FIA has submitted a response to the Bank of England Discussion Paper on enhancing the resilience of the gilt repo market. The discussion paper was published in response to various market stress episodes in the government bond (cash and repo) markets over the last few years, including the March 2020 ‘dash for cash’ and the September 2022 LDI episode. The Bank of England has offered two main policy solutions to enhance resilience of liquidity provisions in government debt stress scenarios, namely greater central clearing of gilt repos and minimum haircuts.
In its response, FIA largely focuses on the central clearing aspects of the discussion paper and advocates for market-led voluntary clearing of gilt repo transactions, rather than a clearing mandate. It discusses possible incentives for more voluntary clearing of gilt repos, including the development of an easily accessible and scalable clearing model for clients that wish to clear gilt repos and to ensure that the provision of clearing services for gilt repos is economically viable for all parties involved.
FIA comments on the differences between the gilt repo market and the US Treasury market. An important function of the former is maturity transformation, while the US market is focused more on overnight liquidity. These market structure differences help explain why clearing of gilt repos for buy-side/NBFIs has not taken off and also why netting and other benefits that clearing otherwise brings may be more difficult to achieve.
FIA encourages the Bank of England to look at the longer-term structure of the market and consider how innovations such as the development of a digital gilt could address some of the points mentioned in the discussion paper (e.g., counterparty credit risk and improving operational efficiency). Such innovations may also represent an alternative way of achieving the benefits of central clearing by other means.
