues to bear credit exposure to its clients, even though the trades are centrally cleared.

54. Additionally, the choice of how greater central clearing is implemented, and the scale of central clearing achieved, will have a bearing on the ultimate financial stability implications. Greater central clearing could be achieved, for example, via a regulatory requirement to centrally clear all gilt repo trades (ie a ‘central clearing mandate’) or could be driven by market participants’ decisions to increase their portion of centrally cleared repo business in response to incentives. In the US, the SEC has mandated central clearing for most cash and repo US Treasury transactions by end-2026 and June 2027, respectively. In the case of the gilt repo market, even if a mandate were the right way forward, it may not be suitable for all types of market participants to be in scope. The costs and benefits for different sectors of the market would need to be assessed. For example, as mentioned above, in the UK, pension scheme arrangements are not in scope of the OTC derivatives clearing mandate as the call for evidence found that the liquidity buffers required to meet cash VM calls would reduce schemes’ ability to invest in productive assets and generate returns. At the same time, were pension schemes not prepared to meet large increases in cash VM in stress, this could exacerbate liquidity and selling pressures in the gilt market and increase the likelihood of financial instability. Finally, the FPC’s March 2023 resilience standard for LDI funds has already resulted in more prudent risk management of leverage in the sector, and the potential impact of greater central clearing on pension schemes should be assessed in this context.

55. Some jurisdictions have suggested that incentives may be a preferable way to achieve greater central clearing (for example, the ESRB report on its system-wide approach to macroprudential policy). Packages of incentives may help achieve greater central clearing of gilt repo without a mandate, achieving some of the benefits of central clearing while potentially helping to minimise costs. Some potential incentives that authorities might consider in this context include:

• Greater consistency around risk management practices for gilt repo across centrally cleared and non-centrally cleared markets by aligning cost structures. This might be achieved, for example, via minimum haircuts or margins on non-centrally cleared gilt repo, a potential measure which is discussed in greater detail later in this paper.
• Enhancing NBFIs’ ability to access CCPs. This could include exploring different ways of bolstering access to central clearing, which could include different forms of membership.
• Exploring cross-margining (ie offsetting margin requirements across multiple positions or asset classes held at different central clearing services, reducing the total collateral needed) across centrally cleared repo and derivatives trades, subject to prudent risk management by CCPs.

3.3: Potential financial stability benefits and costs of minimum haircuts in non-centrally cleared gilt repo transactions

56. In the context of this DP, ‘minimum haircuts’ refers to the potential for a minimum requirement on the level of adjustment to the quoted value of securities collateral provided by market participants in a non-centrally cleared government bond repo transaction.^{footnote [16]}

57. In both the policymaking community and the academic literature, there has been growing interest in exploring the merits of minimum haircuts to address vulnerabilities that may threaten financial stability. Most recently, the FSB recommended that authorities consider introducing activity-based measures such as minimum haircuts to mitigate risks from leverage in core markets. In a similar vein, staff work at the Federal Reserve and the ECB recently has explored the potential impact of minimum haircuts (in government bond and non-government bond repo, respectively) on hedge fund leverage; the former, for example, concluded that minimum haircuts on US Treasury repo would reduce effective leverage on RV trades, but may also have an impact on the size and volatility of spreads in related financial instruments, as well as liquidity conditions in relevant markets.

58. Previously, in 2015, the FSB set out a regulatory framework for minimum haircuts on non-government bond, non-centrally cleared securities financing transactions. This framework was part of a broader package of measures to mitigate financial stability risks from NBFI and was later transposed into bank capital standards by the Basel Committee on Banking Supervision (BCBS). Jurisdictions are continuing to explore the implementation of these standards, and in many cases, there have been delays, including due to data gaps preventing authorities from fully assessing securities financing markets.

59. The remainder of this section explores the extent to which minimum haircuts may mitigate vulnerabilities in the gilt repo market, including by reducing counterparty credit risk, limiting the risk of liquidity shocks from sharp increases in margins or haircuts, and by mitigating the build-up of highly leveraged positions. This section will also explore how minimum haircuts could potentially impact gilt market liquidity and pricing and covers initial considerations on implementation and design choices.

60. As in our exploration of the considerations around central clearing, we have not made any ex ante assumptions about the calibration or design of minimum haircuts. However, international precedents suggest they might be calibrated in a way that reflects the risk profile of the product or portfolio, including different repo terms, collateral maturities, and counterparty credit risk (as noted in, for example, work by the Federal Reserve on proportionate margining for repo transactions, or the FSB’s policy recommendations on addressing NBFI leverage in core financial markets).

