Bank of England to push ahead with plan to limit hedge fund leverage

The Bank of England is moving ahead with plans to limit how much debt hedge funds can use when trading UK government bonds, marking a shift from warning about gilt-market leverage to preparing policy action.

The central bank is expected to use minimum haircuts on repo borrowing, the financing that allows investors to buy gilts against collateral. By requiring more margin upfront, the proposal would make it harder for some funds to build highly leveraged positions.

The plan comes after the BoE said the structure of the gilt market has evolved and that further action is needed to improve resilience. The bank has previously warned that leveraged repo borrowing in gilts remains elevated and can unwind sharply during periods of stress.

Why the BoE is acting

The policy push reflects concern that crowded hedge fund trades can amplify volatility when bond markets weaken. The reporting points to recent selloff episodes, including the post-"liberation day" Treasury move and an Iran-war selloff earlier this year, as part of the backdrop to the debate.

Sarah Breeden, the BoE deputy governor for financial stability, is the senior official associated with the effort. The central bank is expected to provide more detail in a blog post or formal proposal early next year.

Hedge funds account for about 30% of activity in the nearly £3 trillion gilt market, according to the reporting. That makes them a meaningful source of liquidity, but also a channel through which leverage can build quickly.

The BoE has argued that a well-calibrated approach should not materially raise overall margin costs. Its position is that the measure can improve resilience without creating an unnecessary burden on the wider market.

Market impact and pushback

The proposal is likely to face resistance from hedge funds, banks and trade groups that say tighter haircuts could raise funding costs, divert activity and reduce liquidity. Those concerns matter because gilts help set borrowing costs across the economy.

The trade-off is straightforward. Less leverage should reduce the risk of forced selling in a stressed unwind, but it may also make it more expensive for some investors to finance positions in normal conditions.

That balance is central to the policy debate. Supporters see the move as a targeted response to systemic risk in the repo market; critics say the rules could be too blunt and may not deliver enough benefit to justify the cost.

What happens next

The Financial Times first reported the plan on July 2, 2026, and The Times later independently reported the same day that the BoE was advancing the proposal. The two reports align on the core direction of travel: the central bank is no longer only warning about leverage, but preparing to constrain it.

What remains unclear is the final calibration. Open questions include the haircut floor, whether the rules would apply across the market or only to certain counterparties or trades, and whether the BoE will pair the measure with other reforms such as more central clearing.

The policy also sits within a wider international move to constrain leverage in government bond markets. For the BoE, the immediate objective is to make the gilt repo market less vulnerable to the kind of rapid unwind that can deepen a selloff and spill into broader credit conditions.