Finadium’s Rates & Repo North America conference is around the corner on November 4 in New York and we’re highlighting early insights to get you prepped for our industry-leading event. We hear from our expert panelists from State Street and Sunthay about how firms are getting ready for mandatory clearing of US Treasury (UST) and UST repo, coming into force December 31, 2026 and June 30, 2027 respectively, amid a backdrop of new operating models, alternatives and complements, and still with major issues up in the air.
Heading into the mandate’s go-live, the current market and regulatory dynamics are influencing emerging clearing options, and there is the opportunity of positioning clearing firms with an “arsenal” of tools to support client clearing, helping the firm optimize resources while supporting greater cleared volumes at scale, said Travis Keltner, global head of secured financing at State Street, who will be speaking on the “Getting ready for repo clearing – an update on dealers, clients and options” panel.
Keltner draws a distinction between dealers dependent on a tri-party custodians versus banks that offer self-custody solutions, of which State Street is the latter with plans to offer both done with and eventually done away agent clearing alongside support for the sponsored collateral in lieu model for compliance and more efficient access to repo.
As more types of participants get swept into repo clearing, there is a learning curve for what models will fit which players. The educated guess is that traditional asset managers, such as ’40 Acts, may fit into done with, paired with collateral-in-lieu, whereas a broader set of cash investors, borrowers or regulated entities that have unique requirements might consider agent clearing services with high rated institutions.
“We are curious about where the alternative funds community lands beyond the done-with model offered today”, he added. “The biggest question remains with pace on done away adoption. There (is) seemingly some amount of analysis paralysis and [covered clearing agencies] are looking at this more independently to help us progress and get answers so a true model can be launched, adopted, and ultimately scaled.”
Cross-margining wild card
The view from the repo desk on closely watched progress towards cross-margining is that the market will evolve its thinking on the role of futures commission merchants, he said: “Firms that never thought about clearing futures in the past are dusting off some of their perspectives with this cross-margining opportunity considering the repo relationships they build with the alternative community to finance their [relative value] activities.”
The bottom line is that UST repo clearing will be adopted globally and participants should each weigh how current and incoming access models shape and frame their clearing and relationship strategies. Keltner noted that, if constructed in harmony, they can support proprietary and client interests while also contributing to the broader objective of systemic resilience and, ideally, greater liquidity.
He further explained that, while there’s a tendency to look to the same large firms to drive the requirements of new access models, each participant may have a completely different and unique operating model to be self-analyzed and voiced in this “paradigm shift”.
The current status quo related to cross-margining is that banks identify these offsets through global netting agreements that recognize hedging, ultimately resulting in zero haircut repo financing, a sticking point amid regulatory scrutiny, said Shiv Rao, chair at Sunthay, who will be speaking on the “Key topics in the repo landscape for 2025” panel.
However, intracompany transactions can continue along the same vein, he explained: “Guaranteed structures, if they’re effected within the same institution, qualify for the same global netting construct as principal repo transactions.” Sunthay is an all-to-all guaranteed repo trading venue catering to balance sheet-constrained banks with an alternative and complement to mandated clearing. The team has been working with several large market participants proving out the model and launch is expected in Q4.
Balance sheet capacity
Many of the factors related to balance sheet efficiency are up in the air. One highly anticipated move to increase capacity would have been to exempt repo transactions backed by treasuries from the leverage ratio, which at this stage seems unlikely as regulators signal this would not align with Basel standards.
While the industry is sure to be disappointed, Rao cautioned against overstating the impact as US regulators have a track record of stepping in with temporary exemptions when markets are volatile.
What does seem to be shaping out however is that capital increases for risk-based capital will be more critical for most banks, which stem from exposures to low-risk money market funds (MMFs) more so than unrated or low-rated hedge funds and makes repo a richer opportunity cost. Guaranteed structures move those exposures to cash borrowers and away from the banking system.
“The underpinnings of guaranteed structures are completely solid…This structure frees up balance sheet and capital and costs for (banks) and it helps keep cash invested in the repo market and it also goes to borrowers in the repo market who are faced with similar constraints,” Rao said.
Travis will be speaking with fellow experts from BNY, DRW, DTCC, and Tradeweb on the Getting ready for repo clearing – an update on dealers, clients and options” panel and Shiv is joining seasoned market pros from Bank of America, Eurex and Federated Hermes on the Key topics in the repo landscape for 2025 panel at Rates and Repo North America on November 4 in New York. Rates & Repo is a conference for cash investors, dealers, market intermediaries, technology firms and other service providers. Register here for the in-person discussions.