London's gilt repo market set for liquidity increase, says LCH

Liquidity in the UK gilt repo market should increase dramatically next month, when the London Clearing House (LCH) steps in as central counterparty, according to John Burke, director of LCH's RepoClear service.

From August 5, LCH will act as central counterparty to its 46 member banks that trade gilt repos – sale and repurchase agreements on UK government bonds. “Banks will be able to trade multiples of what they trade at the moment,” said Burke.

A gilt repo trader at one LCH member bank said it will allow for more effective netting – the reduction of offsetting obligations to a single 'net' obligation. “If you have the ability to net-down more, then you can do more trades,” said the trader.

Burke added that member banks' capital requirements could also be reduced. “If you have 40 counterparties that you have to allocate cover against, and if you replace that with just LCH, you get a saving.”