Tag: gilt

Central clearing and the functioning of government bond markets

Yuliya Baranova, Eleanor Holbrook, David MacDonald, William Rawstorne, Nicholas Vause and Georgia Waddington

The functioning of major government bond and related repo markets has deteriorated on several occasions in recent years as trading demand has overwhelmed dealers’ intermediation capacity. Seeking a remedy, Duffie (2020) proposes a study of the costs and benefits of a clearing mandate in these markets. Such a policy could boost dealers’ intermediation capacity by allowing more of their trades to be netted, thereby reducing their balance sheet exposures and capital requirements. In a recent staff working paper, we estimate the effects of comprehensive central clearing of cash gilt and gilt repo trades on UK dealer balance sheets during one particular stress episode. This post summarises those quantitative results and discusses qualitatively other costs and benefits of broader central clearing.

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Liquidity resilience in the long gilt futures market

Jonathan Fullwood and Daniele Massacci

Episodes of vanishing market liquidity haunt dealers. This was true in the great stock market crash of 1929 and remains so today: in August 2018, professional corporate bond traders cited vanishing liquidity as their primary source of worry. Dealers in more-liquid long gilt futures – contracts on 10 year UK government bonds – might be less concerned. But have structural changes in the market led to less resilience over time? We address this question in a recent Staff Working Paper. We find that liquidity in the long gilt futures market has increased slightly over recent years, while remaining resilient to periods of market stress.

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