Chicago Fed examines the Treasury clearing mandate, with input from Wepoint

In the press

The Federal Reserve Bank of Chicago has published Central Clearing Mandates and Market Power: Lessons from Swaps for U.S. Treasury Securities, by Ketan B. Patel. Kishore Ramakrishnan, Partner Wepoint is acknowledged among the reviewers who commented on the work.

The SEC requires central clearing of most secondary Treasury cash transactions by 31 December 2026, and of Treasury repo by 30 June 2027. Clearing rates are expected to rise from roughly 25 to 65 percent for cash securities, and from 45 to 77 percent for repo. Patel asks what that transition does to market structure, and answers from the closest precedent: the 2010 clearing mandate for USD over-the-counter interest rate swaps.

Three things followed that mandate. Cleared volumes grew sharply, reaching 87.1 percent of OTC IRS notional by end-2024. CCPs competed on collateral cost, easing risk parameters at the margin while staying above regulatory minimums. And client clearing concentrated: by 2024, LCH held more than 80 percent of client-cleared USD OTC IRS notional across CME and LCH. The mechanism is self-reinforcing. More volume means better netting, better netting means lower collateral costs, and dealers priced that differential into client quotes as the CME-LCH basis. Patel argues clearing therefore shows characteristics of a natural monopoly.

For Treasury, he expects little effect in cash securities, where next-day settlement keeps margin exposure short. Term repo is the exposed segment. If leveraged funds cluster at CME Securities Clearing for cross-margining against Treasury futures while money market funds stay with FICC, dealers inherit the same directional imbalances they carried in swaps, and pass the same costs to clients.

Three implications we are already discussing with market participants:

  • Venue choice is a collateral cost decision, not an operational one. It should be modelled before the June 2027 repo deadline, not after.
  • Cross-margining benefits are real but venue-specific. They need to be netted against a potential clearing basis, not counted separately.
  • Buy-side and sell-side segmentation across CCPs is the variable to watch. It is what created the swaps basis, and it is forming now.