Reduced counterparty credit risk and liquidity supply

61. In Section 2, we noted that the PRA’s Fixed Income Financing review found that, in the non-centrally cleared gilt repo market, margining practices tend to be driven by competitive pressures and market dynamics rather than prudent risk management. These findings were echoed by a recent US Treasury Market Practices Group (TMPG) white paper in the context of the non-centrally cleared US Treasury repo market.

62. Setting minimum haircuts may help address this instance of market failure, creating a baseline degree of counterparty risk protection on firms’ gilt repo exposures. In turn, this reduction in banks’ counterparty exposures may help bolster confidence during periods of stress and reduce the risk of concerns about counterparty credit risk and defaults crystallising into a reduction in liquidity supply, as occurred during the global financial crisis and was illustrated by the SWES (Sections 2 and 3.1). At the same time, minimum haircuts may result in the party giving collateral taking an unsecured credit exposure to the other party, at the margin resulting in additional counterparty credit risk.

Dampening liquidity demands from sudden, sharp rises in haircuts

63. Section 2 describes how haircuts in the non-centrally cleared gilt repo market rose in a sudden, sharp fashion during previous stresses and in the SWES. At the same time, there is generally greater flexibility in risk management practices in non-centrally cleared markets than in centrally cleared markets.

64. Minimum haircuts may help mitigate the sudden, sharp nature of these procyclical increases and reduce corresponding financial stability implications. By setting minimum haircut requirements, banks may be able to avoid sudden spikes in collateral calls, as they would be better collateralised against counterparty risk in the run-up to stresses. Evidence from the SWES corroborated this, finding that banks that came into the exercise with higher haircuts were less likely to raise them procyclically in the stress scenario.

Mitigating risks from leveraged positions

65. In Section 3.1, this DP discussed how margin costs arising from central clearing might impact leveraged NBFI strategies: they could raise the cost of leverage, thereby potentially reducing the ex ante build-up of highly leveraged, concentrated positions. In a broad sense, minimum haircuts are expected to work in the same way: they could cap the level of leverage market participants could take via gilt repo while also affecting the profitability of individual trades by increasing the amount of equity capital needed to fund leveraged positions, particularly for those firms that are leverage constrained. As with greater central clearing, we expect this may bind in particular on the most highly leveraged market participants, reducing the risk that they propagate or amplify shocks.

Impact on cost of trading and market liquidity

66. As outlined in Section 3.1 on the potential impact of greater central clearing, an increase in the cost or decrease in the availability of leverage means that minimum haircuts may have an impact on the cost of trading and on market participants’ ability or willingness to arbitrage between financial instruments or take leveraged positions in the gilt market. This may result in an impact on gilt market participation and pricing. The increase in trading costs would be highly dependent on the calibration of minimum haircuts, but it would likely be larger for market participants who take directional positions or are more highly leveraged. A key distinction from central clearing is that minimum haircuts do not come with set-up and maintenance costs (such as contributions to a CCP default fund). Another is that minimum haircuts would not expand balance sheet capacity, reducing some of the potential countervailing benefits of the policy tool.

3.4: Minimum haircut design, implementation, and financial stability

67. Minimum haircuts could be structured and designed in different ways: they could be calibrated according to different risk sensitivities or vary by maturity; they could apply only to certain subsets of the gilt repo market or to certain participant types (eg, only on dealer-to-client trades); they could be applied at the level of individual trades, or to portfolios as a whole.

68. As with central clearing, policy design and implementation choices would have an impact on the extent to which financial stability costs and benefits are realised. One key variable is the scope of potential minimum haircuts. For example, policymakers wishing principally to address risks from NBFI leverage via minimum haircuts may restrict those minima to the dealer-to-client segment and implement the policy via bank prudential rules.

69. Another key variable in any minimum haircut regime is calibration. Unlike in the case of central clearing, where risk management is conducted by the CCP (subject to regulators’ oversight), authorities would calibrate the level of minimum haircuts. Higher minima may have a greater impact on reducing the ex ante build-up of leverage and achieve a greater reduction in counterparty credit risk, thus bolstering the resilience of liquidity supply, but in turn may imply a greater impact on the cost of trading in normal times.

