The Bank of England (BoE) has signalled that tighter oversight of hedge fund leverage in the UK gilt market is likely, as concerns grow over risks posed by heavily leveraged trading strategies, according to a report by Bloomberg.
Deputy governor Dave Ramsden said officials believe action is needed to address the amount of leverage hedge funds have accumulated through gilt repurchase agreements, or repos, which allow investors to borrow against government bonds. He warned that a rapid unwinding of these positions could pose a threat to financial stability.
“Hedge funds play an essential role in the gilt repo market, but we don’t think the status quo is an option,” Ramsden said, emphasising the need to ensure the market remains safe.
The issue has moved higher up the regulatory agenda following the Bank’s system-wide stress test, which highlighted vulnerabilities in non-bank financial institutions that could spill over into the broader economy.
Among the measures under consideration are the introduction of minimum repo haircuts, which would limit the amount of leverage investors can obtain, and potentially moving gilt repo transactions into central clearing. Similar reforms are already planned in the US, where certain Treasury repos will be centrally cleared from mid-2027.
The haircut proposal has drawn pushback from hedge funds and market participants, with a consultation on the measures closing in November. Ramsden acknowledged significant industry feedback and said any reforms would take time to implement, with the BOE continuing to engage closely with firms and trade bodies.
