Gilt repos allow investors to temporarily exchange holdings of British government bonds for cash. They are a crucial part of financial market plumbing, with an average of more than 500 billion pounds ($600 billion) of repos and reverse repos outstanding.
The increased number of failed trades was the main topic at the BoE’s most recent money markets committee meeting with central banks, investors, and clearing houses, on Friday.
“The Bank noted that it was unhappy to see the current level of fails, particularly in the repo market, and urged all market participants to work together to rectify this,” the minutes said.
“In the Bank’s view, it reflected very poorly on the efficiency of the London market although it was noted that fails were also currently a significant problem in many international markets,” the minutes added.
Executives from clearing house LCH and settlement house Euroclear told the committee that inexperienced staff working from home could be one cause of the problem, on top of low liquidity and a domino effect once a single transaction failed.
Coronavirus Induced Stress
Repo markets globally came under severe stress early in the COVID-19 pandemic. Related bond price volatility was a primary reason the BoE’s massive gilt purchase program in March 2020. It is now trying to unwind.
Repo settlement can fail when either the required gilt or there is an absence of the the necessary cash.
The BoE minutes showed the possibility of fines for failed settlements was unpopular among market participants. Instead, the time frame for payment will likely extend.
