The US repo market is in the middle of a transformational moment as market participants ready for the SEC’s new mandate for central clearing of US Treasury cash and repo transactions.
The rule is designed to support ongoing measures to reduce systemic risk and improve market transparency. However, in reorganising the plumbing of this $29.4 trillion market, regulators have forced a significant amount of readjustment onto market participants.
This has opened the door to other significant changes in market infrastructure, as some participants assess their current clearing set-ups. For some of the market’s larger firms this has meant exploring self-clearing.
In a recent whitepaper, conducted in partnership with FIS, we found that 44% of respondents to a survey of 64 hedge funds, asset managers and proprietary trading firms were either exploring or interested in direct clearing membership. Another 12% were already self-clearing.
The SEC repo mandate has been a catalyst for this move. As the cleared repo market prepares for the significant influx of new participants, it is clear that the done-with, or sponsored, clearing model that has so far served users effectively, will not be appliable to all.
Done-with clearing has been credited with freeing up bank balance sheets and will still be the favoured model of access for players like money market funds. However, for firms that have grown used to done-away clearing in their listed derivatives trading, it is unviable.
Not only does the absence of done-away clearing reduce competition, with the potential to increase costs. It also potentially balloons gross margin requirements for those firms that have multiple clearing relationships.
As such, the mandate becomes not just a regulatory hurdle, but a challenge to the operational model of many hedge funds, asset managers and proprietary trading firms,
While mandatory repo clearing has been the spark for firms to consider self-clearing, there are also numerous secondary drivers behind this shift, such as cost reduction, improved competitive advantage, and enhanced operational efficiency. By bringing clearing operations in-house, firms can bypass third-party fees, while also take greater control of their margin management and enacting faster risk management decisions.
The ability to leverage cross-margining offerings at CCPs, which significantly optimises collateral use, also acts as a powerful incentive for firms to take on the direct clearing membership role.
Tech for self-clearing
For those firms that are pursuing self-clearing, technology will form a crucial part of ensuring the capability to perform this function. For many, this will lead to the question of how to structure tech stack development between inhouse and vendor infrastructure.
So far, self-clearing has mainly been an activity for the largest buy-side firms. These are institutions that have already amassed sophisticated and powerful tech stacks and are therefore already predisposed to inhouse development. Our finding that 75% of firms that self-clear developed the tech to do so inhouse is in line with this.
However, with the repo mandate raising the prominence of self-clearing as a tool, the prospects of a more diverse set of firms using this method have increased. As such, the classic attractions of third-party solutions – fast scalability and controllable costs – will come to the fore of many firms’ minds. Despite a 12-month extension to June 2027, there is still a compliance mandate to work to that overrun development timelines could make tight.
From the experience of those market participants who have embarked on self-clearing, our findings show that establishing post-trade and CCP connectivity technology and finding skilled staff were the biggest challenges. Given the difficulties of resolving these challenges with an inhouse build, especially staffing, we expect that vendors will become as much a part of the self-clearing market as it is for FCM-cleared transactions. This should also be buoyed by advances in cloud technology, which will support the scalability and processing power of such solutions.
To download the report visit: https://www.fisglobal.com/engagement/landing/operations/margin_management_and_the_rise_of_self_clearing