BoE鈥檚 Foulger pushes for UK gilt repo reform
13 November 2025 UK
Image: Martn/stock.adobe.com
Lee Foulger, Director for Financial Stability, Strategy and Risk at the Bank of England (BoE), has addressed concerns on the possible unintended consequences of UK gilt repo market reforms, and encouraged further market feedback to help bolster resilience.
In 2024, the BoE undertook a System-wide Exploratory Scenario (SWES) to assess the resilience of core sterling markets, which revealed how crucial the resilience of the gilt repo market is to financial stability in the UK.
While the exercise had shown how gilt market resilience had increased since 2022, it also highlighted where the market may need to improve resilience.
In a speech at the AFME鈥檚 20th Annual European Government Bond Conference, Foulger noted that in severe stress there may be limits to gilt repo market dealers鈥� capacity to expand the provision of liquidity to counterparties, which could lead to forced sales of gilts in the cash market to meet liquidity needs.
Evidence from previous stress episodes, as well as findings from the SWES, suggest this is primarily due to counterparty credit risk concerns.
In addition, zero or near-zero collateral haircuts in dealer-to-client gilt repo mean that non-bank financial institutions (NBFIs) can build up substantial levels of leverage at little cost.
Foulger indicated that this could lead to large or unexpected liquidity demands from collateral or margin calls, also potentially resulting in forced sales and amplifying stress.
He added: 鈥淥ur data suggests that more than half of the outstanding stock in the non-centrally cleared segment of the gilt repo market is conducted at zero haircuts.鈥�
Background
In recent years, global sovereign bond markets have undergone important structural changes. Their expansion in both scale and complexity has been accompanied by a growing presence of non-bank liquidity providers.
According to Foulger, shorter-term investors that are reliant on the repo market to fund their activities have an increasingly important role in government bond market activity 鈥� including cash, repo, and related derivative markets.
He also noted that the growth of electronic trading 鈥� particularly in futures and government bonds across advanced economies 鈥� has accelerated high-frequency trading and 鈥渞eshaped intermediation鈥�.
Alongside these changes, reserves have fallen as many economies engaged in quantitative tightening, while bond issuance has increased, altering the cash-collateral balance in repo markets.
This decline in reserves has also driven greater demand for sovereign bonds as high-quality liquid assets, says Foulger.
Against that global backdrop, he highlights that the gilt and gilt repo markets are experiencing similar dynamics.
For example, there is an increasing presence of hedge funds in the gilt repo and cash markets, while in the UK specifically, traditional longer-term investors like pension funds have been gradually reducing the rate of increase of their exposures.
In light of these developments, Foulger notes it is important that central banks keep pace in monitoring how market participants鈥� changing behaviours in core markets may affect UK financial stability and consider ways to enhance the resilience of these markets.
Central clearing
The BoE is working alongside UK authorities and international bodies to take steps to strengthen resilience, including the introduction of a resilience standard for liability-driven investment (LDI) funds and the launch of the Bank鈥檚 Contingent Non-Bank Repo Facility (CNRF).
The adoption and use of central clearing in government bond repo markets varies widely across jurisdictions, reflecting differences in market structure, regulation, and trading and clearing infrastructure.
鈥淲hile we are closely monitoring international developments 鈥� including the ongoing implementation of the SEC鈥檚 mandate for central clearing of most US Treasury cash and repo transactions 鈥� it is important that our approach is tailored to the specific structure and needs of the UK gilt and gilt repo markets,鈥� Foulger said.
In the case of greater central clearing, market participants have flagged 鈥減otential unintended consequences鈥� of a one-size-fits-all approach in the case of minimum haircuts versus a risk-sensitive approach to calibration that is tailored to the risk profile of different market participants.
Foulger commented: 鈥淚n this vein, we welcome further feedback on the calibration approach that could deliver meaningful benefits to market resilience, without imposing undue costs on the market.
鈥淲e are mindful that any measure or package of measures may have impacts on trading costs and market liquidity and seek your concrete input on these to inform policy design.
鈥淲e are keen to weigh those costs not just against the resilience benefits, but also potential dynamic benefits: by reducing excessive leverage and concentration, reforms may increase confidence in market resilience, and, over time, attract deeper and more stable liquidity to the market.鈥�
Jo Burnham, margin expert at OpenGamma, says the Bank鈥檚 push to tighten margin and haircut practices highlights a crucial gap that many investors, especially pension funds, still need to close.
鈥淭he central bank is absolutely right to spotlight the dangers of thin collateral and sudden liquidity demands,鈥� Burnham explains.
