The Securities and Exchange Commission’s (SEC) new clearing mandate for US treasury securities recently came into effect, requiring most cash treasury and repo trades to be centrally cleared. But despite the vast market size of US$26 trillion, around 70 to 80 per cent of the former and at least 80 per cent of the latter remain uncleared today, says Horacio Barakat. In his blogpost on Finextra, he discusses the “next-gen tool” for central clearing: DLT-enabled sponsored repo.
DLT-enabled sponsored repo solutions can help make it faster, safer and less costly for firms to move their cash treasury and repo trading business to central clearing, shares Barakat, Broadridge’s head of digital innovation for capital markets.
To get trades centrally cleared, buy-side participants can go through the Fixed Income Clearing Corporation (FICC) or its sponsored service programme. The programme, which does not require a FICC membership, allows dealers to sponsor non-dealer counterparties to clear through FICC. According to Barakat, this allows market participants to avoid the cost of a FICC membership, which could be prohibitive.
DLT-enabled sponsored repo
Dealers who choose the sponsored service option will have to use sponsored repo programmes. Although it is “certainly possible” to build a sponsored repo programme without DLT, Barakat believes that the technology would provide advantages.
He suggests that the characteristics of the repo market, with its high volume of bilateral transactions, operational costs, and risks, represent an ideal use case for DLT. “DLT streamlines the sponsored repo process by reducing movement of collateral during the transaction lifecycle. Hence, reducing transaction fees, settlement charges, and the risk of failed trades.”
Centralised clearing will be required for treasury trades by the end December 2025. Repo trades will have until 30 June, 2026, for the new regulation to go into effect.