Hedge funds warn BoE repo reforms could backfire
TLT•The Alternative Investment Management Association warned the Bank of England that proposed gilt repo reforms, including expanded central clearing, could reduce liquidity during market stress and expose investors to more volatility. Net borrowing in the market totals around £200 billion, including £85 billion by hedge funds.
1. AIMA raises concerns
The Alternative Investment Management Association told the Bank of England that expanding central clearing in the gilt repo market could create “new vulnerabilities” and expose investors to more volatility. The group said the changes could encourage hedge funds to rely on daily repo financing rather than typical two-week deals, leaving investors more exposed to funding-market disruption.
2. Proposed reforms
The BoE is consulting on measures to strengthen the market, including expanded central clearing and minimum haircuts on repo transactions that are not centrally cleared. The proposals followed the 2020 “Dash for Cash” and the 2022 liability-driven investment crisis, which exposed vulnerabilities that amplified market stress and required central bank intervention.
3. Next steps and market size
AIMA urged the BoE to wait and see how a US central-clearing mandate works before implementing one. The BoE has said reforms would likely take years, not months, and has not decided which proposals to take forward. BoE data put net borrowing in the gilt repo market at around £200 billion, of which £85 billion is by hedge funds.
