SEC opens consultation on clearing proposals for US treasury markets
15 September 2022 US
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The Securities and Exchange Commission has proposed rule amendments that would encourage wider clearing of trades involving US treasury securities and reinforce risk management practices for clearing entities servicing US treasury markets.
These proposals will require clearing members to submit certain types of secondary market transaction for clearing, including all repo and reverse repo trades collateralised by US treasuries.
This list will also include all buy and sell trades entered into by a clearing member that is an interdealer broker, and buy and sell trades between a clearing member and specified types of counterparty - specifically a government securities broker, a government securities dealer, a registered broker-dealer, a hedge fund or certain types of leveraged account.
Commenting on these amendments, SEC chair Gary Gensler says: “The Securities and Exchange Commission plays a critical role in how the Treasury market functions, including to help ensure that these markets stay efficient, competitive, and resilient. One aspect of that role is our oversight of clearinghouses for Treasury securities.”
While the SEC believes that central clearing plays an important role in risk reduction, it notes that, in 2017 only 13 per cent of Treasury cash transactions were centrally cleared.
“Thus, I think there is more work to be done with respect to the amount of Treasury activity that is centrally cleared,” says Gensler. “I think that these rules would reduce risk across a vital part of our capital markets in both normal and stress times.”
With respect to customer margin, the proposals would permit broker-dealers to include margin on deposit at a clearing agency in the US Treasury market as a debit in the customer reserve formula, subject to specified conditions.
The proposals would also require clearing entities supporting the UST market to collect and calculate margin separately for proprietary (ie “house”) and customer transactions.
Further, clearing agencies would also be required to demonstrate that they are taking steps to facilitate access to clearing services, including through sponsored clearing channels for indirect participants.
The SEC has published its proposals for public consultation, requesting that respondents post their feedback on the proposed rules within a 60-day consultation period.
These proposals will require clearing members to submit certain types of secondary market transaction for clearing, including all repo and reverse repo trades collateralised by US treasuries.
This list will also include all buy and sell trades entered into by a clearing member that is an interdealer broker, and buy and sell trades between a clearing member and specified types of counterparty - specifically a government securities broker, a government securities dealer, a registered broker-dealer, a hedge fund or certain types of leveraged account.
Commenting on these amendments, SEC chair Gary Gensler says: “The Securities and Exchange Commission plays a critical role in how the Treasury market functions, including to help ensure that these markets stay efficient, competitive, and resilient. One aspect of that role is our oversight of clearinghouses for Treasury securities.”
While the SEC believes that central clearing plays an important role in risk reduction, it notes that, in 2017 only 13 per cent of Treasury cash transactions were centrally cleared.
“Thus, I think there is more work to be done with respect to the amount of Treasury activity that is centrally cleared,” says Gensler. “I think that these rules would reduce risk across a vital part of our capital markets in both normal and stress times.”
With respect to customer margin, the proposals would permit broker-dealers to include margin on deposit at a clearing agency in the US Treasury market as a debit in the customer reserve formula, subject to specified conditions.
The proposals would also require clearing entities supporting the UST market to collect and calculate margin separately for proprietary (ie “house”) and customer transactions.
Further, clearing agencies would also be required to demonstrate that they are taking steps to facilitate access to clearing services, including through sponsored clearing channels for indirect participants.
The SEC has published its proposals for public consultation, requesting that respondents post their feedback on the proposed rules within a 60-day consultation period.
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