The Alternative Investment Management Association (AIMA), a global hedge‑fund industry body, has sent a formal warning to the Bank of England (BoE) about its proposed reforms to the short‑term loan market that uses UK government bonds as collateral, known as the “repo” market.
Industry concerns over central clearing
AIMA’s letter, seen by Reuters, argues that moving more repo transactions into a central‑clearing system could introduce “new vulnerabilities” and expose investors to greater volatility, especially when markets are under stress. The group says the changes might push hedge funds toward daily financing rather than the typical two‑week deals, leaving lenders more exposed to funding disruptions.
BoE’s consultation and proposed safeguards
The BoE is currently consulting on measures intended to make the gilt repo market more resilient. Proposals include expanding central clearing, imposing minimum haircuts on non‑centrally cleared repo trades, and other safeguards designed to protect lenders and curb fire‑sale risks during market shocks.
These steps are a response to past episodes that highlighted fragilities in the market – the 2020 “Dash for Cash” and the 2022 liability‑driven investment crisis – both of which required central‑bank intervention.
Broader market context
Recent global bond‑market sell‑offs have pushed 30‑year gilt yields to their highest levels since 1998, putting borrowing costs in the spotlight. The International Monetary Fund noted that hedge‑fund activity in sovereign bond markets has grown, and the BoE has previously warned that increased leveraged hedge‑fund participation adds new risks.
Deputy Governor Sarah Breeden has emphasized that “doing nothing is not an option,” warning that banks could pull repo financing more aggressively in a severe shock. The BoE estimates the total net borrowing in the gilt repo market at around £200 billion, with hedge funds accounting for roughly £85 billion of that amount.
Next steps
AIMA recommends the BoE wait to see how the United States’ upcoming mandatory central‑clearing regime for Treasury repo operates before committing to similar changes in the UK. The BoE has said any reforms would likely take years to implement and has not yet indicated which proposals it will adopt.
Original reporting: Appleton, WI News Feed (HLL/CB) — read the source article.
