UK, EU bond traders warn regulators against locking in a new leverage rule

Bond traders in the UK and across Europe are warning regulators to think twice before locking in a new leverage ￰0￱ Bank of England, with backing from global financial authorities, is pushing for mandatory minimum haircuts on repo deals involving government ￰1￱ 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 ￰2￱ 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 ￰3￱ idea is to stop hedge funds from borrowing too much with too little ￰4￱ the ERCC, speaking for about 120 financial institutions, said that slapping a single haircut formula on every deal doesn’t reflect how real trading ￰5￱ paper faces backlash from repo markets The Bank of Englan d flagged the issue in a consultation paper on gilt repo trades, where banks sometimes give “zero or near-zero” ￰6￱ 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 ￰7￱ 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 ￰8￱ 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 are misreading the numbers. “One of the mistakes that’s come from reading some of the existing data is there’s a lot of repo activities occurring with zero haircuts,” Stephen said.

“But in fact those repos are being done as a part of an overall portfolio margining ￰9￱ is actually collateral being held against those.” ERCC warns rule could drive traders out of repos The Financial Stability Board floated the idea last December, telling governments to consider hard limits on haircut sizes in bond repos where lenders were competing too ￰10￱ BoE picked that up and moved ahead, but for traders, if regulators force haircuts too high, they’ll just walk away from repos ￰11￱ ERCC warned that interfering with repo pricing could “distort” the market, hurt efficiency, and push traders toward more shadowy tools like total-return ￰12￱ products allow leverage too, but without the same level of ￰13￱ instead of solving a problem, regulators could just be pushing risk somewhere ￰14￱ regulators keep saying they want more clearing and transparency, the haircut rule is where the room ￰15￱ the ISDA event, everyone agreed on moving more transactions to ￰16￱ forcing haircuts?

Not so ￰17￱ funds and dealers say they already manage risk using collateral and ￰18￱ a fixed rule would just add cost, complexity, and more headaches. Meanwhile, across the Atlantic, ￰19￱ yields jumped on Friday after the Fed made its first rate cut of the ￰20￱ 10-year Treasury climbed 3.1 basis points to hit 4.135%, briefly touching 4.145%. The 2-year yield hit 3.578% after peaking at 3.59%. The 30-year bond yield went up 2.7 basis points to land at 4.747%.

That’s the highest for all three since September ￰21￱ basis point equals 0.01%, and yields move in the opposite direction of bond ￰22￱ when yields go up, borrowing gets tighter, and leverage gets more ￰23￱ pressure is already building without a haircut ￰24￱ if the BoE’s plan goes ahead, it could hit traders from both sides at ￰25￱ crypto news deserves attention - KEY Difference Wire puts you on 250+ top sites