6 - The gilt repo market

Abstract

This chapter describes the gilt repo market in the United Kingdom. The repo market in the United Kingdom is relatively new, begun only on January 2, 1996. The introduction of repo was part of a range of structural changes and reforms undertaken in the gilt market to bring market practice up to date. These changes included changes in quotation convention to decimals in place of tick pricing and the introduction of a market in zero-coupon gilts or strips. The repo market has been arguably the most successful element of these market reforms. The introduction of an open gilt repo allowed all market participants to borrow and lend gilts. Additional market reforms also liberalized 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. One of the stated objectives behind introducing gilt repo was to enhance the liquidity of the gilt market and the attraction of gilts as an investment, particularly to overseas investors. The positive impact on this with regard to dealing sizes and bid-offer spreads is difficult to measure; however, as the excess of demand for gilts over supply, particularly at the long end of the yield curve, has resulted in some illiquidity in the market since repo was introduced. Overall, there has been a reduction in the cost of financing long positions and the average cost of borrowing stock has also fallen. These lower financing and borrowing costs are also available to other market participants.