Closing the gaps in repo

Key Takeaways

• The repo industry has made great strides in modernizing its infrastructure.
• The new US Treasury (UST) clearing mandate will add pressure to accelerate its progress.
• Repo trading technology will play a role in compliance and enhancing competitive edges.

Although volatility has been a hallmark across financial markets in 2025, repurchase agreements (or repo) have weathered the storms better than expected. However, the Trump administration’s ongoing geopolitical tensions and fluctuating tariff policies have underscored the need to modernize systems and processes further.

April 2025 was the most tumultuous month due to the fallout from President Trump’s so-called “Liberation Day” tariffs. The Secured Overnight Financing Rate (SOFR) — an important one-day lending benchmark linked to activity in the market for overnight repo collateralized by the US Treasury (UST) — jumped 4.36 percent, according to New York Federal Reserve data.

Once the dust settled, Roberto Perli, the manager of the New York Federal Reserve’s System Open Market Account, acknowledged that the US government bond market’s liquidity deteriorated sharply in mid-April – but noted that it continued to function. Repo markets, in particular, proved resilient; the basis between cash treasuries and treasury futures remained reasonably stable.

Perli said this was in sharp contrast to the turmoil witnessed in March 2020, when the treasury market nearly froze due to the onslaught of COVID-19. The pandemic is considered to be a far bigger economic and financial shock than the vacillating tariff pronouncements.

Electronification of repo markets

The repo industry has benefited from recent upgrades to its infrastructure, which historically was riddled with manual processes, reliance on voice brokers, handwritten records, and pockets of opacity. In recent years, participants have embraced greater repo market automation, electronification, and real-time data, enabling them to manage balance sheets, capital, and liquidity better.

Despite the progress, more work is still required to make the repo industry fit for purpose in the UST central clearing world. The Securities and Exchange Commission (SEC) mandate was recently extended by a year, with the starting dates for eligible cash market treasury transactions shifted to 31 December 2025 and 30 June 2026 for eligible repo transactions.

While the industry welcomed the reprieve, participants would have liked even more time to prepare. As a new study by Crisil Coalition Greenwich reveals, a host of challenges still must be addressed. Top of the list is which of the two models – done-with or done-away – should be used, according to the 10 senior experts interviewed at buy-side and sell-side firms based in the US, UK, Europe, and Asia.

Currently, both models are employed. The Fixed Income Clearing Corporation (FICC) has long supported the done-with model, whereby the clearing of trades is through the same dealer that executes them. One key benefit is that the dealer’s exposures can be netted with other exposures; some 70 percent of respondents cited this advantage as an important attribute in clearing.

Under the SEC mandate, many market participants are expected to pivot to the done-away model. This model is akin to the current futures commission merchant (FCM) prototype, in that market participants employ different clearing brokers for execution. This option ensures best execution and minimizes the number of clearing counterparty agreements (CCAs), increasing efficiencies and lowering costs.

While done-away trading for UST trading is possible with current models, it will be a new dynamic in repo – which traditionally is a principal business. It will require different technology, and buy-side firms are focused on what new workflows are necessary as they consider optimizing margins within the cleared repo structure by reducing intermediaries.

Overall, repo trading technology will play a significant role in helping smooth the transition. Technology will also enable firms to differentiate themselves from their competitors. To do so means becoming more innovative while also streamlining processes, reducing human intervention, automating functions like affirmation and confirmation processes, and moving away from overnight batch processing.

It is not straightforward, as there is still uncertainty over the nuts and bolts of the mandate. Most of the study’s participants compared the prescriptive nature of the Dodd-Frank Act to the opaque guidelines of the new proposal. They believe that this divergence from clearly laid-out rules creates roadblocks along the path to compliance.

The study respondents also voiced concerns over how many dealers would offer done-away clearing services to clients. Historically, the largest clearing firms dominated the business regardless of product. While buy-side firms prefer choice and competition, it is seen as inefficient to clear with too many clearing brokers. Moreover, as Crisil Coalition Greenwich points out, “it is not yet obvious that done-away repo clearing will generate the necessary return on capital for the largest dealers.”

The general consensus is that Bank of New York, State Street, and other similar behemoths will continue to act as the biggest clearing firms in the market under the new mandatory clearing regime, with many global investment banks remaining focused on trade execution.