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Hedge funds warn BoE gilt repo reforms could worsen stress

The Alternative Investment Management Association said expanding central clearing and setting minimum haircuts could reduce liquidity and increase investors' funding risk during market volatility.

Reported · Written up by our desk · Fund Industry

The hedge fund industry has warned the Bank of England that proposed reforms to the UK gilt repo market could have unintended effects, including reduced liquidity and higher funding risks during periods of market stress, according to a Reuters report.

HousingWire reports that the Alternative Investment Management Association, which represents hedge funds, raised the concerns in a letter to the central bank this month about plans to expand central clearing for short term financing secured against UK government bonds.

AIMA said the proposals could create “new vulnerabilities” that expose investors to greater volatility, adding that it previously flagged structural concerns when responding to the BoE's initial plans last year, Reuters reported.

The BoE is consulting on steps intended to strengthen the resilience of the gilt repo market, including wider use of central clearing, where a central counterparty sits between buyers and sellers and guarantees transactions, plus minimum haircuts on repo deals that are not centrally cleared.

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