On November 28, ISDA responded to the Bank of England’s discussion paper on gilt market resilience.

ISDA encourages the Bank of England, before introducing any significant policy changes that would affect the functioning of the gilt repo market, to consider the prudential requirements on capital and liquidity in relation to repo transactions, in conjunction with monetary policy and financial stability, to avoid unintended and detrimental consequences for the UK gilt market and firms’ risk management practices.

ISDA also notes that changes related to clearing and the introduction of minimum haircuts could drive up the cost of funding and adversely affect market liquidity and overall demand for gilts. Instead, prudent risk management practices, in line with the Basel Committee on Banking Supervision’s guidelines on counterparty credit risk management and the Treasury Market Practices Group’s best practices, developed in the context of US Treasury markets, could serve as a reference point for gilt repo market participants.

ISDA supports risk-appropriate regulatory and capital-related measures to incentivize make central clearing, if such measures ensure that market participants can decide when and where clearing is most efficient for them, and avoid penalizing the non-cleared repo market with prescriptive mandatory haircuts. With this in mind, ISDA sets out a number of regulatory changes that could make voluntary clearing more attractive.