Sell-side players are not confident in the introduction of clearing markets across cash Treasury and repo markets, concerned that deadlines are unfeasible, infrastructure is insufficient and costs will skyrocket.
Mandatory central clearing for US cash Treasury and repo markets was adopted by the SEC in December 2023, after concerns were raised around volatility and systemic risks in the US Treasury market. The initiative aims to mitigate counterparty risk, improve transparency and provide a more robust market infrastructure.
Implementation in cash transactions scheduled for December 2025, with repo transactions following six months later in June 2026. However, a recent Acuiti survey reported that just a fifth of market participants are confident that the deadlines will be met, noting that with 80% and 70-80% of cash and repo activity in the US currently uncleared, this timeline is tight. Almost a third (31%) believe the cash deadline is unlikely or impossible; even more (48%) think this of the repo deadline.
Survey participants also took issue with the SEC’s big-bang approach to the transition, with more than 75% requesting a phased approach to repo clearing, either by thresholds or client type.
Currently, market participants use a done-with clearing model – which bundles clearing and execution services together to be handled by a dealer – or a done-away model, whereby clients can execute trades with a counterparty and clear the transaction through a separate clearing relationship. Survey participants stated that the former will be unable to scale in a mandated clearing environment, and were concerned that its use could limit competition and increase cost and complexity due to the multiple repo counterparties and sponsors clients with multiple clearing relationships would face.
Almost half (44%) of FCMs polled stated that they would offer the done-away model either when the mandate goes live or as soon as possible after implementation. A further 18% plan to offer the service later down the line. However, just 9% plan to encourage clients to use the done-away model compared to 15% pushing the done-with model.
Since the SEC announced it would make cleared repo compulsory, FICC, up until now the only clearing house to offer cleared repo in the US, has been preparing to face competition. LCH and CME were seen as the strongest competitors, according to Acuiti’s survey, with participants expecting FICC to maintain top spot as an incumbent.
Just 20% of those polled do not expect the costs of Treasury market participation to increase following the mandate, with the majority predicting spikes in compliance costs and pressure on the FICC sponsored model.
©Markets Media Europe 2024
