What will be left of uncleared UST repo after SEC mandate go-live?

Key Takeaways

• Central bank facilities’ trades will remain uncleared
• US banks and buy-side firms will migrate to clearing or a new alternative – guaranteed repo
• Non-US banks and buy-side firms are out of scope but may be disincentivized to trade uncleared

Our recent blogs on mandate scope, FICC access methods and financial costs outlined how and at what cost UST repos will clear after the SEC clearing mandate go-live in mid-2026.  But what will remain of uncleared UST repo activity after that date?  Here we try to answer that question.

Clearing mandate context

The SEC’s UST clearing mandate is centered on its requirement that any UST CCP* makes rulebook changes to require its direct participants (i.e. bank “netting members”) to clear all UST trades with in-scope counterparties. It follows that uncleared UST trades remain allowed in two cases:

• Between a direct participant and an out-of-scope counterparty, and
• Between two non-direct participants.

(Note: * The only live UST CCP is FICC.  CME indicated interest in March 2024 in creating an additional UST CCP. We are unaware of any progress with their CCP application since March.)

Interbank trades

Already before the mandate, UST repos between two FICC netting member banks regularly clear for the regulatory capital advantages (reduction of leverage and ccRWA). US banks must clear their UST trades with US dealers. Non-US banks are out of scope so will be allowed to continue to trade uncleared UST repo. However, the capital burden on them in their local implementation of Basel III may incentivize them to clear anyway via sponsored or agent clearing or even by becoming a netting member.

Central bank trades

Since the 2008 global financial crisis, the Fed has become more directly involved in the repo markets via several new secured funding facilities (ON RRP, SRF and FIMA repo). These are here to stay as they are conveniently complementary to the traditional QE tools and short-term cash injection for managing more severe end of day cash liquidity shortages or surpluses.

Banks, foreign central banks and even authorized money funds and hedge funds may use these secured funding facilities to park cash with or raise cash from the Fed in exchange for US government bonds including US Treasuries. It is no surprise that the Fed and other central banks are out-of-scope counterparties for the mandate, so all their trades are not required to clear.

Buy-side trades

Beyond banks and central banks, UST repo buy-side clients are non-bank financial firms which want to borrow or lend cash vs UST. These are usually limited to hedge funds – borrowing cash vs UST to create leverage – and money market funds (“money funds”) – lending cash to generate a safe return. Other buy-side investors (e.g. traditional asset managers or insurance companies) typically invest cash one-time or unleveraged in buy-and-hold securities and are not able to lend or borrow cash.

Today money funds and hedge funds always trade repo with a dealer. Why? Because money fund credit policy prohibits direct exposure to hedge funds which are leveraged, relatively low credit-rated and often unregistered. A dealer bank (or several) is needed to upgrade the hedge fund’s credit by standing in between as principal – generating two dealer-to-client (D2C) repos. D2C UST repos with US financial firms will certainly be required to clear after mid-2026 and will thus generate bank financial impacts, as per our prior post linked above. Again, foreign buy-side firms will be exempt but those financial impacts will likely lead banks to charge a worse spread and/or haircut on uncleared trades which may discourage the activity.

Guaranteed repo

The preceding indicates all that will be left of uncleared UST repo post-mandate are trades with central bank facilities plus a small volume with foreign banks and buy-side firms. Two firms are trying to innovate to change that:

• Venturi is State Street’s single-dealer “peer-to-peer” repo trading platform where clients trade directly via Venturi’s trading protocol built in partnership with FinOptSys. State Street is the sole broker-guarantor and State Street’s Collateral+ Triparty Solution handles margin and settlement processing.
• Sunthay is a multi-dealer “guaranteed repo” trading platform where dealers compete to broker and guarantee client-to-client repos based on standardized repo trading and guarantee documents. Built into Bloomberg terminals, Sunthay’s protocol routes to a customized Euroclear margin calculation and direct trade settlement process.

The guaranteed repos traded on these platforms work something like this:

• The repo executes and settles directly between two client principals with operational assistance from the provider’s platform.
• A bank brokers the repo but is not a principal. With no direct participant principal, clearing is not required.
• The bank provides the money fund with a guarantee: to step in if the hedge fund defaults to settle the repo with the money fund

Clearly, the money fund can only do such trades if they are comfortable there is no credit exposure to the hedge fund. One idea we hear is the guarantee transfers their repo credit exposure from versus the hedge fund to versus the bank. The providers also claim that banks get favorable capital treatment over both cleared repo and D2C uncleared repo.

In summary, the bank still has a role in brokering the trade and providing a hedge fund credit upgrade but this is now via the guarantee instead of by intermediating as a principal.

After the SEC clearing mandate go-live in mid-2026, uncleared UST repos will still include Fed facilities trades and limited foreign bank and financial firm trades.

Whether they will also include material guaranteed repo activity depends on whether participants see enough benefits to justify the investment in setting up capability and infrastructure to handle them.

We will explore those benefits in more depth in a future post.

In the meantime, please contact us with any comments or requests for future blogs.