OFR: Treasury Clearing, Repo, SOFR
The Office of Financial Research (OFR) recently published "How the Treasury Clearing Rule for Repo Might Affect SOFR." It states, "The Securities and Exchange Commission (SEC) rule requiring the central clearing of certain U.S. Treasury-secured repurchase agreements (repos) is scheduled to go into effect on June 30, 2027. While there are exceptions, this rule will cover up to 85% of non-centrally cleared repos. As these repos move to clearing, a portion of their associated rates will be used to calculate the Secured Overnight Financing Rate (SOFR), which serves as a benchmark for borrowing cash overnight in the United States." The piece explains, "The inclusion of repo-rate information from newly cleared repos could affect the level and behavior of SOFR and affect the price of many loans and swaps. One way to assess the potential impact is to estimate a hypothetical SOFR that includes representative non-centrally cleared bilateral repos (NCCBR). In this blog, the authors describe their estimation methodology and results. They use a 2022 pilot collection of NCCBR data from the Office of Financial Research (OFR) and apply the SEC rule that governs which NCCBR will need to be cleared. The authors also use tri-party repo data from the Federal Reserve Bank of New York (FRBNY) and GCF and DVP repo data from the OFR, as well as the FRBNY's methodology for calculating SOFR." It adds, "The OFR's pilot collected NCCBR data from nine sell-side participants on three days during June 2022, totaling about $900 billion in outstanding repos per day. The estimation shows that if the SEC rule had been in effect at the time of the pilot, 42% of the sampled volume would have been cleared under the rule, and about 9% of the volume would have been included in the reference rate. Including the volume in the SOFR calculation would have no effect on SOFR for those three days in June 2022. However, the new volume affects the SOFR distribution’s tails, indicating that including NCCBR could make SOFR slightly more volatile. This analysis does not account for the equilibrium effects of the SEC clearing rule. Dealers with constrained balance sheets may behave differently after the rule takes effect."
