A unique vantage point − speech by Nathanaël Benjamin

Why surveillance matters more than ever

Good afternoon, and my thanks to ISDA for inviting me to speak at this year’s London Derivatives Trading and Treasury Forum. It is a pleasure to be here.

ISDA has played a key role in shaping the modern derivatives market through its work on legal standards, market infrastructure, data, and risk management. At a time when markets are becoming more interconnected and increasingly vital for the provision of financial services to the real economy, that contribution matters more than ever.

The nature of risks to financial stability has changed a lot over the last two decades.

Before the global financial crisis, the attention of authorities was often focused primarily on individual banks. The resilience of individual institutions is still fundamental today, of course. But many of the vulnerabilities that matter today emerge not within a single bank, but from interactions across non-bank financial institutions (NBFIs), markets, and funding structures.

Recent episodes have demonstrated that stress can originate in one part of the financial system and propagate rapidly through funding markets, collateral demands, margin calls, and leveraged positions. And the actions taken by individual market players can, even when rational from their own perspective, combine to amplify stress across the system. We have talked about these risks on numerous occasions – including in this forum.

As the risks have changed, so has our financial stability perspective, adopting a resolutely system-wide lens that can observe their complex interconnections and interactions.

That scrutinising lens, how surveillance is evolving, and what it can help us achieve, is the first thing I’m going to talk about today. And then I will turn to one policy area which has benefited from that mindset: the resilience of gilt repo markets.

A unique vantage point

Over the past decade, the post-crisis reform agenda has transformed the information available to authorities.

One of the shortcomings identified following the global financial crisis was the lack of visibility into activity in important financial markets, and into the interconnections between market participants. Transaction-level reporting was introduced in response, allowing authorities to better understand how markets function and how market participants interact.

Today we can draw on transaction-level reporting across derivatives, securities financing, and trading activity, together with fund-level reporting and supervisory data. We've been using these insights for years to better understand how markets function, how risks propagate, and where vulnerabilities may be building across the financial system. They have informed our analysis during episodes such as the “dash for cash” that followed the outbreak of the Covid-19 pandemic, the stresses in energy markets following Russia’s invasion of Ukraine, or the 2022 gilt market disruption. Yet as the nature of vulnerabilities changes, the way we use this data has changed too. Having access to millions of transaction records is not the same as being able identify how shocks might propagate through a complex web of funding relationships, collateral chains, and leveraged investors.

No single reporting regime was designed to provide a complete view of the financial system. Each dataset offers a different lens. As the UK’s central bank with macro- and micro-prudential authority, we have a unique vantage point that allows us to bring multiple sources of data together, building out a picture of chain reactions that would otherwise be unforeseeable.

Our institutional set-up makes us particularly well placed to do so for UK markets. As a participant in these core markets ourselves, and through the gathering of market intelligence from that position, we obtain invaluable insight that brings colour and context to reporting data. And through close collaboration with our colleagues at the Financial Conduct Authority, we can bring together information from derivatives markets, securities-financing markets, trading activity, fund reporting, and prudential supervision within a shared analytical framework.

This allows us to answer questions that would have been much harder to address in the past. We are increasingly able to identify where leverage resides, how it is financed, who is providing that financing, and how funding and liquidity shocks might propagate through the financial system. These capabilities are helping us to understand the behaviour of leveraged market participants and to evaluate how changes in market structure, such as greater central clearing, broader clearing access, or minimum haircut frameworks, could affect the resilience of core funding markets.

To show what a system-wide perspective can do, let's turn to a sector where these insights have been invaluable: hedge funds.

Data, and the case of hedge fund leverage

Increasingly, hedge funds contribute to liquidity, price discovery, and risk-bearing capacity across important financial markets. The financial stability question for us is not the fact that they use leverage to support their activities – that is a commercial matter entirely up to them, and indeed well-managed leverage is a positive thing for the economy. The question is rather about where that leverage resides, how concentrated it is, how it is financed, and how it interacts with the rest of the financial system.

