NY Fed Economists Describe Growth of Sponsored Repo
"Sponsored repo is likely to grow more important in the years ahead given the SEC’s central clearing mandate for Treasury repo. ... In the next few years, understanding the details of sponsored repo and the trade-offs it presents relative to other forms of repo will only grow more important."
NY Fed Economists
"Sponsored repo is likely to grow more important in the years ahead given the SEC’s central clearing mandate for Treasury repo. ... In the next few years, understanding the details of sponsored repo and the trade-offs it presents relative to other forms of repo will only grow more important."
NY Fed Economists
Federal Reserve Bank of New York economists considered the recent expansion of sponsored repo activity and its growing role in Treasury market structure.
In its Liberty Street Economics blog, Federal Reserve Bank of New York economists summarized a recent Staff Report analyzing the growing shift of dealer-to-client Treasury repo trades to central clearing. The economists explained that these changes have driven increased use of the Fixed Income Clearing Corporation’s ("FICC") Sponsored Service—the primary channel for accessing central clearing. They noted that, while the service has existed for years, its recent expansion has made it a focal point for understanding evolving Treasury market dynamics.
The economists highlighted the following:
- On new momentum for sponsored clearing: The economists explained that interest in sponsored clearing rose sharply following the SEC’s December 2023 rule amendments mandating broader central clearing for Treasury repos. They said many dealers and clients are turning to the FICC Sponsored Service as the primary method to comply with the new requirements. The economists said this structure allows clients to access central clearing through sponsoring dealers, extending efficiencies once limited to interdealer trades.
- On benefits and costs of sponsored repo: The economists said that sponsored repo offers dealers balance-sheet netting benefits, helping reduce capital charges and leverage exposure. They explained that novating trades to FICC consolidates counterparties and enhances efficiency, but it can also raise margining costs through value-at-risk requirements. The economists cautioned that dealers remain liable for their clients’ performance, increasing potential exposure and collateral demands.
- On the changing market for sponsored repo: The economists reported that sponsored repo now accounts for nearly 30 percent of Treasury repo activity, with money market funds leading sponsored lending and hedge funds leading borrowing. They observed that both lending and borrowing volumes have more than doubled since 2022, driven by greater adoption across market participants. The economists highlighted that FICC-sponsored membership has surged—from 38 new members between 2020 and 2022 to 555 between 2022 and 2024—reflecting its growing role in Treasury market infrastructure.