The European Association of CCP Clearing Houses (EACH) has responded to the Bank of England’s discussion paper on enhancing the resilience of the gilt-repo market. EACH welcomes the Bank’s review of vulnerabilities observed during periods of market stress and support the objective of further enhancing the robustness of the gilt-repo market by Clearing through CCPs. At the same time, Members invite the Bank to ensure that any reforms are carefully calibrated so that resilience measures do not unintentionally impair liquidity, limit participation, or add disproportionate burden to users of repo markets.
EACH particularly welcomes the following:
- Consideration of central clearing as a resilience tool – EACH agrees that expanding the use of central clearing through CCPs can further strengthen market transparency, standardisation and risk management practices.
- Assessment of risk-sensitive collateralisation frameworks – EACH supports exploring proportionate, risk-based approaches to margining and collateralisation, noting that risk-sensitive methodologies used in cleared markets are more risk sensitive than bilateral arrangements.
- Focus on removing barriers – Rather than mandatory clearing, EACH suggests focusing on facilitating broader voluntary adoption of clearing, including by reviewing regulatory and structural disincentives that currently exist for many non-bank financial institutions (NBFIs). Examples include:
- Fund-level concentration and diversification limits that were not designed for CCP intermediation,
- Constraints on reuse of cash or collateral pledged to CCPs, and
- Prudential frameworks (e.g. SA-CCR, NSFR) that do not fully recognise the funding and risk benefits of central clearing.
- Broader approach to haircuts – While minimum haircuts may help address procyclicality, EACH notes that they are static and can be less risk-sensitive than alternative approaches. We therefore agree with the Bank that bilateral margin requirements for uncleared repos, similar to the uncleared margin rules for OTC derivatives, could potentially be considered as a risk-management tool. Any margin or haircut framework should form part of a broader toolkit that enhances resilience, improves predictability, and supports liquidity in both normal and stressed conditions.
Please find the full EACH response here.