70. It is also conceivable that the optimal approach to enhancing the resilience of the gilt repo market lies in a combination of greater central clearing and the introduction of minimum haircuts on non-centrally cleared transactions. As outlined above, increased central clearing promotes more prudent collateralisation, which can serve as an effective mitigant against the build-up of excessive leverage, but only if margin requirements are fully met by clearing members’ NBFI clients. To ensure this outcome, a dual approach that integrates broader central clearing with minimum haircuts may offer the greatest benefits in enhancing the resilience of the gilt repo market.

4: Other potential measures to enhance gilt repo market resilience

71. This DP has been primarily focused on greater central clearing and minimum haircuts on non-centrally cleared gilt repo transactions, as those appear to be the measures that could help mitigate more than one of the vulnerabilities described in Section 2. Overall, the Bank recognises that no single measure would address fully all gilt repo market vulnerabilities in a way that minimises the impact on the cost of trading and market liquidity, and that a combination of measures could be more effective. We therefore welcome views on potential measures, either alternative or additional to those described in this DP, that could enhance the resilience of the gilt repo market.

72. As described in Section 2, constraints affecting the resilience of repo lending by dealers in stress are complex and include risk limits, including those driven by counterparty credit risk concerns, as well as balance sheet constraints, such as those resulting from the leverage ratio requirement.

73. Section 3 describes how greater central clearing and minimum haircuts could ensure better collateralisation, helping mitigate counterparty credit risks, thus supporting the resilience of liquidity provision via gilt repo in stress. However, greater collateralisation could also be supported via other initiatives, such as promoting best practice around more prudent risk management practices in relation to banks’ gilt repo exposures. This was suggested in the recently updated BCBS counterparty credit risk guidelines and the 2023 CRO letter on Fixed Income Financing. In addition, the US TMPG recently updated its existing Best Practices for Treasury-backed securities markets to ensure that all US Treasury repo is risk managed prudently (including the application of appropriate haircuts) and that market participants facilitating central clearing for clients ensure that all aspects of that activity are appropriately risk managed.

74. Enhanced public and counterparty disclosures, cited as potential options in the FSB policy recommendations to address risks from leverage in NBFI, could also help promote more prudent risk management practices by providing information that may support market participants to better monitor, understand, and manage vulnerabilities linked to highly leveraged and concentrated positions, including those in government bond repo markets. For example, public disclosures of aggregated, anonymised information (such as positions, leverage and market liquidity conditions) could help market participants identify concentrations of exposures and crowdedness, as well as estimate losses under stressed conditions. Privately shared counterparty disclosures, provided by leveraged non-banks to leverage providers (including, for example, aggregate information on their exposures across all entities or vehicles that are managed under a common strategy), could grant leverage providers the transparency necessary to effectively manage counterparty credit risks, including the calibration of appropriate haircuts and risk limits.

75. In relation to mitigating dealer balance sheet constraints in stress, including those associated with regulatory requirements, any measures should be weighed against the broader financial stability considerations that would arise. Internationally, there have been discussions around the potential impact of the leverage ratio on dealer balance sheet capacity and wider market functioning, including US authorities’ recent consultation on potential changes to the eSLR requirements, to aid US Treasury market liquidity. The leverage ratio, introduced following the GFC to curb the build-up of excessive leverage in the banking system, is a key tool for strengthening the resilience of financial institutions. By mitigating the risk of destabilising deleveraging episodes, it supports broader financial system stability. In the UK, the FPC holds statutory responsibility for regularly reviewing the UK leverage ratio framework and making adjustments as necessary, considering the potential costs and benefits to both the stability of UK financial markets and the wider real economy. Given the need to consider wider microprudential and financial stability implications associated with resilient dealer balance sheets, this DP does not explore potential structural changes to the UK leverage ratio framework.

76. Separately, overall market capacity for gilt repo lending in stress could also be increased by adopting market structures that expand the number and types of liquidity providers beyond the traditional group of repo dealers, for example via the development and adoption of all-to-all trading platforms. The impact of these types of initiatives in both normal and stressed market conditions should be assessed carefully as they may generate both benefits (eg, increased competition and more efficient price discovery) and introduce risks (eg, increased counterparty credit risk given limited information on counterparties’ creditworthiness).

77. It is unlikely that one single policy would effectively mitigate all the vulnerabilities described in this DP. The Bank therefore welcomes market participants’ views on how different policies could be combined to increase the overall resilience of the gilt repo market, including considering potential trade-offs and complementarities. This could include, for example, the requirement to centrally clear a portion of the gilt repo market alongside minimum haircuts for those trades that are not captured in the central clearing requirement.

