The Bank of England is moving forward with proposals to limit leverage used by hedge funds in the UK gilt market, despite industry concerns that the measures could increase funding costs and reduce market liquidity, according to a report by the FT.
The central bank plans to introduce minimum "haircuts" on gilt repo transactions, requiring hedge funds to post more collateral when borrowing against government bonds. The proposal forms part of a broader effort to strengthen the resilience of the gilt market following episodes of heightened volatility, including the sharp sell-offs seen in recent government bond markets.
Sarah Breeden, the Bank's Deputy Governor for Financial Stability, is expected to outline further details later this month, arguing that a well-calibrated framework can improve market resilience without materially increasing overall financing costs. The Bank has also raised concerns that competition among banks has resulted in some large hedge funds receiving excessive leverage through near-zero repo haircuts.
The proposals have drawn criticism from market participants, who argue that higher collateral requirements could reduce liquidity and increase costs across the wider market. Industry groups have also warned that broad restrictions on repo financing could affect a wider range of investors beyond the largest hedge funds.
The BoE is expected to publish its final policy proposals in early 2027, as regulators globally continue efforts to strengthen oversight of leverage in government bond markets, with similar reforms under way in the US and Europe.
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