MFA Supports Increased Central Clearing of Gilt Repos

MFA urged the Bank of England to encourage greater voluntary central clearing of bilateral gilt repo transactions in a comment letter. MFA recommended steps to expand clearing access and reduce structural barriers, while stressing that a mandatory clearing requirement is premature.

“A stable gilt repo market helps keep borrowing costs low for the UK government, businesses, and households,” said Jillien Flores, MFA Chief Advocacy Officer. “Voluntary central clearing will strengthen resilience without increasing costs or pushing activity out of the market. Smart, proportionate reforms will help ensure the gilt market remains deep, liquid, and a cornerstone of global finance.”

Central clearing of bilateral repos reduces counterparty credit risk, improves transparency for regulators, and increases market capacity by lowering balance sheet and capital costs for dealers. These benefits depend on expanding access so a broader range of market participants can clear their trades. A voluntary approach, paired with stronger infrastructure and “done-away” clearing, will strengthen the market. The scale of the UK gilt market continues to evolve and imposing a mandatory clearing mandate at this time would disproportionately raise costs, limit participation, and concentrate activity among fewer firms—all to the detriment of market liquidity.

MFA outlined several areas where the Bank of England can reduce barriers and encourage greater adoption of voluntary central clearing, including:

• Address capital and accounting barriers: Revise capital requirements and accounting rules that make clearing costly for dealers and clients.
• Improve operational efficiency: Implement pre-trade credit checks and robust close-out provisions to reduce risk and streamline clearing processes.
• Enable cross-margining: Allow firms to offset margin requirements across products, which lowers costs and encourages broader adoption.
• Expand access through “done-away” clearing: Ensure indirect participants can clear trades executed with third parties, preserving anonymous trading and reducing fragmentation.

MFA also cautioned against requiring mandatory haircuts on non-centrally cleared repos. Such measures would ignore offsetting transactions that reduce risk, deviate from longstanding market practices, and impair liquidity. Firms should retain flexibility to apply proportionate, risk-based margining tailored to their counterparties and strategies.

Read the full letter here.

Source: MFA

ICMA responds to the Bank of England’s Discussion Paper on Enhancing the resilience of the gilt repo market

ICMA has responded to the Bank of England’s exploratory discussion paper, Enhancing the resilience of the gilt repo market.

In responding to this discussion paper, ICMA convened a dedicated taskforce from its diverse membership. This was coordinated through ICMA’s European Repo and Collateral Council as well as through its Asset Management and Investor Council (AMIC). The Taskforce includes gilt-edged market maker (GEMM) repo traders, other active sell sides in the gilt repo market, as well as firms from the buy-side, including pension funds, insurers, UCITS asset managers, money market funds (MMFs), alternative investors (hedge funds), trading venues (cash and repo), central counterparties (CCPs), and custodians. Essentially, the Taskforce represents the entire gilt and gilt repo market ecosystem, and a diversity of perspectives and priorities.

In its response, ICMA recognises the important benefits of central clearing for gilt repo, and the potential for increased non-bank participation, not least in reducing counterparty credit risk and expanding liquidity provision. ICMA notes the initiatives currently being undertaken by CCPs to support broader clearing participation, while maintaining the integrity of CCP risk management frameworks. Furthermore, ICMA identifies a number of regulatory initiatives that could help to remove barriers to access and so encourage non-bank participation in central clearing.

However, based on the unanimous member consensus, ICMA strongly opposes the suggestion of mandatory clearing for gilt repo. This would increase costs and restrict access for some participants, undermine the maturity transformation function of repo intermediation, and increase procyclicality. It is also not clear what the purpose of mandating clearing would be, and that the arguments relating to transparency, leverage, or counterparty credit risk are each flawed in the context of the UK market. Ultimately this would be a cost, and a risk, to gilt market stability and so to the UK economy. Clearing should be a commercial choice based on cost and risk considerations of the market participant and their clients.

Also based on broad consensus of members, the suggestion of minimum haircuts for bilateral gilt repo is dismissed for a number of reasons. Prime among these are: the fact that haircuts are a transaction-level tool intended to hedge liquidation risk and not intended to manage leverage; they do not take account of firms’ individual, counterparty-level risk management frameworks and risk appetite; and that they can introduce an additional and unnecessary cost and friction to trading in benign markets while quickly becoming redundant in volatile markets.

ICMA identifies a number of other policy measures, beyond improving access to clearing, that could be considered to enhance gilt market resiliency. Chief among these is the potential for enhancements to the operational resilience of the Sterling Monetary Framework (SMF), which could be the most meaningful and ultimately valuable outcome of this consultation. Promoting bank risk-management practices, in a number of areas, could also be a positive contributor to market resilience.

A well-functioning repo market is critical to the smooth and efficient operation of the gilt and other sterling fixed income markets, as well as for the effective transmission of monetary policy. Any additional costs to accessing the gilt market are a cost to UK taxpayers and savers, while any measures that make the gilt market more vulnerable to market volatility, or threatens its ability to function normally, particularly in times of stress, is a direct threat to the UK Government’s growth agenda.