US cash Treasury and repo markets are on the brink of a significant shift in market structure, with the introduction of mandatory clearing from the end of 2025.
The intention of the mandate, which is being introduced by the Securities and Exchange Commission (SEC), is to enhance transparency, stability, and resilience in the $27 trillion Treasury market. However, many questions remain as implementation of the mandate approaches, especially around the cost structure of the new market.
In partnership with ION Markets, Acuiti conducted a study into how the sell-side firms that will service the market are preparing for the mandate.
The report, US Treasury Markets: Plotting the Sell-Side’s Path to Mandatory Clearing, found significant concerns over both the timeline for implementation and the viability of the commercial and operational models that the sell-side can use.
The clearing mandate, which on the current timeline will be introduced in December 2025 for cash transactions and June 2026 for repo transactions, is designed to mitigate systemic risks in the cash Treasury and repo markets.
The report found that nearly half of the sell-side firms that will offer clearing to clients have significant concerns over the feasibility of the repo clearing timeline and almost a third over the cash timeline.
These executives are also calling for a phased implementation, similar to other regulatory initiatives like Uncleared Margin Rules (UMR). This is at odds with the current “big bang” approach mandated by the SEC.
The market’s capacity to absorb demand is a major concern for the sell-side. Just 17% of survey respondents thought that the industry definitely had the capacity to meet the mandate.
Fears over the market’s capacity to absorb demand are in part driven by uncertainty around new access models that the sell-side and CCPs will offer the market. However, there are also deeper concerns over the scalability of current clearing models.
At present, the fundamental choice facing market participants is between a done-with and a done-away model for cleared repo. The done-with model combines clearing and execution services under one umbrella and has served US cleared repo markets well until now.
However, there is widespread concern about its scalability for the large and diverse new pool of market participants that will enter the cleared ecosystem under the new mandate.
That has led many to call for a done-away model, which allows for clients to use separate execution and clearing brokers. While this is common practice in cleared derivatives markets, exact models for Treasury clearing are still being developed and unlikely to be finalised until next year.
As such, FCMs face a tight deadline for adoption, exacerbated by ongoing uncertainty around scalability and dealer capacity.
Another concern is the economic model of what will be a low-margin business for FCMs.
For clients, the shift to mandatory clearing is expected to increase participation costs in the short-term, owing to compliance and operational adjustments.
However, over the longer term, enhanced margin efficiencies and streamlined and automated processes are expected to drive down costs.
For clearing firms, the mandate represents a double-edged sword. While concerns over market capacity, capital costs and returns loom large, the potential for higher revenues represents a potentially large growth opportunity.
As a result, firms are turning to technology to boost efficiency and automation. The survey found that the sell-side is planning to invest in automation, smart order routing, and post-trade processing to handle the anticipated surge in activity and reduce the costs of participation in the market.
The report identified early challenges about the viability of fitting features of rates clearing into the new repo framework, such as pre-execution allocation and trade limit management.
Third-party vendors are seen as a crucial part of managing this integration. While 44% of survey respondents are planning to use existing technology infrastructures for their repo clearing offering,
more were looking to build new functionality.
Of those looking to build technology, 64% were planning to engage third-party vendors – with the majority of those doing so as part of a hybrid inhouse and third-party development plan.
The introduction of mandatory clearing for US cash Treasury and repo markets represents a massive opportunity for sell-side institutions in the cleared derivatives markets.
In the short term at least, it is probable that costs and complexity will increase. Adaptation will not just be something for new entrants to deal with, but existing market participants too. The sheer number of clients that will be clearing Treasury transactions for the first time will test new clearing models and infrastructure, challenging previous efficiencies and workflows.
In the longer term, however an enormous opportunity awaits those who can create new efficiencies both for clients and themselves. Cross-margining, capital efficiencies and STP processing are likely to be key differentiators for firms looking to drive down costs and increase automation.