THE UK GILT REPO MARKET
The UK gilt repo market is worth looking at in detail because it is a rare example (possibly the only example) of a market that was established fully-formed at birth. The Bank of England (BoE
), after market consultation, set out the market structure in advance and the market was established ready to deal and settle on 2 January 1996. In other words, a ‘big bang’ inception date was set and market trading began as planned on that date. It has proved a considerable success, and is a good illustration of how to introduce new structures into an existing capital market.9
Prior to this, stock borrowing and lending in the gilt market was available only to gilt-edged market makers (GEMMs), dealing through approved intermediaries – that is, stock exchange money brokers (SEMBs). The introduction of gilt repo allowed all market participants to borrow and lend gilts. Market reforms also liberalised gilt stock lending by removing the restrictions on who could borrow and lend stock, thus ensuring a ‘level playing field’ between the two types of transaction. The gilt-edged stock lending agreement (GESLA) was also updated to ensure that it dovetailed with the new gilt repo legal agreement; the revised GESLA was issued in December 1995 and repo and stock lending are inter-linked aspects of the new, open market.
In the run-up to the start of repo trading, market practitioners and regulators drew up recommended market practices, set out in the Gilt ...