Balance-Sheet Netting in U.S. Treasury Markets and Central Clearing

In this paper, we provide a comprehensive investigation of the potential for expanded central clearing to reduce the costs of the supplementary leverage ratio (SLR) on Treasury market intermediation in both cash and repo markets. Combining a detailed analysis of the rules involved in calculating the SLR with a unique set of regulatory data, we conclude that expanding central clearing would have relatively limited effects on the level of SLRs. We do find intermediaries’ increase their balance sheet netting when their regulatory balance sheet costs are higher. Our data permits us to establish a number of empirical facts related to the noncentrally cleared bilateral (NCCB) repo segment, and to repo activity overall, at the bank holding company level. We find that sizeable amounts of bilaterally-cleared activity would not be nettable even if centrally cleared. We also find that a significant portion of activity is already nettable outside of central clearing because dealers are structuring their NCCB trades to net. While expanded central clearing could have other benefits, such as imposing a more uniform margin regime on Treasury market intermediation, the scope of its effects on reducing balance sheet costs associated with the leverage ratio is limited.