Those questions cannot be answered using any single dataset, or by looking at hedge funds in isolation. They require combining transaction-level data, fund-level reporting, supervisory intelligence, market engagement, and deep market expertise.

Doing so has already generated insights that would have been difficult to obtain in the past. For example, in our July 2026 Financial Stability Report (FSR) we showed that, over the past four years, hedge funds have shifted from being net cash lenders to net cash borrowers in repo markets across a range of currencies, reflecting the important role of the banks as by far the major providers of leverage.^{footnote [1]} We were also able to show that growth in hedge funds' gilt repo borrowing has coincided with increasing futures open interest, consistent with an expansion in basis trading activity. We were able to spot and track the growth of the cash-futures basis trade in the UK over the last 18 months – which was corroborated by our market intelligence.^{footnote [2]} These insights help us understand where leverage is being created, how it is financed, and which transmission channels may matter during periods of stress.

That said, transaction data can only tell us part of the story. They help us understand positions and interconnections. They do not necessarily tell us how firms will behave if conditions deteriorate. To understand that, we complement our datasets with analysis of behaviours and reaction functions.

That is why we have started to run system-wide scenario exercises in collaboration with the industry. Our first one, two years ago, focussed on core sterling markets. During that exercise, many hedge funds originally assumed that additional repo financing would be available if needed. But it was clear from dealer banks that this would not necessarily be forthcoming. So we shared that feedback with hedge funds and asked how they would respond if banks reduced the amount of gilt repo financing available. Many reported that they would need to unwind positions financed through repo, illustrating how pressures on dealer balance sheets could be transmitted to leveraged investors and potentially amplify market moves.^{footnote [3]}

Hedge funds play an important role in supporting market functioning, including in government bond markets, by warehousing risk and providing liquidity. But they are also generally more responsive to changes in market conditions and financing costs. As a result, the unwinding of leveraged and often crowded positions can have a disproportionate impact on market liquidity and may amplify stress during periods of market turbulence.

This is precisely why a system-wide perspective matters. A hedge fund can observe its own financing relationships. A dealer can observe its own clients. However, only the authorities can bring these perspectives together, helping identify vulnerabilities and interconnections that may not be visible to any single firm. Publishing analysis through our Financial Stability Reports, Staff Working Papers, and other publications allows market participants to benchmark their own exposures against broader market developments, improve risk management playbooks, understand which avenues would or wouldn’t be open to them in a stress, and identify vulnerabilities earlier.

As a concrete example of this, in our Financial Stability Report we have started to publish regularly aggregated data and charts that can help market participants understand wider developments and aid their own risk management. Examples of this in our latest FSR include how the preferred maturities of the gilt investor base have changed over the past decade, investor positioning in gilt repo, and breakdowns of the term and collateral maturity of those transactions.^{footnote [4]} As part of our ongoing market engagement we look to understand which other areas might benefit from increased transparency, such as deep dives into specific market segments like retail investors in gilt markets and transparency on basis trade dynamics.

So please do take a look at our FSRs! I am not sure all the market participants who might find this information helpful actually clocked that we had very deliberately started to publish it. So far the feedback from hedge funds about its usefulness has been positive, and our message is: please put your thinking caps on and let us know what other aggregate data you would find helpful to see for your risk management. If we have it and can share it, we will.

At its best, surveillance is not just about helping authorities understand the system, it is also about helping the system understand itself better. Equipped with better information, market participants can be a more effective first line of defence, and the market as a whole is better able to self-stabilise when shocks hit – reducing the need for us to intervene.

And because we’re better placed than anyone else to see the overall picture, assembling it and sharing it back is an increasingly important policy tool in our toolbox.

But in addition to allowing market transparency to play out more effectively and do its work, surveillance also helps us identify in a discerning way the select few areas where the structure of markets does need to evolve to enhance resilience. Which brings me to a market where we have been asking such questions: the government bond repo market.

Leverage and funding in core markets

Like much of the financial system's infrastructure, the repo market is probably most visible only if it stops working properly. But its day-to-day role is essential – it keeps cash and collateral flowing through the financial system, supports liquidity in government bond markets, and facilitates the transmission of monetary policy.

