BoE targets repo clearing, cross-margining in resilience push

Speaking at the ISDA Derivatives Trading and Treasury Forum in London on Wednesday, Nathanael Benjamin, executive director for financial stability strategy and risk at the Bank of England (BoE), said the central bank is examining the structure of government bond repo markets as part of a system-wide approach to financial stability.

“Less often appreciated are the market-wide benefits arising from greater netting efficiencies, lower balance sheet usage, and a greater capacity for intermediaries to absorb positions, warehouse risk, and supply liquidity during periods of stress,” Benjamin said in a speech at the event.

BoE researchers estimate greater central clearing could have reduced gilt exposures on UK bank dealers' balance sheets during the March 2020 “dash for cash” by between 40% and 60%.

Benjamin said experience in other jurisdictions suggests greater central clearing can encourage changes in market structure and access models.

“This is why access models matter. Different access arrangements can broaden participation in central clearing while preserving the diversity of participants that supports market liquidity,” he said.

Benjamin pointed to indirect clearing, sponsored access and guaranteed sponsored models, which distribute responsibilities differently between clients, clearing members and central counterparties.

“Improvements in access to client clearing may themselves encourage greater use of clearing and catalyse the evolution of markets over time,” Benjamin said.

Bank weighs cross-margining

Benjamin said margin and collateral arrangements that limit netting opportunities or prevent recognition of genuine risk offsets can increase funding pressures during periods of stress.

“From a financial stability perspective, the objective is not simply to demand more collateral from market participants; it is to ensure that collateral and margin reflect underlying risks while avoiding unnecessary demands on liquidity during periods of stress,” he said. “This is one reason why appropriately designed cross-margining arrangements are attracting increasing interest as they can improve collateral efficiency and reduce unnecessary liquidity demands where genuine risk offsets exist.”

Benjamin cautioned, however, that “cross-margining is not a free good”, with offsets needing to reflect genuine reductions in risk and correlations potentially becoming less reliable during periods of stress.

“Realising the benefits of cross-margining also requires effective legal and operational arrangements and close cooperation of infrastructures and jurisdictions,” he said. “No single measure is likely to be a silver bullet,” Benjamin said, adding that measures addressing leverage, broader access to central clearing and collateral efficiency “should be viewed as complementary rather than substitutes”.

The Bank intends to publish a comprehensive update, including potential policy proposals, in early 2027.

“As we said in the past, doing nothing is not an option,” Benjamin said.

The push towards cross-margining is already developing in the US Treasury market. Marex in May executed the first customer trade under the expanded CME Group and FICC cross-margining framework, allowing eligible US Treasury securities and interest rate futures with offsetting exposures to be margined across the two clearing houses.

Repo leverage remains on Bank's radar

Benjamin described the repo market as essential to keeping cash and collateral flowing through the financial system, supporting government bond liquidity and facilitating monetary policy transmission.

“Our intention is not to reduce leverage financed through the repo markets,” Benjamin said. “It is to ensure that the leverage provided and access supports market liquidity, efficient risk transfer, and the allocation of capital in all environments, not just when the sun shines.

“Well managed and well understood leverage is welcome. Out of control leverage is unwelcome,” he added.

The Bank is also examining repo haircut practices, with Benjamin saying zero or near-zero haircuts can be justified where netting and portfolio margining reduce counterparty exposure.

However, he said the Bank had found that “competitive considerations also play a role” in setting very low haircuts, including where they are set to avoid losing clients to competitors.

Benjamin said near-zero or negative haircuts not directly linked to underlying risks can facilitate the build-up of leverage at little cost and increase vulnerabilities during periods of stress.

“Poorly calibrated measures could reduce market-making capacity, shift activities elsewhere, or create unintended incentives,” he said. “Margin and collateral arrangements that limit netting opportunities or prevent the recognition of genuine risk offsets can increase funding pressures precisely when market participants are already in distress.”

Bank tracks hedge fund repo leverage

Benjamin said the Bank has tracked growth in the UK cash-futures basis trade over the past 18 months, with growth in hedge fund repo borrowing coinciding with increasing futures open interest.

The Bank's previous system-wide scenario exercise found many hedge funds initially assumed additional repo financing would be available if needed during stress.

“It was clear from dealer banks that this would not necessarily be forthcoming,” Benjamin said. “Many reported that they would need to unwind positions financed through repo, illustrating how pressures on dealer bank balance sheets could be transmitted to leveraged investors in potentially amplifying market moves.”

Benjamin said the Bank is combining transaction-level data, fund reporting, supervisory intelligence and market engagement to understand “where that leverage resides, how concentrated it is, how it is financed and how it interacts with the rest of the financial system”.

The comments came as ISDA chief executive Scott O’Malia, speaking at the same event, warned that capital rules could undermine the efficiencies created by cross-margining. O’Malia said firms are looking to cross-margin Treasury cash, repo and futures positions as US Treasury clearing expands, but warned that without equivalent recognition of risk offsets in bank capital rules, the resulting margin efficiencies could increase capital requirements and restrict balance-sheet capacity.