A prominent hedge fund industry group has formally cautioned the Bank of England that its proposed reforms for the U.K. government bond repurchase market could reduce liquidity, particularly during periods of financial stress. The Alternative Investment Management Association (AIMA) submitted its feedback as part of a consultation process initiated by the central bank to enhance the resilience of the market following turmoil in 2022.
The Bank of England launched its consultation earlier this year, seeking to strengthen the framework of the repurchase agreement, or repo, market. This market allows financial institutions to conduct short-term borrowing and lending using government bonds, known as gilts, as collateral. It is a critical component for providing liquidity to the broader financial system.
The central bank’s proposals were developed in response to the severe instability in the gilt market in September and October 2022, which was connected to liability-driven investment (LDI) funds used by pension schemes. The episode required the Bank of England to intervene to stabilize markets. The proposed reforms include measures to expand the use of central clearing, standardize contracts, and improve data reporting to increase transparency and reduce systemic risk.
In its official response, AIMA, which represents the global alternative investment industry, supported the Bank of England’s goal of improving market resilience. However, the association expressed concern that certain aspects of the proposals could have unintended consequences.
According to AIMA, mandating broader central clearing or imposing overly rigid standards could lead some market participants to reduce their activity or exit the market altogether. The group argued that this could diminish the number of available counterparties and shrink the pool of available capital, making it more difficult for firms to secure short-term funding when it is most needed.
“The risk is that some of the Bank’s well-intentioned proposals could have the effect of reducing liquidity and balance sheet access at a time when the market is under stress,” Jack Inglis, CEO of AIMA, stated in the group’s submission. “This would run counter to the Bank’s stated objectives.”
The association recommended a more flexible and phased approach to reform, suggesting that any changes should be carefully calibrated to avoid disrupting the market’s functioning. AIMA advocated for voluntary adoption of best practices and for reforms that accommodate the diverse range of participants in the repo market.
The consultation period for the Bank of England’s proposals has now closed. The central bank will review the feedback from AIMA and other stakeholders, including banks, asset managers, and pension funds. It is expected to publish a summary of the responses and outline its next steps later this year.
