The UK market for gilts and gilt repos are in focus as the Bank of England tries to quantify how much benefit can be generated by central clearing in a crisis. More netting between buy and sell trades would have taken stress out of the balance sheet for dealers in March 2020, it concludes.

“More widespread central clearing could enhance dealers’ ability to intermediate financial markets by increasing the netting of buy and sell trades, thereby reducing the impact
of trading on balance sheets and capital ratios,” state the writers of the staff working paper from the central bank.

They calculate that the resulting improvements in netting “would in principle have allowed the dealers’ repo desks to expand their trading during the [“dash for cash” in March 2020] by 2.5 times more than under prevailing clearing rates for each incremental unit of capital available to them”.

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They conclude that gilt repo exposures on UK dealers’ balance sheets would have been reduced by 40 percent, boosting aggregate leverage ratios by 3 basis points. If repo maturity dates were standardised to a joint day every week (except overnight repo), this would have improved event to 60 percent and 5 basis points, respectively.