Cleared repo for client business gets a lot right when it’s voluntary. Both clients and dealers report that there are cost savings, pricing improvement and risk reduction from using a CCP. This is true in the US, Canada, the UK and Europe, where volumes have been stable or growing across a range of monetary policy conditions. On a voluntary basis, clearing appears to support market liquidity in both repo and cash government bond markets. Mandatory clearing is a different thing however, and the evidence suggests a potential disruption to liquidity when every eligible counterparty needs to engage.
In its recent discussion paper on clearing for gilt repo, the Bank of England asked “What would the largest impacts of minimum haircuts be for market participants? How would they affect your business model/trading strategies and what actions would you take in response? How would minimum haircuts on gilt repo impact cash gilt market liquidity and pricing?” These are critical questions that could impact market functioning and domestic financial conditions.
In the US version of mandatory clearing, the Securities and Exchange Commission failed to address this question adequately. Instead, they relied on assertions made in a working paper by the independent Group of 30 made up of academics and current and former regulators. The working paper itself had no data to back up its claims, which was too bad, given the big impact it ultimately had. (Here’s the 2022 update to the Group of 30 paper, which has links back to the original 2021 version). US repo dealers and clients have told us that they expect a short-term dislocation in US repo rates when 2027 rolls around. They believe that a new equilibrium will set in but it may be more expensive to trade than it used to be.
The impact of basis traders is a unique concern: if basis traders are buying around $1 trillion of US Treasuries in the current market, and foreign buyers are pulling back, and the US Treasury is conducting buyback operations for long-term bonds while issuing more short-term debt, does the financing equation hold true when repo margins rise? The counterargument to this is that the CME-FICC cross-margining deal will solve the problem, but we can’t help but wonder about CME’s commercial incentive to maintain that structure once their own repo clearing is up and live, and where dealers and client might be in setting up on CME when the mandate goes live. We aren’t confident that all these puzzle pieces fit together nicely whether repo clearing is mandatory or not; adding clearing is another complex factor especially when cross-border trading or the activities of global players are considered.
In the UK, the Bank of England has kept an eye on the growing business of basis traders and their potential to unsettle markets with fast directional changes. The July 2025 Financial Policy Committee Record said that:
The Committee noted the continued growth of leveraged strategies in the gilt market since early 2024. The FPC observed that the disorderly unwind of these strategies could be driven by several common triggers, including the sudden withdrawal of funding in the gilt repo market, sharp increases in margin or collateral calls, stop loss or risk limit breaches, as well as cross-market or cross-border contagion due to the interconnected nature of financial markets and the presence of common participants. In particular, positions with directional exposures could result in one-way sales of gilts when unwound which could challenge market functioning. In addition, relative value strategies that used net repo borrowing to arbitrage between different related financial instruments (such as the cash-futures basis trade) could also threaten financial stability, for example if intermediation capacity were impaired or if correlations between instruments were to break down, as had occurred during the March 2020 ‘dash for cash.’
Moving all gilt repo to central clearing could potentially result in an orderly or disorderly unwind. If big enough relative to market liquidity, that would be disruptive in the short-term before a new UK equilibrium gets established.
There may also be global capacity issues. The use of Collateral-in-Lieu and the Done Away model in US markets should alleviate dealer balance sheet capacity shortages if the US repo market has outstanding volumes of US$8 trillion. However, a recent Federal Reserve analysis said that the US repo market actually had US$12 trillion outstanding. The Fed study, The $12 Trillion US Repo Market: Evidence from a Novel Panel of Intermediaries, relied on some secret sauce data that are not accessible to the public. There are also inconsistencies between the data and anecdotal reports from large dealers. The authors calculate that inter affiliate repo is 7% of the market while inter affiliate reverse repo is 6%. Dealers have told us that the figures are more like 25%. The difference may lie in the fact that the Fed study collected data from only US sources; a study of international banks and cross-border banking business may tell a different story; it’s hard to say. The UK version of the General Clearing Member model doesn’t line up as well as the US Done Away model yet in part due to accounting issues; the US model just saw an important SIFMA and SEC approval for Done Away accounting treatment. We will be discussing the nuances of these issues at our Cleared Repo in Europe event in Paris.
Our conclusion is that, partly due to the growing activity of UK basis trades between cash and futures gilts, a move to central clearing could provoke a similar short-term market dislocation as the US is expecting. Policy makers and market participants should stay alert to the potential. Many will look to the behavior of basis traders in the run-up to clearing go-live for more indications on what will happen when the rules go into effect.