The overnight U.S. Treasury repo market has grown from roughly $1 trillion in early 2022 to $3 trillion today, according to a framework published September 1 by the Federal Reserve Bank of New York. The underlying transaction volumes for the Secured Overnight Financing Rate have tripled over that span as the market became more complex with the adoption of central clearing. The new framework, called the Client Segments Framework, is designed to help the Fed's Open Market Trading Desk track this critical component of monetary policy transmission and communicate conditions to stakeholders.
The framework divides the repo market into three distinct segments based on the direction of cash movement: Client-to-Dealer, Interdealer, and Dealer-to-Client. The Client-to-Dealer segment captures dealers borrowing cash mainly from money market funds and represents the primary cash supply for the market, with rates gravitating near the Tri-Party General Collateral Rate. The Interdealer segment redistributes liquidity among dealers and is the smallest of the three, serving as a funding source for lower-rated dealers unable to transact with money market funds. The Dealer-to-Client segment represents dealers lending cash to leveraged accounts, mostly hedge funds executing Treasury relative-value strategies, and carries the highest funding costs of the three segments, with market participants often citing the 75th percentile of SOFR as a proxy for transacted rates.
The report finds that the repo market operates as a hub-and-spoke network with dealers acting as central intermediaries, highlighting the market's heavy dependence on dealers to connect counterparties that can't face each other directly. Authors Rubi Renovato and Sophia Lansell of the New York Fed's Markets Group write that "the fundamental value of the Client Segments Framework is in viewing the repo market for what it really is—a set of different segments where distinct market participants operate—rather than looking at an aggregate view of reference rates." According to the report, on reporting dates when dealers reduce their intermediation activity for balance sheet management, rates rise across all segments, though at varying magnitudes, with the spread between Dealer-to-Client and Client-to-Dealer segments providing a more reliable measure of intermediation spreads than publicly available SOFR percentile differences.
The framework allows the Desk to assess the effectiveness of monetary policy implementation tools by identifying which types of market participants transact at the highest rate distribution, particularly when repo dynamics push the Tri-Party General Collateral Rate above the federal funds target range. The Client-to-Dealer segment's rates tend to be relatively low because lenders in this segment prioritize safety and liquidity, causing them to favor dealers with strong credit ratings. Meanwhile, Interdealer rates experience more intraday volatility compared with other segments and consistently trade above Client-to-Dealer rates, reflecting the funding needs of lower-rated dealers and unexpected liquidity demands from higher-rated Primary Dealers.
Looking ahead, the report states the framework will prove resilient to significant structural changes from the U.S. Treasury repo central clearing mandate, with the granular perspective becoming increasingly valuable as new products and central counterparties enter the market. The framework will help the Desk determine the effectiveness of existing monetary policy tools, propose adjustments if needed, and facilitate overall communication around the evolving structure of this rapidly changing market. The more detailed view enables better discourse around rate control and monetary policy transmission than aggregate measures alone can provide.