Capital markets show resilience despite emerging structural risks
£100bn in hedge fund gilt repo borrowing. Over 90% concentrated in a small cohort of funds. Zero or near-zero haircuts, very short tenors.
That is the structural picture behind the Bank of England's ongoing consultation on leverage caps in UK government bond markets — and the math gets worse once you trace the same cohort into US Treasury and European sovereign repo books.
Mechanism under review
The BoE is continuing consultation through 2026 on gilt repo resilience, with a comprehensive policy update — including potential reforms — targeted for early 2027. The toolkit under consideration: enhanced central clearing for gilt repo and minimum haircuts on the non-centrally cleared segment. No final decision has been taken; further detail is expected later this month.
Per the FPC's December 2025 report, net hedge fund borrowing in gilt repo sits at almost £100bn. Concentration is the binding constraint — a small cohort holds over 90% of net borrowing, transacted at near-zero collateral haircuts and very short maturities. Short-duration, high-turnover leverage. The unwind risk is mechanical, not discretionary.
For related context, see Vanguard Total World Stock ETF vs FTSE Emerging Markets ETF. Which Global Stock Fund.
Cross-market exposure
The FPC's concern extends well beyond the gilt book. Some of the most leveraged gilt players carry large repo positions in US Treasury and European government bond markets. A disorderly unwind in one venue transmits directly into the next. Post-Middle East conflict onset, aggregated net gilt repo borrowing fell 21% — £19bn — versus pre-conflict levels. The market de-risked itself before any regulator intervened.
Parallel rails
Bloomberg frames the broader backdrop as capital markets showing resilience despite emerging structural risks. Separately, MAS and CSRC are deepening cross-border ties, and the ASIFMA survey signals elevated confidence in Asia-Pacific capital markets with intensifying competition for allocation. Read the three signals together: institutional capital is being routed into alternative infrastructure while the BoE tightens the gilt rail.
What to track next: specific haircut thresholds in the BoE's July update; the funding-cost counter-argument already flagged in the BoE's September 2025 feedback paper; and any volume migration into off-rail instruments, offshore sovereign repos, or synthetic structures once the rule parameters firm up.