The Bank of England (BoE) is intensifying its focus on hedge fund leverage in the UK gilt repurchase agreement (repo) market, as concerns grow over concentration risk and potential threats to financial stability, according to a report by Bloomberg.
In remarks delivered last week, Dave Ramsden, the BoE’s deputy governor for markets, warned that hedge fund positioning in the gilt repo market has reached levels that warrant regulatory attention, signalling that policy intervention may be increasingly likely.
According to the central bank’s July 2025 Financial Stability Report, just five hedge funds account for around 90% of net gilt repo borrowing, with exposures exceeding £100bn as of the end of November. The BoE has not identified the funds involved but has highlighted the scale and concentration of leverage as a key vulnerability.
The gilt repo market plays a critical role in providing liquidity and financing for UK government bonds. While the BoE exercises oversight of banks operating as gilt-edged market makers (GEMMs), hedge funds typically access the market through prime brokers, where margin requirements are significantly lower than those applied directly by the central bank.
Under current arrangements, GEMMs face relatively high haircuts when transacting with the BoE, but these costs are not consistently passed on to hedge fund counterparties in bilateral repo trades. As a result, large funds are able to operate with minimal margin requirements, particularly for longer-dated repo financing.
Policymakers are now assessing potential measures to curb excessive leverage. Options under discussion include mandating greater use of central clearing for gilt repo transactions and introducing higher minimum margin requirements. Both approaches would increase the cost of leveraged trading but could help reduce systemic concentration risk.
However, market participants have cautioned that overly aggressive reforms could have unintended consequences, including reduced market liquidity and the risk of pushing trading activity to other jurisdictions. Banks have also raised concerns that mandatory clearing or sharply higher margins could disrupt established financing structures and raise operational costs.
The BoE has indicated that discussions with market participants are ongoing, with further guidance expected following the publication of a discussion paper later this year. UK policymakers are also mindful of international coordination, particularly with US regulators, where similar reforms to Treasury and repo market structures have faced repeated delays.
