Hedge Fund Group Warns BoE Repo Reforms Risk Cutting Gilt Market Liquidity

LONDON — The Alternative Investment Management Association warned the Bank of England that proposed reforms to the gilt repo market could backfire and reduce liquidity during periods of market stress, according to a letter seen by Reuters. AIMA said expanding central clearing could create "new vulnerabilities" and push hedge funds toward shorter-term daily repo financing over typical two-week deals, leaving investors more exposed to funding disruptions and "greater volatility during times of market stress." The BoE is consulting on reforms, including broader central clearing and minimum haircuts on non-centrally cleared repo, in response to the 2020 "Dash for Cash" and the 2022 liability-driven investment crisis. AIMA urged the central bank to wait for the U.S. Treasury market's central clearing mandate, effective next year, to demonstrate results first. Net gilt repo borrowing totals about £200 billion ($270 billion), £85 billion of it by hedge funds, BoE data show. The BoE declined to comment.