5: Commenting and summary of questions

5.1: Commenting on this discussion paper

The Bank welcomes feedback on the questions posed in this DP from all interested parties.

Comments should be sent to GiltreporesilienceDP@bankofengland.co.uk by 28 November 2025.

Responses to the questions set out in this DP will form the basis of the Bank’s engagement with market participants and other interested parties on the resilience of the gilt repo market and MBF more broadly.

Please indicate in your response if you believe any of the proposals in this DP are likely to impact persons who share protected characteristics under the Equality Act 2010, and if so, please explain which groups and what the impact on such groups might be.

Please refer to our Privacy and the Bank of England page for more information.

5.2: Summary of questions

The Bank is seeking views from interested parties on the following issues:

Characteristics of the gilt repo market

Q1. Do you agree with assessment of the gilt repo market dynamics described in Section 2? Are there any further dynamics that you would highlight, beyond those identified above? Which of the issues described in Section 2 do you see as key risks to gilt repo market resilience, given current market structure?

Potential measures to enhance gilt repo market resilience

Q2. What is your view on the potential benefits, risks and broader market implications of greater central clearing of gilt repo? To what extent do you expect greater central clearing, especially in the dealer-to-client segment, would expand dealers’ gilt repo intermediation capacity in normal times and in stress? To what extent would greater central clearing reduce counterparty credit risk exposures as well as uncertainty during periods of stress and counterparty defaults, and increase market participants’ appetite to extend further gilt repo lending? How do you expect dealers would deploy any additional capacity, both in stress and in stable market conditions?

Q3. How do you expect greater central clearing would impact the build-up and unwind of highly leveraged, concentrated trading strategies in the gilt repo market? Which market activities and types of participants do you expect would be most affected?

Q4. What would the largest impacts of greater central clearing be for market participants? How would it affect your business model/trading strategies and what actions would you take in response? How would greater central clearing impact cash gilt market liquidity and pricing? Please provide worked examples or quantitative evidence where possible.

Q5. To what extent do you think market participants would be prepared to manage the potential increases in liquidity needs that could come with greater central clearing in the gilt repo market? Which policy initiatives might be able to help mitigate this risk?

Q6. Do you see any risks to financial stability generated by an increase in centrally cleared gilt repo activity at CCPs and, potentially, a limited number of sponsoring banks? In your view, how material are these risks, and how could they be best mitigated?

Q7. In your view and given your business model, what are the costs and benefits of different clearing models? What are the key features of a central clearing model which maximises benefits to market resilience and financial stability while minimising any potential increase in trading costs?

Q8. To what extent could incentives achieve a sufficient expansion in central clearing to deliver meaningful benefits to the resilience of the gilt repo market? Would a clearing mandate be necessary?

Q9. What is your view on the potential benefits, risks and broader market implications of introducing minimum haircut on non-centrally cleared gilt repo transactions? To what extent could minimum haircuts effectively address observed market failures around margining practices in the non-centrally cleared gilt repo market? To what extent would this measure reduce counterparty credit risk and uncertainty during periods of stress, and bolster market participants’ appetite to extend further repo lending?

Q10. To what extent could minimum haircuts help dampen procyclical increases in haircuts in stress? What is your view on the materiality of this benefit in the context of broader liquidity shocks that repo market participants may face?

Q11. How do you expect minimum haircuts would impact the build-up of leveraged, concentrated trading strategies in the gilt repo market? Which strategies and types of market participants do you think would be most affected?

Q12. What would the largest impacts of minimum haircuts be for market participants? How would they affect your business model/trading strategies and what actions would you take in response? How would minimum haircuts on gilt repo impact cash gilt market liquidity and pricing? Please provide worked examples or quantitative evidence where possible.

Q13. Is there a particular model or calibration of minimum haircuts which maximises benefits to financial stability while minimising potential costs to market participants?

Other potential measures to enhance gilt repo market resilience

Q14. Aside from greater central clearing and minimum haircuts in non-centrally cleared transactions, what are the measures, or combination of measures, that you think could effectively alleviate different constraints to the expansion of gilt repo lending in a stress?

Q15. In particular, what are the risks and benefits associated with greater private and public disclosures of leveraged positions generated via gilt repo? How do you expect market participants’ behaviour to evolve as a result of these potential measures?

Q16. In your view, what is likely to be the most effective combination of potential reforms to effectively address the vulnerabilities in the gilt repo market and enhance its resilience?