FICC proposes Collateral-in-Lieu service to cut double-margining
The Fixed Income Clearing Corporation has filed a rule proposal with the US Securities and Exchange Commission to introduce a new cleared tri-party service, the Sponsored General Collateral "Collateral-in-Lieu" service.
The proposal aims to address industry concerns around margin and capital efficiency, as market participants prepare to comply with the US Treasury Clearing mandate. The filing is set to be published in the Federal Register, which will open a period for public comment.
Addressing margin challenges
The Collateral-in-Lieu service is designed to leverage the collateral haircut traditionally posted by dealers to money market funds and other cash investors in tri-party arrangements. This will be done through a central counterparty lien that is applied in place of both a sponsor guarantee of client performance and, in most circumstances, the posting of margin to the clearing corporation.
The issue known as "double-margining" has been a notable challenge in the industry. Presently, sponsors are required to post haircuts to money market funds to fulfil overcollateralisation requirements and also to post margin at the central counterparty on behalf of clients. This new service intends to reduce the need for such duplicate collateral posting.
"The Sponsored Service has been an incredibly popular buyside clearing solution, with over $2T in volume flowing through the Service on a typical day," stated Laura Klimpel, Managing Director, Head of DTCC's Fixed Income and Financing Solutions.
"The proposed Collateral-in-Lieu service has been intentionally designed to build upon that success and allow Sponsors and their clients to leverage many of their existing legal agreements and operational processes for Sponsored repo, but take the margin and capital efficiencies of the product to the next level. We welcome SEC and public input as we advance this important initiative."
Operational framework
The service is set to use BNY's tri-party infrastructure for collateral management and settlement of Collateral-in-Lieu repurchase agreement trades. The offering will support both "done-away" and "done-with" trade execution styles, accommodating a variety of trading practices within the Treasury market.
Nate Wuerffel, BNY's Global Head of Market Structure and Product Leader for the Global Collateral Platform, commented on the significance of the proposed solution for the market's new regulatory environment. "The FICC's Sponsored GC Collateral-in-Lieu service is precisely the type of solution the industry needs to meet the SEC's central clearing rule in a capital- and margin-efficient way," he said.
He continued: "Built using BNY's global collateral platform - the largest Treasury tri-party repo settlement venue - Collateral-in-Lieu offers Treasury market participants streamlined, efficient access to central clearing."
Next steps and regulatory review
The launch of the Collateral-in-Lieu service is targeted for December 2025, pending regulatory approval. Once approved, the service would mark an enhancement to the existing Sponsored Service, which has become an important clearing solution for the buyside market, according to statements from FICC and DTCC officials.
The regulatory review will include a period for industry participants and the public to provide feedback on the rule proposal, following its expected publication in the Federal Register.
With this initiative, FICC and BNY are looking to provide a cleared avenue for tri-party repo transactions that could allow market participants to achieve compliance with upcoming requirements more efficiently in terms of capital and margin usage.
