US Repo Conditions and Market Structure in 2023

Finadium
January 2023

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Repo is an interconnected piece of how financial markets work, but changes in balance sheet management mean that costs can no longer be buried in other transactions. A requirement that repo pay its way means a likely repricing of clients in 2023 whether or not transactions are centrally cleared. This will mark a new era of how dealers, clients and regulators view repo activity.

This report presents the results of conversations with repo dealers, clients, service providers and market infrastructure. It looks at three major considerations in US repo at the start of 2023: how market participants will react to the Federal Reserve; the dynamics of repo economics and settlement venues, including the proposed mandatory clearing rules for US Treasury repo; and the big question of who will buy new Treasury issuance over the coming year.

While the Federal Reserve remains the biggest actor in US repo, other factors are set to gain steam in 2023 that modestly decrease Fed engagement while testing the limits of US repo capacity. The Fixed Income Clearing Corporation’s (FICC) Sponsored Repo service has proven its case of adding value to the market on a voluntary basis. It remains to be seen whether lost private sector business of the last few years can be regained as Fed participation decreases.

This should be read by any participant in the US repo market including balance sheet management professionals at regulated institutions and clients across cash and collateral providers. Regulators and service providers may benefit from an increased understanding of repo market participants’ economic and operational requirements over the next year.

Table of Contents

• Executive Summary
• The Interconnectedness of Repo Liquidity
• Reacting to the Federal Reserve
• The Economics of Repo Settlement
• – Where Sponsored Repo Adds Value
• – The US Treasury Repo Clearing Mandate
• – Guarantees and Other Alternatives
• Looking Past the Trading Desk
• – Who Will Buy All the Treasuries?
• About Finadium LLC