The Bank of England (BofE) is moving ahead with plans to cap how much debt hedge funds can leverage during UK government bond trading, amid mounting concerns around potential volatility and market shifts.
Specifically, potential reforms for the gilt repo market may include enhanced central clearing and minimum haircuts on non-centrally cleared transactions.
Currently no decision has been taken, however the BofE is set to continue consulting on gilt repo resilience over the course of 2026, with plans underway to publish a comprehensive update, including potential policy proposals, in early 2027.
The move comes as leveraged borrowing by hedge funds in gilt repo markets remains elevated, with the Financial Policy Committee’s (FPC) report in December 2025 indicating that borrowing reached almost £100 billion in November last year.
In addition, a small proportion of the hedge funds in this sector make up more than 90% of net borrowing, with data revealing that trades are often executed at zero or near-zero collateral haircuts, and transacted at very short maturities.
Moreover, according to the FPC, some of the hedge funds with the highest gilt market leverages also hold large repo positions in other government bond repo markets, such as the US Treasury and European government bond markets, raising questions around the risks associated with these cross-market positions.
These findings are particularly relevant against the backdrop of an uncertain global environment, with the FPC highlighting in its April 2026 record that the conflict in the Middle East has impacted the dynamic of sovereign debt markets across the world, by weighing on growth, raising interest rates and increasing spending pressures.
Spotlights on hedge funds in these markets have come in particular from concerns around a handful of players dominating large positions across various jurisdictions, potentially destabilising the wider market if positions were disorderly unwound, causing a jump to illiquidity in core markets.
These leveraged hedge fund strategies reveal vulnerabilities in the market, according to the FPC, and following the onset of the Middle East conflict, aggregated net glit repo borrowing by hedge funds was reduced by 21% compared to pre-conflict levels, constituting £19 billion.
Recommendations for regulatory action on these leveraged positions have been ongoing, with risks flagged in the FPC’s July 2025 report, as well as public calls from Dave Ramsen, BofE deputy governor in January 2026.
However, some responses to the suggestions have centred around concerns that measures such as introducing minimum haircuts in the non-centrally cleared segment of the gilt repo market may “raise funding costs and potentially divert activity into other markets or instruments, reducing gilt market liquidity and price efficiencies,” as revealed in the BofE September 2025 discussion paper feedback.
Further detail around the potential hedge fund leveraged position plans are expected to be provided by the Bank of England later on in July.