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The expansion of cleared repo, particularly in the US with the Treasury clearing mandate, is not simply a direct application of existing repo practices to a central counterparty (CCP) model. Instead, it’s a dynamic process that integrates valuable “lessons learned” from both the established bilateral repo market and the more mature cleared OTC derivatives environment.
Here’s a breakdown of the key elements:
* Learning from Existing Models:
* Bilateral Repo Adaptation: Existing bilateral repo platforms and processes are being adapted to accommodate clearing. This involves defining the specific entities responsible for submitting trades to the CCP, a crucial step in formalizing the clearing workflow.
* OTC Derivatives Clearing Influence: The cleared repo environment is significantly influenced by the operational efficiencies and risk management frameworks developed for OTC derivatives clearing. While specific regulations for US cleared repo differ from those for OTC derivatives (e.g., initial margin requirements, reporting specifics), market participants still demand comparable services for operational efficiency. This desire for consistency holds true globally, driving the growing popularity of non-mandatory cleared repo due to dealer and client needs for streamlined processes and enhanced risk management.
* The Rise of Agency Clearing in Repo:
* Similarities to Futures and OTC Derivatives: The introduction of agency clearing models in the repo market bears strong resemblances to the established practices in futures and OTC derivatives clearing. In this model, a clearing broker facilitates the trade for its client, but the client retains the economic exposure to the CCP.
* Critical Need for Fund Confirmation: A key similarity with OTC derivatives clearing is the paramount importance of confirming that counterparties possess the necessary funds for a trade before it is executed. This “pre-trade credit check” is vital, especially in situations where the clearing broker has not agreed on the trade’s economics but is still responsible for crucial clearing processes, such as remitting margin to the CCP. This mirrors the “done-away” trading model prevalent in OTC derivatives, where execution and clearing are separate, requiring robust pre-trade credit checks.
* Operational Implications:
* Adapting Infrastructure: The shift necessitates changes to existing market infrastructure to facilitate these OTC-style clearing workflows. This includes modifications to platforms and processes to support the new roles and responsibilities in an agency clearing environment.
* Streamlined Workflows: The goal is to create streamlined and efficient workflows that can handle the increased volume and complexity of cleared repo transactions. This involves automating processes for trade submission, margin management, and lifecycle events.
* Market Drivers:
* Regulatory Push: In the US, the Treasury clearing mandate is a significant driver, pushing a large volume of previously bilaterally settled Treasury cash and repo transactions into central clearing.
* Dealer and Client Needs: Beyond regulatory mandates, dealers and clients globally are increasingly seeking the benefits of cleared repo, such as reduced counterparty credit risk, balance sheet netting, and improved capital efficiency. This demand is fostering the growth of non-mandatory cleared repo markets.
In essence, the cleared repo market is evolving by cherry-picking the best practices from both traditional repo and OTC derivatives clearing, with a particular emphasis on adapting to the requirements of agency clearing and ensuring robust pre-trade credit checks.

Video courtesy of Escrow.com

Video courtesy of Escrow.com