Bank of England Proposes Tighter Rules for Gilt Repo Markets

The Bank of England (BoE) has put forward proposals aimed at strengthening the stability of Britain’s gilt repo markets, which play a crucial role in government bond financing and liquidity management. The Financial Policy Committee (FPC) has published a discussion paper outlining potential new requirements, including more central clearing of repo transactions and mandatory minimum risk margins, also known as “haircuts,” for trades that remain outside central clearing houses.

Repos, or repurchase agreements, are a key part of the financial system, allowing banks and investors to borrow cash against government bonds as collateral. They are widely used for funding and liquidity but can become a point of stress during periods of market volatility. The BoE has pointed to the turmoil in September 2022, when pension funds faced severe liquidity pressures during a sudden spike in gilt yields, as evidence of the vulnerabilities in the current system. By tightening rules, the bank hopes to ensure smoother functioning of markets during shocks and reduce the risks of contagion.

Under the proposals, firms would need to move more of their repo activity into central clearing, where trades are guaranteed by a clearing house. This mechanism reduces counterparty risk and improves market transparency. For repo trades that remain bilateral, the BoE is considering setting minimum haircuts, which would limit the amount of leverage institutions can take on when borrowing against government bonds. The idea is to prevent situations where sharp changes in collateral values trigger destabilizing margin calls.

The consultation is expected to run until early 2026, with final rules potentially implemented later that year. Market participants are being invited to comment on how the proposals would affect liquidity and costs. Some investors and trading firms have already expressed concerns that stricter requirements could raise the cost of repo financing, particularly for smaller institutions that rely heavily on bilateral arrangements. However, regulators argue that the benefits of resilience outweigh the potential increase in costs.

This initiative places the UK in line with global efforts to strengthen repo markets after several episodes of stress, including the U.S. Treasury repo market turmoil in 2019. Both the Financial Stability Board (FSB) and the Bank for International Settlements (BIS) have called for reforms that limit excessive leverage and encourage greater use of central clearing.

If adopted, the BoE’s measures could reshape how gilt repos are conducted, forcing a structural shift toward more transparent and centrally managed transactions. For the UK, where gilts underpin not only government financing but also pension fund strategies and broader financial stability, ensuring the resilience of this market is seen as critical.