Global hedge funds are pushing back against a Bank of England (BoE) proposal aimed at curbing risk-taking in UK bond trading, arguing that the measures could undermine market liquidity and the international appeal of British government debt.
Two major industry groups representing hedge funds—the Alternative Investment Management Association (AIMA) and the Managed Funds Association (MFA)—stated in a letter to the BoE that they oppose plans to impose minimum "haircuts" on gilt repo transactions. Such rules would effectively limit the cash investors can borrow against gilt collateral, restricting hedge funds' ability to accumulate leverage.
While supporting a separate proposal to shift more trades to central clearinghouses, the groups cautioned in their response to the BoE's consultation (which closed Friday) that mandatory clearing goes too far given current market readiness. The BoE's proposals seek to prevent a repeat of the 2022 market crash triggered by leveraged pension fund strategies during former PM Liz Truss's "mini-budget" crisis—the worst gilt selloff on record.
"If the UK leads with minimum haircuts, some professional traders may infer higher risk in UK government debt," warned Adam Jacobs-Dean, AIMA's global head of markets, governance, and innovation. "This could reduce gilt attractiveness, lower liquidity, and raise borrowing costs for the UK government." The BoE declined immediate comment.
The repo market has moved to the forefront of global regulatory agendas as officials seek to curb leverage risks in non-bank financial institutions (NBFIs). In the U.S., most Treasury-backed repos will require central clearing by mid-2027. Hedge funds' growing gilt market activity makes their stance significant: BoE data shows net repo borrowing by hedge funds hit £77 billion ($102 billion) in early June—a record high since 2016, with a few unnamed firms accounting for 90% of the total.
The most contentious proposal involves haircuts—the gap between a bond's market value and its collateral valuation in repos. BoE officials note that over half of non-centrally cleared gilt repos currently occur with zero haircuts as dealers compete to offer cheap leverage. Lee Foulger, the BoE's director of financial stability, warned this allows NBFIs to build "large leveraged positions at near-zero cost," risking liquidity shocks and forced sales during volatility.
Market participants, including hedge fund groups, argue regulators should adopt a more holistic approach, noting zero haircuts often reflect portfolio margining—where collateral considers a counterparty's overall exposure rather than individual trades. "Absence of a haircut in one trade doesn’t mean the position lacks effective risk management," wrote Rob Hailey, MFA's EMEA head of government affairs.
The BoE has invited evidence on portfolio margining practices to assess their robustness. Another proposal seeks higher central clearing rates for gilt repos, but industry groups urge incentives over mandates, citing the U.S. SEC's delayed compliance deadline after industry pushback. "The market isn’t yet ready for forced clearing," Hailey said, suggesting reconsideration if gilt repo volumes and infrastructure develop further.
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