AIMA Warns Bank of England Over Gilt Repo Reforms

The Alternative Investment Management Association (AIMA) has warned the Bank of England that proposed reforms to the gilt repo market could reduce liquidity and create new vulnerabilities during periods of market stress. AIMA argues that expanding central clearing for short-term loans secured against UK government bonds might encourage hedge funds to rely on shorter-term daily financing rather than traditional two-week deals, which would increase exposure to funding disruptions.

The Bank of England's proposals, which include central clearing and minimum haircuts, are designed to prevent a recurrence of the 2022 liability-driven investment crisis and the 2020 Dash for Cash. Deputy Governor Sarah Breeden has defended the necessity of these changes, stating that "doing nothing is not an option" to prevent banks from aggressively pulling financing during market shocks.

AIMA urged the Bank of England to observe the implementation of similar clearing mandates in the US Treasury market before proceeding with the UK reforms. The industry body suggests that the proposed mandates could backfire and increase overall market volatility.