Our first system-wide exploratory scenario (SWES) several years ago illustrated the crucial role that this market plays. Its resilience has improved, as was demonstrated by the fact that it has withstood successfully all the recent shocks in a heightened global risk environment. But that improved resilience isn’t yet locked permanently into its fundamental structure – it can still not be taken for granted.

Specifically, a key issue on our radar is how leveraged positions that are extremely large, concentrated, or correlated with respect to the size of the market have the potential to amplify shocks if they are unwound abruptly. Market corrections as a result of economic fundamentals are natural and healthy. What we want to avoid is such corrections getting amplified by structural features, as happened in the 2022 LDI crisis. That does not mean eliminating risk, though. Quite the opposite. The repo market performs crucial economic functions precisely because participants take and manage risk, often in the form of leverage. In principle leverage supports market liquidity and efficient risk transfer. Margin protects counterparties. Intermediation connects investors with different funding and investment needs.

Our intention is not to reduce leverage financed through the repo market. It is to ensure that the way it is provided and accessed supports market liquidity, efficient risk transfer, and the allocation of capital in all environments – not just when the sun shines. That might require limiting the particular forms of risk-taking that make the system more fragile.

So well-managed and well-understood leverage is welcome. Out-of-control leverage is unwelcome.

The challenge for policymakers is therefore to identify the combination of measures that best strengthen the resilience and efficiency of the system as a whole, in both normal and stress times. These properties depend on the ability of the financial system to supply liquidity when it is most needed. And they depend on limiting the build-up of vulnerabilities that can generate sudden and disruptive demand for liquidity during periods of stress.

On the supply side, greater central clearing has the potential not only to reduce counterparty credit risk, but also to strengthen the resilience of the market structure itself. The benefits for risk management are well understood, including more transparent and risk-sensitive margining practices. Less often appreciated are the market-wide benefits arising from greater netting efficiencies, lower balance sheet usage and a greater capacity for intermediaries to absorb positions, warehouse risk, and supply liquidity during periods of stress. Bank of England researchers have estimated that greater central clearing could have reduced gilt repo exposures on UK bank dealers' balance sheets during the “dash for cash” by between 40% and 60%.^{footnote [5]} So this could free up a lot of capacity.

Experiences in other jurisdictions suggest that greater use of central clearing can encourage innovation in market structure and access models. In the United States Treasury repo market, for example^{footnote [6]}, market structures are evolving alongside clearing reforms, with new intermediation models and broader clearing access arrangements developing over time.

This is why access models matter. Different access arrangements can broaden participation in central clearing while preserving the diversity of participants that supports market liquidity. In the indirect model, clients access the central counterparty (CCP) via a clearing member. Sponsored access allows eligible firms to become direct participants of the CCP with support from a sponsoring clearing member, typically a dealer bank. Such support might include managing the connectivity to the CCP; managing collateral and settlement processes; and funding default fund requirements. In some ‘guaranteed’ sponsored models, direct access can be extended to an even wider range of participants, supported by greater obligations of the sponsor, for example to step in and make margin payments on behalf of the sponsored member. Arrangements can therefore sit at different points along a spectrum. By allocating responsibilities differently between clients, clearing members, and the CCP, they create different trade-offs between market access, balance sheet efficiency, incentives to provide intermediation, and overall market resilience.

Improvements in access to client clearing may themselves encourage greater use of clearing and catalyse the evolution of markets over time.

The measures I have discussed so far operate primarily through the liquidity supply channel. But recent episodes have demonstrated that liquidity stress is often driven not simply by a shortage of liquidity supply, but by sudden increases in liquidity demand.

This is where margining and haircut practices become important, reducing the build-up of extreme and unmanageable leverage, strengthening counterparty risk management, and lowering the likelihood of abrupt position liquidations.

