MFA submits gilt repo discussion paper comment letter

MFA sent a letter to the Bank of England encouraging greater voluntary central clearing of bilateral gilt repo transactions in a comment letter today. The letter recommended steps to expand clearing access and reduce structural barriers, while stressing that a mandatory clearing requirement is premature.

MFA's comments are summarised as follows:

• The Bank should encourage more voluntary central clearing for repo transactions, not impose a clearing mandate at this time.
• The Bank should expand the availability of central clearing by making it more attractive, including by addressing capital requirements, netting and accounting rules, pre-trade credit checks, and close-out provisions upon default.
• The movement to greater adoption of central clearing should be focused on reducing counterparty credit risk, not targeting particular trading strategies or singling out particular types of market participants.
• Firms should have the flexibility to apply proportionate, risk-based margining to their non-centrally cleared bilateral repo transactions.
• Requiring haircuts on repo transactions would ignore risk-reducing offsetting transactions and determinations of counterparty creditworthiness, deviate from longstanding market practices, and impair market liquidity.
• Promoting the availability of cross-margining is important to encourage the greater adoption of central clearing.