The U.S. Treasury market is about to undergo a trading transformation. The SEC adopted rule changes in December 2023 which will require most cash Treasury and repo trades to be centrally cleared. Centralized clearing will be required for Treasury trades as of the end of December 2025. Repo trades will have until June 30, 2026, for the new regulation to go into effect.

According to the SEC, 70-80% of the Treasury funding market and at least 80% of cash markets are currently uncleared. Shifting more Treasury and repo trades to central clearing will reduce systemic risk. It will also give regulators greater visibility into the $26 trillion Treasury market.

The securities industry has a lot of heavy lifting to do to get ready for what will be a massive shift. Dealers must build out the operational processes, governance frameworks, and business models required to centrally clear trillions of dollars of Treasury and repo trades — and secure regulatory approval for these new procedures.

Broadridge believes that distributed ledger technology (DLT) will play a pivotal role in helping dealers transition U.S. Treasury and repo trades to central clearing [by reducing trade costs and operational risk]. This will also help regulators achieve their goal of reducing systemic risk in one of the world’s most important markets.

Sponsored Repo

On the repo side, asset managers, hedge funds, and other buyside market participants will have two primary options for getting their trades centrally cleared:

• Become a member of the Fixed Income Clearing Corporation (FICC).
• Participate in the FICC’s Sponsored Service Program.

The first option would allow these market participants to join dealers on the FICC platform and centrally clear trades. However, the steep costs associated with FICC membership will put that option out of reach for many firms.

Instead, most buyside firms will use the FICC’s Sponsored Service Program, which allows dealers to sponsor non-dealer counterparties to clear through FICC.

This arrangement produces huge benefits for dealers, non-dealer counterparties, and the marketplace as a whole. Allowing dealers to sponsor clients for central clearing lets dealers net out their transactions through FICC. The increase in central clearing greatly reduces settlement errors and minimizes counterparty and credit risk, allowing for a more robust market that is less susceptible to crises.  

The FICC currently clears about $1 trillion in daily sponsored activity. For the industry to comply with the new SEC rules, that amount will have to increase by orders of magnitude in less than three years. Broadridge estimates that about half the dealers processing Treasury trades on our impactSM system have established sponsored repo programs. The remaining dealers will have to build these programs from scratch. Regulators will need to approve their programs in time to comply with the new clearing rules.

The DLT Solution

Innovations in technology can ease dealers’ transition to central clearing by eliminating many of the complexities involved in setting up and processing sponsored repo transactions as well as significantly reducing costs.

Over the past five years, companies around the world have worked to develop robust use cases for distributed ledger technology (DLT). In most industries, the results have been mixed at best. In financial services, however, market participants and technology experts have found a near-perfect application for DLT: workflow efficiencies within the repo markets.

A Compelling DLT Use Case

In many ways, repo represents an ideal use case for the DLT. It is a market in which a huge volume of bilateral transactions — executed with manual processes — create big operational costs and risks. DLT streamlines those processes and removes many of the costs and risks. By enhancing the speed and security of these transactions, DLT-powered solutions, like Broadridge’s Distributed Ledger Repo platform, have already transformed intraday repo from wish to reality, unlocking an important new source of short-term funding for financial service firms.

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.

Dealers should look closely at these potential benefits when making plans to comply with the new SEC central clearing requirements. While it is certainly possible to build out a sponsored repo program without using DLT, it makes more sense to construct a new capability leveraging ‘next-gen” technology. Given the efficiency gains, cost savings, and risk reductions offered by DLT solutions, even dealers with established sponsored repo programs should consider joining the likes of UBS and HSBC, who have already made the switch to the DLT-based model.

The Clock is Ticking

In the weeks ahead, all the major dealers will be finalizing their strategies for moving their cash Treasury and repo trading businesses to central clearing. By enabling these firms to make that jump faster, safer, and at less cost, DLT-enabled sponsored repo solutions will help the SEC achieve its goal of reducing systemic risk by ensuring a smooth transition to a new, centrally cleared market structure.