In some circumstances, zero or near-zero haircuts can be justified by risk-reducing features such as netting and portfolio margining arrangements, which lower the overall exposure of the lender of leverage to its counterparty by recognising offsetting positions across different portfolios. However, while these arrangements can explain an important share of observed near-zero haircuts, we found that competitive considerations also play a role in the setting of very low haircuts – whereby the haircut is not set on risk grounds, but to avoid losing the client to competitors.^{footnote [7]} This matters because near-zero or negative haircuts that are not directly linked to underlying risk can facilitate the build-up of unmanageable levels of leverage at little cost, and increase vulnerabilities in periods of market stress. More broadly, these findings support ongoing efforts by policymakers to strengthen the resilience of core funding markets and reduce vulnerabilities associated with extreme leverage in non-bank financial institutions.

Considering policy across these areas inevitably involves trade-offs. Poorly calibrated measures could reduce market-making capacity, shift activity elsewhere, or create unintended incentives. Margin and collateral arrangements that limit netting opportunities or prevent the recognition of genuine risk offsets can increase funding pressures precisely when market participants are already under stress.

From a financial stability perspective, the objective is not simply to demand more collateral from market participants. It is to ensure that collateral and margin requirements reflect underlying risks while avoiding unnecessary demands on liquidity during periods of stress.

This raises an important question: can the same level of risk protection be achieved while reducing unnecessary liquidity demands? This is one reason why appropriately designed cross-margining arrangements are attracting increasing interest, as they can improve collateral efficiency and reduce unnecessary liquidity demands where genuine risk offsets exist. However, cross-margining is not a free good. The scope for recognising offsets has to be determined by genuine offsets in the risks, noting asset correlations that appear stable in normal times may become less reliable during periods of stress. Realising the benefits of cross-margining also requires effective legal and operational arrangements and close cooperation across infrastructures and jurisdictions.

No single measure is likely to be a silver bullet for the resilience of gilt repo markets.

Measures that promote the appropriate pricing and management of leverage, support clearing adoption, broaden access to central clearing, and improve collateral efficiency should be viewed as complementary rather than substitutes. Considered together, they may offset some of the costs or limitations that would arise if any individual measure were implemented in isolation.

As it happens, and thankfully, that is what system-wide surveillance is helping us understand. It will certainly inform which policy package we put forward.^{footnote [8]} As we said in the past, doing nothing is not an option.^{footnote [9]} We intend to publish a comprehensive update on this, including potential policy proposals, in early 2027.

Many of these issues are inherently cross-border, and we continue to work closely with international partners through the Financial Stability Board and other fora to strengthen the resilience of market-based finance globally, where surveillance is high on the agenda. We are strong supporters of initiatives such as the FSB’s Nonbank Data Taskforce to break down barriers to transparency in these inherently global markets. The changes we see to the UK’s financial system are also being seen by our fellow regulators around the world, so we are far from alone in investigating these issues.

Conclusion

Of course the challenge of interpreting vast quantities of data to make sense of complex, interconnected systems is not unique to financial regulation. Let me conclude with a famous example of system-wide thinking from history. Often, the deployment of newly invented radar technology is credited with winning the Battle of Britain. But it was not one innovation that won out: not superior radar, better guns, or faster pilots. RAF fighter command understood that it was getting the right data where it needed to go that would win the battle. It was in setting up the famous Dowding System in the 1930s – a central command that could filter thousands of data points from radar systems, civilian spotters, and reconnaissance planes, turn those observations into system-wide insight, and relay them back out to gunners and fighter squadrons, giving them the information they needed to make front line decisions – that made British air defence so effective.

They had a system-wide mindset. And that mindset is bound to be powerful as we adapt to a new era of complexity and interconnectedness in the financial system. As central banks and regulators we have a unique vantage point over the whole system. Post-crisis reforms gave us more data than ever before. But our objective is not more and more data for its own sake. It is to draw from it genuinely system-wide insight. And then to share that aggregate data and insight back with the financial system to support its enduring ability to self-stabilise autonomously.

The more reliably it does that, the more selective we can be with policy interventions.

Thank you.

I would like to thank Gerardo Ferrara, Emily Evans, Nicholas Butt, Shefalika, Waris Panjwani, Michael Wood, Bradley Hudd, Julia Giese, David Bailey, and Sasha Mills for their comments and help in the preparation of these remarks.