FICC’s Collateral-in-Lieu
Something old, something new
Last month, in a further effort to facilitate the mandatory clearing of US Treasury repo by expanding the range of client-clearing options, the Fixed Income Clearing Corporation (FICC) announced a new variant of its Sponsored GC Repo service (which may be launched in December 2025). The new variant --- called “Collateral-in-Lieu” (CIL) --- is intended to reduce the cost tp clearing members (Netting Members) of sponsoring Registered Investment Companies (RICs) and other cash-lenders, in particular, money market funds.
CIL will also bring in other changes designed to remove blockages to the use of Sponsored GC Repo, by permitting done-away trades and allowing the clearing of repos with joint trading accounts managed by investment managers for multiple funds (ie agency block trades) before the investment manager has allocated the repo to the underlying funds.
The cost problem faced by sponsors bringing repos with RICs into clearing on FICC has been called “double margining”. Not only do the sponsors have to concede a collateral haircut to the RICs,[1] they also have to post initial margin to FICC.
The CIL solution is for the cash-lender to grant a lien to FICC on its collateral. This will (generally) eliminate the need for an initial margin to be posted by the sponsor and the need for the sponsor to guarantee FICC. These changes have obviously sigtnificant capital and regulatory savings.
The FICC lien on the cash-lender’s collateral would also eliminate the need for the sponsor to take responsibility for paying or receiving the twice-daily Funds-Only Settlement Amounts on behalf of the cash-lender (these arise from cashflows such as coupons on collateral and various valuation adjustments). The need for the sponsor to manage the Funds-Only Settlement Amounts arises because many cash-lenders do not have the operational capability to manage these high-frequency payments. The responsibility for Funds-Only Settlement Amounts is seen as posing regulatory issues about the custody of client assets and imposing costs that could prevent the scaling-up of sponsorship.
CIL seems to be a neat solution to the problems being experienced by sponsors in the current Sponsored GC Repo Service. But there is a sense of deja vu here.
The idea of CIL harks back to FICC’s the first iteration of Sponsored Repo, launched in 2005. In practice, because this was limited to custody clients of the sponsor, who can only lend cash, it was only used to clear repos with clients who were net cash lenders (it was not until 2017 that sponsorship was relaxed and Sponsored Repo boomed). The first model intentionally restricted to net cash lenders was introduced by Eurex in 2012 as Select Invest. In this, collateral is held at the tri-party agent and pledged to the CCP. In 2017, FICC copied Eurex and introduced CCIT (Centrally-Cleared Institutional Tri-Party) service, which sits within FICC’s GCF (GC Financing) facility.
Unfortunately, the original Sponsored Repo, Eurex Select Invest and CCIT never gained much traction. In the case of CIL, however, there is the pressure of mandatory clearing.
[1] Required under Rule 5b-3 of the Investment Companies Act 1940.