Rates & Repo Preview: mandatory clearing of UST repo

The proposal to mandate central clearing of cash US Treasuries and US Treasury repo is the Securities and Exchange Commission’s bid to solve problems with the stability of US Treasuries in global markets, bank risk management practices and tail risk to avert crises, and figures from a recent Depository Trust & Clearing Corporation (DTCC) survey shows an expected market shift in the $1.6 trillion range. Ahead of Finadium’s Rates & Repo conference, we speak with our panelist experts from BNY Mellon, State Street and Sunthay.

The industry is anticipating a phased-in approach to any finalized central clearing rule for US Treasuries, but it is important that market participants consider changes their organizations need to make, which is likely overlap with other industry initiatives including the transition from T+2 to T+1 settlement, said Andrea Pfenning, president and chief operating officer at BNY Mellon Government Securities Services.

BNY Mellon provides U.S. treasury bilateral and tri-party settlement services for broker-dealers, other financial institutions and financial market infrastructure including Fixed Income and Clearing Corporation (FICC). The US treasury market has grown significantly over the last several years with issuance reaching all-time highs and approximately $25 trillion in UST securities outstanding.

The proposed changes impact all aspects of the US treasury market, including the current market infrastructure. Sell-side participants (collateral providers) and buy side participants (cash providers) will need to consider their current repo activities – both front and back-office processes, the technology, and their trading relationships. This market infrastructure change is being led by FICC, which is the CCP for the US treasury market. Given its important role in this market, BNY Mellon’s team is working with closely with FICC and all market participants.

Who’s in and who’s out

According to US Office of Financial Research (OFR), uncleared bilateral repo is the largest segment of the market in gross exposure by primary dealers, and volumes are estimated at 60% of a $4 trillion overall market — a proportion that has been steady over the last few years.

What is instructive is what’s excluded from the SEC clearing mandate, which will be part of determining flows between one of two options: clearing or guaranteed structures, said Shiv Rao, co-founder and chair at Sunthay. Among those exclusions would be trades between non-FICC members and indirect, or sponsored repo, participants – for example, between a hedge fund and a money market fund, even when they are both sponsored FICC members.

Repo market participants will need to consider several points to decide how to manage: optionality, liquidity and costs. The latter in particular has been highlighted in comment letters submitted to the SEC, Rao noted: “Haircuts, operational costs, documentation costs — there’s a full list of reasons why people believe that clearing will increase costs relative to existing matched book on balance sheet trades (and) a number of trades being done by banks that are either marginally profitable or unprofitable are likely to be the natural fit for guaranteed structures.”

Rao estimates that number at between 20% and 25% of banks’ gross balance sheet in this category of transactions, which are done almost entirely for netting purposes. Moreover, guaranteed structures don’t have quite the onerous documentation involved, he added, and Sunthay has standardized it: “The implementation time for sponsored repo is going to be quite long as we work through docs. Guaranteed repo results in substantial efficiency of resources for repo market clients and is available to be deployed globally now.”


State Street is one of the major players in sponsored repo and also has a peer guaranteed service, Venturi. While guaranteed repo is not going to be replacing dealer or dealer-to-client market trading and liquidity, it is a valuable economics and diversification play that reinforces market resilience, said Travis Keltner, managing director and head of Secured Financing at State Street.

Resilience and transparency are foundational elements of the clearing mandate with a full set of trade-offs, and participants should be focusing on medium- and long-term views when considering its importance, he noted, adding that “there’s no free lunch”: whether a firm is in bilateral or clearing, there are balance sheet tradeoffs. For some, there could be a material improvement in sheet utilization.

State Street is not an institutional bank that manages a traditional balance sheet repo book, and balance sheet repo over the years has been and is generally expected to become more constrained. This makes clearing via sponsored repo the scalable answer for the bank because of accounting netting and leverage relief benefits, he explained.

Among the trade-offs with costs, Keltner highlighted liquidity drags, which can come from posting margin and contingency fund contributions as part of CCP risk waterfalls, for example: “Repo is a basis point game, and if you are introducing a basis point of cost or more, that can impact your market and your trade, but particularly for some…players, perhaps more costly.”

He is keen to note however that there’s a continuum of perspectives on the revenue-resiliency trade-off, and while it is not a “one-size-fits-all” it goes a long way on the “80-20 side”. He compares the situation to saving a sinking ship in a fog, with CCPs positioned to support transparency to “clear the fog and create a safer environment”.

“There’s a lack of transparency in the repo market today, there’s material volumes being put through, there’s major issues around the repo market during (stress events)…If you think about what the exponential risk is today in a major event, you could arguably be much better off with the resiliency of creating that market transparency and buoyancy, and support around a failing institution,” he said.

Andrea, Shiv and Travis will be joining colleagues from DTCC and GLMX on the panel “Mandatory Clearing of US Treasury Repo” at Rates and Repo North America, where they will discuss these and other major market trends. Rates & Repo is a conference for cash investors, dealers, market intermediaries, technology firms and other service providers. Register here  for the in-person panel discussions on November 2.


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