How the U.S. Treasury Futures Market and the Basis Trade Could Be Affected by the Treasury Clearing Mandate: Part 2—The Possible Role of Cross-Margining

In part 2 of this Chicago Fed Letter series, I delve further into the implications of the U.S. Securities and Exchange Commission’s (SEC) recent mandate requiring transactions for both U.S. Treasury cash securities and repurchase agreements (repos) to be cleared and settled through an authorized central counterparty (CCP). In part 1, I provided a primer on the Treasury futures market and the Treasury cash–futures basis trade and touched on the possible impact of the SEC mandate on both. Here, I explain in greater detail how the mandate could affect the cost and functioning of the basis trade. In addition, I examine the possible role of CCP cross-margining programs—which recognize offsetting exposures to similar risks across the Treasury futures and repo markets—in mitigating the mandate’s impact on the amounts of collateral, or initial margin (IM), that clearing members (or their clients) will need to post at CCPs.