Liquidity at Stake: Analysis of the Mandatory Clearing Proposal for US Treasury Repo
Finadium
March 2023
The US Securities and Exchange Commission’s (SEC) September 2022 proposal to mandate central clearing of cash US Treasuries and US Treasury (UST) repo is long on argument and short on analysis. In this report, Finadium breaks down the extent of the proposal’s impact on UST repo with a focus on liquidity, balance sheet and client behavior.
The SEC says that central clearing will help to solve problems with the stability of US Treasuries in global markets, bank risk management practices and tail risk for another serious financial crisis. The proposal itself is largely commentary with little quantitative evidence. This may not matter however, as regulatory and political trends at the SEC suggest that some or all of the proposal could become a final rule in the foreseeable future. The question then will be how mandatory clearing of cash US Treasuries and UST repo will force changes to liquidity and the behavior of market participants and clients. If enacted as current proposed, a clearing mandate for UST repo will be a global challenge.
This report considers commentary from the SEC and market participants on the proposal including the thesis that changes to US Treasury repo trading for clients will impact liquidity for both UST repo and cash trading. Following a read-through of selected comment letters, the report then looks at the data for how much of the UST repo market will be impacted by mandatory clearing. It concludes with business considerations on liquidity and which service providers and clients may see the biggest need to adjust their strategic planning.
The SEC has asked for comment whether US Treasury securities loans should be cleared as part of the mandate as well. Unless the SEC creates a specific exemption and figures out how to avoid gaming the rules by dealers making securities loans instead of repo transactions, the securities lending industry may be forced to figure out how to manage the CCP.
This report should be read by any market participant working in financing, treasury, or clearing in fixed income or equities worldwide. The scale of change that the proposal could deliver across products and market functions means that new winners and losers will emerge, some sooner than others. Market participants should take an opportunity now to familiarize themselves with the language of the proposal and the numbers behind the markets.
Table of Contents
- Executive Summary
- How Did We Get Here?
- Review of the Proposal
- How Much Repo Does the Proposal Capture?
- Scope of the Impact
- – Will There Be More Balance Sheet?
- – Operational Costs and Smaller Dealer Participation
- – All to All, Peer to Peer and Done Away
- – The Global Liquidity Ripple Effect
- The Other Shoe: UST Securities Lending
- About Finadium LLC