The NY Fed'​s Liberty Street Economics blog published, "The Rise of Sponsored Service for Clearing Repo." It states, "Recently instituted rule amendments have initiated a large migration of dealer-​to-​client Treasury repurchase trades to central clearing. To date, the main avenue used to access central clearing is Sponsored Service, a clearing product that has, until now, received little attention. This post highlights the results from a recent Staff Report which presents a deep dive into Sponsored Service. Here, we summarize the description of the institutional details of this service and its costs and benefits. We then document some basic facts on how market participants use this service, based on confidential data." The piece says, "In December 2023, the Securities and Exchange Commission (​SEC) instituted rule amendments to central clearing of Treasury repurchase (​repo) trades that are expected to greatly expand the number of dealer-​to-​client trades that are centrally cleared. How firms will comply with these rule amendments is still uncertain, but it is likely that a substantial amount of repo will be centrally cleared using the Fixed Income Clearing Corporation'​s (​FICC) Sponsored Service offering. FICC, currently the only central counterparty for Treasury repo, offers a full suite of clearing services for its direct clearing members. For a variety of reasons, not all repo market participants want (​or are eligible) to become direct clearing members, and so repo trades with these firms are not eligible for FICC'​s usual central clearing services (​which are FICC DVP and GCF Repo; see this post for a map of U.​S. repo segments). FICC'​s list of direct clearing members includes a wide variety of firms, but securities dealers account for a strong majority of centrally cleared trades. As such, for the purposes of this post, we characterize the direct clearing members as '​dealers.'" The post adds, "`​The main benefit to dealers from engaging with sponsored repo is balance-​sheet netting. This accounting benefit allows for the net value of repo positions to be reported on a dealer'​s balance sheet as opposed to the gross value. Netting can benefit a dealer because a smaller balance sheet typically requires holding less capital. For those dealers that are part of bank holding companies (​BHCs), balance-​sheet netting helps the BHC meet regulatory targets, such as the supplementary leverage ratio.... The two main groups of dealer customers that take advantage of sponsored repo are money market funds and hedge funds. Money market funds, which are looking to invest their cash holdings in short-​term secured investments, dominate sponsored lending. Hedge funds dominate sponsored borrowing. The motivations for hedge funds vary across firms and time, however, a current driver of hedge fund borrowing behavior in sponsored repo is to implement a cash-​futures basis trading strategy." Finally, it says, "Sponsored repo is likely to grow more important in the years ahead given the SEC'​s central clearing mandate for Treasury repo. In addition to the rise in activity detailed above, many dealer clients are becoming sponsored members of FICC. Between December 2020 and August 2022, FICC'​s list of sponsored members increased by only thirty-​eight, whereas between August 2022 and July 2024, it increased by 555. 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."

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