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Bond traders in the UK and across Europe are warning regulators to think twice before locking in a new leverage rule. The Bank of England, with backing from global financial authorities, is pushing for mandatory minimum haircuts on repo deals involving government bonds. The traders, through the European Repo and Collateral Council, said the plan is risky, poorly thought out, and could blow up parts of the system that actually work. According to Bloomberg, the haircut rule would set a fixed minimum on how much value gets shaved off a bond when used as collateral in a repurchase agreement. The idea is to stop hedge funds from borrowing too much with too little risk. But the ERCC, speaking for about 120 financial institutions, said that slapping a single haircut formula on every deal doesn’t reflect how real trading works. BoE paper faces backlash from repo markets The Bank of England flagged the issue in a consultation paper on gilt repo trades, where banks sometimes give “zero or near-zero” haircuts. The BoE claimed that could be a sign of “market failure.” But the ERCC pushed back, saying haircut levels alone don’t give a full picture of leverage or risk. The real story, the ERCC argued, lies in something called portfolio margining. That’s when a bank looks at a trader’s entire book of positions, not just the repo side, before deciding how much protection is needed. The group said, “It becomes difficult, if not impossible, to draw meaningful conclusions from transaction-level data on haircuts.” They added that haircut data doesn’t explain broader leverage or market risk and shouldn’t be treated like some kind of master switch for fixing the system. Citadel’s global head of government and regulatory policy, Stephen Berger, told a crowd at this week’s ISDA conference in London that regulators…

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Filed under: News - @ September 19, 2025 2:28 pm