Bank of England advances plan to limit hedge fund leverage in gilt repo market

The Bank of England is moving to cap how much leverage hedge funds can deploy when trading UK government bonds, targeting a corner of the financial system where a handful of players have built positions so large they could destabilize the broader market if things go sideways.

Net gilt repo borrowing by hedge funds has swelled to nearly £100 billion, up from £77 billion earlier in the year.

A market dominated by a handful of players

Five hedge funds reportedly account for 90% of gilt repo market activity. Some positions are leveraged as high as 50x, meaning a fund is controlling £50 worth of gilts for every £1 of its own capital. In some cases, these trades are being executed with zero haircuts, meaning the counterparties extending the credit aren’t requiring any collateral cushion at all.

The maturities on these repo agreements also tend to be short, which creates rollover risk. If market conditions deteriorate and counterparties refuse to renew the lending, funds could be forced into rapid deleveraging. Anyone who remembers the UK gilt crisis of late 2022, when liability-driven investment funds triggered a doom loop that forced BoE intervention, can see why regulators are nervous.

A long time coming

The Financial Policy Committee flagged leverage risks in its July 2025 report, then returned to the subject with additional warnings in December 2025. By January 2026, BoE Deputy Governor Dave Ramsden was publicly calling for regulatory action to address the buildup of leveraged positions in the gilt market.

The central bank released a discussion paper in April 2026 focused on monitoring the gilt repo market’s resilience, laying the intellectual groundwork for the restrictions now being advanced.

The Financial Stability Board issued recommendations in July 2025 calling for limits on leverage among non-bank financial institutions, the regulatory euphemism for hedge funds, private credit firms, and other entities that do bank-like things without being regulated like banks.

What this means for investors

The concentration issue is arguably more troubling than the leverage itself. When five funds dominate 90% of a market, any regulatory change that forces even one of them to adjust creates outsized effects.

If the BoE imposes leverage limits that other jurisdictions don’t match, hedge funds could simply shift their gilt trading activity offshore, potentially to entities and venues with lighter oversight. The FSB’s 2025 recommendations suggest there’s appetite for coordinated international action on NBFI leverage, which would reduce the arbitrage incentive. But coordination between financial regulators across jurisdictions is famously slow, and the BoE appears unwilling to wait.

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