The Bank of England (BoE) has announced plans to consult the financial services industry on potential reforms aimed at enhancing the resilience of the gilt repo market. This initiative responds to vulnerabilities exposed during the 2022 market turmoil, particularly following the "mini-budget" introduced by then Prime Minister Liz Truss, which led to significant declines in British government bond prices.

Deputy Governor Sarah Breeden revealed that the BoE will launch a Discussion Paper later this year to engage industry stakeholders on possible structural reforms. Speaking at the annual meeting of the International Swaps and Derivatives Association in Amsterdam, Breeden stated, "We will start a conversation with industry via a Discussion Paper later this year on possible reforms to market structure to enhance gilt repo market resilience."

The gilt repo market is a critical component of the UK's financial infrastructure, allowing institutions to borrow cash against UK government bonds (gilts) as collateral. This market plays a vital role in providing liquidity and facilitating the smooth functioning of financial markets.

In September 2022, the UK government, under Prime Minister Liz Truss, introduced a "mini-budget" that included significant unfunded tax cuts. This announcement led to a sharp decline in gilt prices and increased volatility in the gilt market. The turmoil exposed vulnerabilities in the gilt repo market, particularly concerning the liquidity and stability of non-bank financial institutions (NBFIs) such as pension funds and hedge funds. These entities faced margin calls and liquidity shortages, leading to forced asset sales and further market destabilization.

In November 2024, the BoE's Financial Policy Committee (FPC) published a Financial Stability Report highlighting the need to strengthen the resilience of the gilt repo market. The report emphasized the importance of enhancing market structures to prevent future disruptions and ensure financial stability. The FPC noted that vulnerabilities in the repo market could amplify price corrections and affect the availability and cost of credit in the UK.

One of the potential reforms under consideration is the introduction of mandatory central clearing for gilt repo transactions. Central clearing could mitigate counterparty credit risk and enhance market stability. However, this proposal has faced resistance from market participants. Glenn Handley, a securities financing consultant, noted, "The Bank's attitude is: 'well, why not mandate it?' But the banks certainly don't want that."

Enhancing the resilience of the gilt repo market is crucial for maintaining financial stability in the UK. A robust repo market ensures that financial institutions can access liquidity during times of stress, preventing forced asset sales and market disruptions. Reforms aimed at strengthening this market could bolster investor confidence and contribute to the overall health of the UK's financial system.

The Bank of England's forthcoming consultation on gilt repo market reforms represents a significant step toward enhancing the resilience of the UK's financial system. Engaging with industry stakeholders through a Discussion Paper will provide valuable insights into potential structural changes aimed at preventing future market disruptions.