Finadium: US Repo Conditions and Market Structure in 2023

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.

“If you are responsible for funding at a bank or hedge fund, the clock is ticking loudly. The pressure of finding repo liquidity may be an existential threat,” said a Rates & Repo 2022 panelist. With US$5.5 trillion in US primary dealer activity, clients depend on repo to facilitate their trading activity, while repo also drives stability in the US$24 trillion US Treasury market. While always connected to other markets, in 2023 it seems that repo is now even more interconnected across cash products, derivatives and government policy. More market participants than ever have a better understanding of what repo is and what it isn’t. The very interconnectedness of US repo makes it a high priority when focusing on financial market stability: disruptions in US repo echo far and wide.

US repo market conditions and market structure are also complex, the result of Dodd-Frank, Quantitative Easing, COVID, increased US Treasury issuance, the Reverse Repo Facility, higher interest rates and the beginnings of Quantitative Tightening. It’s a long list. New developments like the US Securities and Exchange Commission’s proposal for mandatory clearing of US Treasuries and US Treasury repo would not only create operational requirements but could also change the face of market liquidity if high volume client strategies become less profitable with higher margins.

This report is based on market research conducted in November 2022. We heard from more than 25 market professionals among panelists and audience members at our Rates & Repo event on November 2, 2022. Finadium benefitted from participation in prep calls as well as moderating two of the three panels. We also interviewed 12 US repo dealers including primary dealers, bank affiliates and independent broker-dealers.

This report 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.

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