Key facts
- Hedge fund industry body AIMA warned the Bank of England that proposed reforms to the gilt repo market could backfire.
- AIMA said central clearing and minimum haircuts could create new vulnerabilities and increase volatility.
- The reforms are a response to the 2020 'Dash for Cash' and 2022 LDI crisis.
- Net borrowing in the gilt repo market totals around £200 billion, with hedge funds accounting for £85 billion.
The Bank of England's proposed reforms to the gilt repo market have drawn criticism from the Alternative Investment Management Association (AIMA), a hedge fund industry body. AIMA warned in a letter seen by Reuters that implementing central clearing and minimum haircuts could backfire, potentially reducing liquidity and increasing volatility during times of market stress.
The proposals aim to make the market more resilient, following vulnerabilities exposed by the 2020 'Dash for Cash' and the 2022 liability-driven investment crisis. These events amplified market stress and required central bank intervention.
AIMA expressed concerns that the changes could lead hedge funds to favor shorter-term financing over typical two-week deals, increasing exposure to funding market disruptions. The body suggested the Bank of England should observe the impact of the US Treasury market's upcoming central clearing mandate before proceeding.
Net borrowing in the gilt repo market, where traders seek to profit from interest rate moves and investors temporarily convert bond holdings to cash, totals approximately £200 billion. Of this, hedge funds account for £85 billion. The Bank of England has stated that "doing nothing is not an option" and that reforms are likely years away, with no final decisions made.