鈥淧ension funds, in particular, are seeking far more sophisticated margin and liquidity frameworks if they鈥檙e to avoid being caught short when markets turn. Better preparation is the only way to make these reforms truly effective.鈥�
In 2024, the BoE undertook a System-wide Exploratory Scenario (SWES) to assess the resilience of core sterling markets, which revealed how crucial the resilience of the gilt repo market is to financial stability in the UK.
While the exercise had shown how gilt market resilience had increased since 2022, it also highlighted where the market may need to improve resilience.
In a speech at the AFME鈥檚 20th Annual European Government Bond Conference, Foulger noted that in severe stress there may be limits to gilt repo market dealers鈥� capacity to expand the provision of liquidity to counterparties, which could lead to forced sales of gilts in the cash market to meet liquidity needs.
Evidence from previous stress episodes, as well as findings from the SWES, suggest this is primarily due to counterparty credit risk concerns.
In addition, zero or near-zero collateral haircuts in dealer-to-client gilt repo mean that non-bank financial institutions (NBFIs) can build up substantial levels of leverage at little cost.
Foulger indicated that this could lead to large or unexpected liquidity demands from collateral or margin calls, also potentially resulting in forced sales and amplifying stress.
He added: 鈥淥ur data suggests that more than half of the outstanding stock in the non-centrally cleared segment of the gilt repo market is conducted at zero haircuts.鈥�
Background
In recent years, global sovereign bond markets have undergone important structural changes. Their expansion in both scale and complexity has been accompanied by a growing presence of non-bank liquidity providers.
According to Foulger, shorter-term investors that are reliant on the repo market to fund their activities have an increasingly important role in government bond market activity 鈥� including cash, repo, and related derivative markets.
He also noted that the growth of electronic trading 鈥� particularly in futures and government bonds across advanced economies 鈥� has accelerated high-frequency trading and 鈥渞eshaped intermediation鈥�.
Alongside these changes, reserves have fallen as many economies engaged in quantitative tightening, while bond issuance has increased, altering the cash-collateral balance in repo markets.
This decline in reserves has also driven greater demand for sovereign bonds as high-quality liquid assets, says Foulger.
Against that global backdrop, he highlights that the gilt and gilt repo markets are experiencing similar dynamics.
For example, there is an increasing presence of hedge funds in the gilt repo and cash markets, while in the UK specifically, traditional longer-term investors like pension funds have been gradually reducing the rate of increase of their exposures.
In light of these developments, Foulger notes it is important that central banks keep pace in monitoring how market participants鈥� changing behaviours in core markets may affect UK financial stability and consider ways to enhance the resilience of these markets.
Central clearing
The BoE is working alongside UK authorities and international bodies to take steps to strengthen resilience, including the introduction of a resilience standard for liability-driven investment (LDI) funds and the launch of the Bank鈥檚 Contingent Non-Bank Repo Facility (CNRF).
The adoption and use of central clearing in government bond repo markets varies widely across jurisdictions, reflecting differences in market structure, regulation, and trading and clearing infrastructure.
鈥淲hile we are closely monitoring international developments 鈥� including the ongoing implementation of the SEC鈥檚 mandate for central clearing of most US Treasury cash and repo transactions 鈥� it is important that our approach is tailored to the specific structure and needs of the UK gilt and gilt repo markets,鈥� Foulger said.
In the case of greater central clearing, market participants have flagged 鈥減otential unintended consequences鈥� of a one-size-fits-all approach in the case of minimum haircuts versus a risk-sensitive approach to calibration that is tailored to the risk profile of different market participants.
Foulger commented: 鈥淚n this vein, we welcome further feedback on the calibration approach that could deliver meaningful benefits to market resilience, without imposing undue costs on the market.
鈥淲e are mindful that any measure or package of measures may have impacts on trading costs and market liquidity and seek your concrete input on these to inform policy design.
鈥淲e are keen to weigh those costs not just against the resilience benefits, but also potential dynamic benefits: by reducing excessive leverage and concentration, reforms may increase confidence in market resilience, and, over time, attract deeper and more stable liquidity to the market.鈥�
Jo Burnham, margin expert at OpenGamma, says the Bank鈥檚 push to tighten margin and haircut practices highlights a crucial gap that many investors, especially pension funds, still need to close.
鈥淭he central bank is absolutely right to spotlight the dangers of thin collateral and sudden liquidity demands,鈥� Burnham explains.
鈥淧ension funds, in particular, are seeking far more sophisticated margin and liquidity frameworks if they鈥檙e to avoid being caught short when markets turn. Better preparation is the only way to make these reforms truly effective.鈥�
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