SFS: Industry leaders outline challenges related to mandatory central clearing
07 May 2025 US
Image: Daniel_Tison
There are issues that need to be solved before implementing mandatory central clearing, and there is no one-size-fits-all solution, according to the panellists at the Securities Finance Symposium in Boston.
‘The Future of US Treasury Clearing’ panel, moderated by Andrew Lazar, managing director and head of rates sales at Buckler Securities, explored the operational, technical, and risk management implications of the mandate.
As the industry adapts to mandatory clearing for US Treasury cash trades on 31 December 2026 and repos on 30 June 2027, representatives from clearing houses, custodians, and major dealers discussed infrastructure requirements, margin methodology changes, and liquidity management practices.
Commenting on the current state of play in central clearing, Matt Peabody, director of securities finance strategy and commercialisation enablement at BNY, noted that a lot of dealers are growing their repo books and shifting more of the composition sponsored.
On that note, Jeff Sowell, vice president of financing solutions and head of product strategy for North America at State Street, said: “The sponsored repo model has proven itself through some really challenging market conditions, such as the September 2019 funding freeze, the zero-interest rate environment during the coronavirus pandemic, and then the rising rate environment thereafter.”
Peabody then noted: “Sponsored may have a ceiling to growth without some relief valve, like ‘collateral in lieu’ which is expected to be supported by BNY tri-party”
Specifically, ‘collateral in lieu’ contemplates allowing FICC a targeted lien over the Treasury collateral in an investor’s triparty account, which likely eliminates the necessity for the sponsor to guarantee the performance of participants in sponsored repo.
Collateral in lieu would be helping in reducing funding and capital requirements sponsors currently absorb as a function of providing the guarantee.
The discussion continued by looking at some alternative routes to market and peer-to-peer activity, with Shiv Rao, chairman and founder at Sunthay, introducing his firm’s approach.
“The model we’ve developed has a third-party credit enhancer step in and guarantees the performance of the hedge fund, for example,” he said. “Those trades do not have to be cleared, even if the guarantor of the end user is a full lending member of FICC.”
Sowell believes that peer-to-peer is a “really nice” compliment to clearing, but not a replacement.
Outlining its limitation, he said: "First, the liquidity in a pure market right now is not the liquidity that you have via a big sponsor. Second, the model provided the guarantors of banking entity; we're not creating capacity in the system."
Sowell also noted that his company offers its own peer-to-peer repo product, but the key difference is that State Street is the guarantor entity.
Moving on, Colleen Stapleton, product manager of MarketAxess Match, outlined some burning questions regarding the operational requirements.
“What we’re really struggling with is the finalisation of documentation specific to the ‘done away’ market, where we have the largest amount of capacity and place to play just because of the increased complexity,” she said.
This involves specific operational challenges, including the need for API development, limit checks, and delivery to CCPs.
Another challenge Stapleton mentioned was global outreach: “This is definitely a global mandate where firms outside of the US are in scope if they are trading with a direct member. Through our conversations, that comes as a surprise for some of our folks overseas, especially in the APAC and the Middle East region.”
She also observed that the wider part of the community is looking for matching capabilities because of the future complexity.
The panel consensus was that multiple models will coexist, with no single solution fitting all market needs.
Panellists stressed the critical importance of creating commercially viable, regulatory-compliant processes that can adapt to evolving market demands.
Closing up, Lazar summarised the shared insights as: “We all know where we’re going — we just need to figure out how to get there.”
‘The Future of US Treasury Clearing’ panel, moderated by Andrew Lazar, managing director and head of rates sales at Buckler Securities, explored the operational, technical, and risk management implications of the mandate.
As the industry adapts to mandatory clearing for US Treasury cash trades on 31 December 2026 and repos on 30 June 2027, representatives from clearing houses, custodians, and major dealers discussed infrastructure requirements, margin methodology changes, and liquidity management practices.
Commenting on the current state of play in central clearing, Matt Peabody, director of securities finance strategy and commercialisation enablement at BNY, noted that a lot of dealers are growing their repo books and shifting more of the composition sponsored.
On that note, Jeff Sowell, vice president of financing solutions and head of product strategy for North America at State Street, said: “The sponsored repo model has proven itself through some really challenging market conditions, such as the September 2019 funding freeze, the zero-interest rate environment during the coronavirus pandemic, and then the rising rate environment thereafter.”
Peabody then noted: “Sponsored may have a ceiling to growth without some relief valve, like ‘collateral in lieu’ which is expected to be supported by BNY tri-party”
Specifically, ‘collateral in lieu’ contemplates allowing FICC a targeted lien over the Treasury collateral in an investor’s triparty account, which likely eliminates the necessity for the sponsor to guarantee the performance of participants in sponsored repo.
Collateral in lieu would be helping in reducing funding and capital requirements sponsors currently absorb as a function of providing the guarantee.
The discussion continued by looking at some alternative routes to market and peer-to-peer activity, with Shiv Rao, chairman and founder at Sunthay, introducing his firm’s approach.
“The model we’ve developed has a third-party credit enhancer step in and guarantees the performance of the hedge fund, for example,” he said. “Those trades do not have to be cleared, even if the guarantor of the end user is a full lending member of FICC.”
Sowell believes that peer-to-peer is a “really nice” compliment to clearing, but not a replacement.
Outlining its limitation, he said: "First, the liquidity in a pure market right now is not the liquidity that you have via a big sponsor. Second, the model provided the guarantors of banking entity; we're not creating capacity in the system."
Sowell also noted that his company offers its own peer-to-peer repo product, but the key difference is that State Street is the guarantor entity.
Moving on, Colleen Stapleton, product manager of MarketAxess Match, outlined some burning questions regarding the operational requirements.
“What we’re really struggling with is the finalisation of documentation specific to the ‘done away’ market, where we have the largest amount of capacity and place to play just because of the increased complexity,” she said.
This involves specific operational challenges, including the need for API development, limit checks, and delivery to CCPs.
Another challenge Stapleton mentioned was global outreach: “This is definitely a global mandate where firms outside of the US are in scope if they are trading with a direct member. Through our conversations, that comes as a surprise for some of our folks overseas, especially in the APAC and the Middle East region.”
She also observed that the wider part of the community is looking for matching capabilities because of the future complexity.
The panel consensus was that multiple models will coexist, with no single solution fitting all market needs.
Panellists stressed the critical importance of creating commercially viable, regulatory-compliant processes that can adapt to evolving market demands.
Closing up, Lazar summarised the shared insights as: “We all know where we’re going — we just need to figure out how to get there.”
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