This report examines the cost implications of Sponsored, Agented, done with and done away in US repo clearing markets. It provides an overview of the models approved for use at FICC and delivers results of a primary survey conducted in Summer 2024 across 37 buy-side institutions on their opinions of repo clearing and the agent model. Lastly, it consolidates market commentary told to Finadium individually and at our Rates & Repo North America 2024 conference on model options.
A new clearing model for repo could change the relationship aspect of the business. Agency clearing, well known to futures and cleared swaps participants as the Futures Commission Merchant (FCM) model, was approved for repo trading in 2024. No trades have yet gone live, but Finadium survey results and conference panel participants agree that at least some agency clearing will be necessary to meet market capacity when US mandatory repo clearing rules go live in June 2026 (presuming no delays). If the rules go forward as planned, and some repo becomes a cleared instrument like futures or options, albeit with physical settlement, would the relationship part of the business disappear for some clients, and how much will it matter to the industry?
The Fixed Income Clearing Corporation’s (FICC’s) Agent Clearing Model for repo, and done with and done away options, creates opportunities but also challenges for dealers and clients. The more that firms understand what the model options mean as dealers present their product offerings, the better they can assess the short-, medium- and longer-term impacts on their businesses. Our survey of hedge funds and cash investors shows that while clients are generally familiar with the US Treasury repo clearing mandate, the application of agent clearing and done away models could mean additional costs.
The contribution of this report is to assist firms in understanding what new repo models mean for their business models and trading strategies. If a client trading repo now has someone to speak with on a bilateral basis and moves to an agency model, would they be provided just a screen and a login? If a smaller Sponsored client is asked or forced to move to agency clearing, how does that change the spectrum of business that the client does throughout the bank when balance sheet requirements change? While clients will learn this information in time, dealers are working through the implications as they look to keep their clients in place through what may be a few different transitions across continents.
This report should be read by any market participant in the repo or government bond trading space as a preview on client economics that many firms will discuss over the next year.
A direct link to the report for Finadium research clients is here
For non-subscribers, more information is available here.