Opinion divided on benefits of clearing in UST securities and repo markets
10 August 2022 US
Image: AdobeStock/Julien Eichinger
A survey by the International Swaps and Derivatives Association (ISDA) shows that industry opinion is divided regarding whether central clearing would improve the efficiency and resilience of cash Treasury securities and repo markets.
This study responds to dialogue between policymakers and the market about the virtues of further clearing of UST and whether this would improve the resilience of the market during stress events.
A G30 Working Group on Treasury Market Liquidity has recommended central clearing for all UST repos, along with all UST transactions executed on electronic interdealer trading platforms. The G30 has also asked financial supervisors and market participants to review whether (and, if so, how) dealer-to-client UST trades should be cleared.
Most respondents to the survey were generally supportive of clearing, the report finds, but there is limited support for broad clearing mandates, with some warning that this could prompt firms to reduce their trading activity or potentially withdraw from the market altogether, thereby lowering market liquidity.
In contrast, some respondents said that the percentage of cleared transactions was unlikely to rise substantially unless this was mandated by the regulatory authorities.
For those opposed to mandated central clearing, the majority of respondents highlighted the value of incentives including relief under the supplemental leverage ratio and better access to direct clearing for firms that meet relevant central counterparty (CCP) membership requirements.
Many respondent firms identified the ability to pass client collateral to the CCP as a fundamental aspect of a functional client clearing model. Some respondents also noted that greater use of central clearing by principal trading firms could help to deliver a more efficient US treasury repo clearing market.
Respondents were divided regarding whether use of existing sponsored clearing facilities at the Fixed Income Clearing Corporation (FICC), the Depository Trust & Clearing Corporation’s fixed income clearing subsidiary, offers benefits over alternative client clearing models.
Many dealer respondents to the survey indicated that, if these structural hurdles and issues could be overcome, greater use of central clearing would be beneficial to the overall market, particularly for UST repo trades. Some also identified parallel benefits that might be applicable to linked futures and derivatives markets.
On the downside, respondents flagged up additional costs that might result from moving transactions into central clearing, including higher transaction-related costs (fees, margin requirements, admin costs) and a higher requirement for technology investment.
In the context of UST repo markets, some respondents indicated that there is no significant requirement for further reform to clearing under the interdealer model or principal trading firm (PTF) model, believing that existing interdealer clearing functions via FICC are sufficient. One respondent noted that PTF firms can and do join FICC and, consequently, there is no strong case for reform.
The survey, published today, was conducted by Brattle Group on behalf of ISDA and was based on responses from 25 ISDA member and non-member organisations, including primary dealers, principal trading firms, buy-side firms and CCPs.
Commenting on the survey results, ISDA chief executive Scott O’Malia says: “Our survey shows there’s currently very little consensus on the impact of increased clearing in the US Treasury market, suggesting further research on the costs and benefits is necessary.
“We support the aims of US policy makers to strengthen the resilience of this critical market and we hope our survey serves as a useful data point as they weigh up their opinions,” says O’Malia.
The report is titled The Brattle Report: Summary of Responses to the 2022 UST Survey Regarding Ongoing Efforts to Incentivize and/or Potentially Require Additional Clearing of US Treasury Securities and Repo, 10 August 2022.
This study responds to dialogue between policymakers and the market about the virtues of further clearing of UST and whether this would improve the resilience of the market during stress events.
A G30 Working Group on Treasury Market Liquidity has recommended central clearing for all UST repos, along with all UST transactions executed on electronic interdealer trading platforms. The G30 has also asked financial supervisors and market participants to review whether (and, if so, how) dealer-to-client UST trades should be cleared.
Most respondents to the survey were generally supportive of clearing, the report finds, but there is limited support for broad clearing mandates, with some warning that this could prompt firms to reduce their trading activity or potentially withdraw from the market altogether, thereby lowering market liquidity.
In contrast, some respondents said that the percentage of cleared transactions was unlikely to rise substantially unless this was mandated by the regulatory authorities.
For those opposed to mandated central clearing, the majority of respondents highlighted the value of incentives including relief under the supplemental leverage ratio and better access to direct clearing for firms that meet relevant central counterparty (CCP) membership requirements.
Many respondent firms identified the ability to pass client collateral to the CCP as a fundamental aspect of a functional client clearing model. Some respondents also noted that greater use of central clearing by principal trading firms could help to deliver a more efficient US treasury repo clearing market.
Respondents were divided regarding whether use of existing sponsored clearing facilities at the Fixed Income Clearing Corporation (FICC), the Depository Trust & Clearing Corporation’s fixed income clearing subsidiary, offers benefits over alternative client clearing models.
Many dealer respondents to the survey indicated that, if these structural hurdles and issues could be overcome, greater use of central clearing would be beneficial to the overall market, particularly for UST repo trades. Some also identified parallel benefits that might be applicable to linked futures and derivatives markets.
On the downside, respondents flagged up additional costs that might result from moving transactions into central clearing, including higher transaction-related costs (fees, margin requirements, admin costs) and a higher requirement for technology investment.
In the context of UST repo markets, some respondents indicated that there is no significant requirement for further reform to clearing under the interdealer model or principal trading firm (PTF) model, believing that existing interdealer clearing functions via FICC are sufficient. One respondent noted that PTF firms can and do join FICC and, consequently, there is no strong case for reform.
The survey, published today, was conducted by Brattle Group on behalf of ISDA and was based on responses from 25 ISDA member and non-member organisations, including primary dealers, principal trading firms, buy-side firms and CCPs.
Commenting on the survey results, ISDA chief executive Scott O’Malia says: “Our survey shows there’s currently very little consensus on the impact of increased clearing in the US Treasury market, suggesting further research on the costs and benefits is necessary.
“We support the aims of US policy makers to strengthen the resilience of this critical market and we hope our survey serves as a useful data point as they weigh up their opinions,” says O’Malia.
The report is titled The Brattle Report: Summary of Responses to the 2022 UST Survey Regarding Ongoing Efforts to Incentivize and/or Potentially Require Additional Clearing of US Treasury Securities and Repo, 10 August 2022.
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