RMA: US Treasury clearing proposal and T+1 recall deadlines cause confusion
13 October 2023 US
Image: SFT
The regulatory trajectory signifies a busy future for the industry, which is currently engaged in an altering landscape that is preparing for the adoption of T+1 in the US and Canada, Basel III Endgame and the US Securities and Exchange Commission’s 10c-1 rule.
The Future Market and Regulatory Impacts on Securities Finance panel heard from Tamela Merriweather, associate general counsel at The Northern Trust Company, Laura Klimpel, general manager of DTCC’s Fixed Income Clearing Corporation (FICC), and Greg Lyons, partner at Debevoise & Plimpton.
Speakers of the session also included KPMG’s Michael Martinen, managing director of Customer and Operations Financial Services, and Brown Brothers Harriman’s Anthony Camarota, global head of securities lending operations.
Conversations regarding the stability and the resiliency of the Treasury market, and the interest of having more activity in the Treasury market be centrally cleared, has been ongoing for years. Recent periods of extreme volatility in the Treasury market, particularly in December 2019 and March 2020, has driven this conversation.
Also driving discussions for further centrally cleared transactions in the Treasury market, one panellist said, is an indication from studies that a ‘vast majority of bilateral repo activity is done with zero haircut’. Regulators are therefore concerned about the lack of margin associated with these transactions.
An SEC proposal from September 2022 intended to further strengthen the resilience of the US Treasury market by expanding the use of central clearing. The proposal aims to provide market-wide benefits such as standardised risk management, reduced settlement risk, centralised default management and increased transparency.
To be subject for clearing, one of the two counterparties involved in the repo transaction needs to be a netting member of the government securities division of the Fixed Income Clearing Corporation (FICC).
While triparty repo and DVP repo are in scope for this proposal, there is an open question regarding whether treasury lending should be in scope for the requirement, a panellist said. The concern with Treasury lending is whether these structures could be used as a way to evade clearing requirements, one panellist indicated.
Furthering the discussion on the hot topics of the regulatory landscape, one panellist reviewed the current position of the US, Canada and Mexico as the three regions transition to T+1.
Canada is a ‘little behind’ in terms of industry testing, indicated one panellist. In the US, industry testing has already begun, with firms ‘up and running’ in terms of their connectivity to the Depository Trust and Clearing Corporation (DTCC), internal systems and workflows.
In Canada, industry testing is anticipated to begin in January 2024. Although Mexico currently has no testing time frame, panellists expect the region to begin testing in January 2024 also.
The US and Canada will transition to a T+1 settlement next year, with the US moving to the shortened settlement cycle on 28 May 2024 and Canada and Mexico adopting the settlement on 27 May 2024. The rule change will see the settlement cycle for most broker-dealer transitions in securities shorten from two business days after the trade date to one.
The final rule is designed to benefit investors and reduce the credit, market and liquidity risks in securities transactions faced by market participants. It has proven to be a topic of much discussion as firms prepare for system, operational and behavioural changes.
Although no date has been set, panellists indicated that Europe is aiming for a transition to T+1 in 2026, though it seems, from the attitude of one panellist, that the likelihood of this ‘goal post’ date remains unknown.
In recent news, the European Securities and Markets Authority (ESMA) annouced a call for evidence on the benefits and costs of transitioning to a shortened settlement cycle.
One panellist indicated that the most asked question in this transition is: what is the recall deadline?
There remains ‘a lot of confusion’ on the topic, said one panellist. The panellist believed that 3pm was ‘likely’ to be the deadline for recall issuance in the US.
Market participants were advised to look at the contractual agreements with their counterparties. This is to identify where the liability lies in terms of the deadlines participants set for underlying beneficial owners to transmit sell notifications, and also deadlines that firms set for their borrowing counterparties.
The Future Market and Regulatory Impacts on Securities Finance panel heard from Tamela Merriweather, associate general counsel at The Northern Trust Company, Laura Klimpel, general manager of DTCC’s Fixed Income Clearing Corporation (FICC), and Greg Lyons, partner at Debevoise & Plimpton.
Speakers of the session also included KPMG’s Michael Martinen, managing director of Customer and Operations Financial Services, and Brown Brothers Harriman’s Anthony Camarota, global head of securities lending operations.
Conversations regarding the stability and the resiliency of the Treasury market, and the interest of having more activity in the Treasury market be centrally cleared, has been ongoing for years. Recent periods of extreme volatility in the Treasury market, particularly in December 2019 and March 2020, has driven this conversation.
Also driving discussions for further centrally cleared transactions in the Treasury market, one panellist said, is an indication from studies that a ‘vast majority of bilateral repo activity is done with zero haircut’. Regulators are therefore concerned about the lack of margin associated with these transactions.
An SEC proposal from September 2022 intended to further strengthen the resilience of the US Treasury market by expanding the use of central clearing. The proposal aims to provide market-wide benefits such as standardised risk management, reduced settlement risk, centralised default management and increased transparency.
To be subject for clearing, one of the two counterparties involved in the repo transaction needs to be a netting member of the government securities division of the Fixed Income Clearing Corporation (FICC).
While triparty repo and DVP repo are in scope for this proposal, there is an open question regarding whether treasury lending should be in scope for the requirement, a panellist said. The concern with Treasury lending is whether these structures could be used as a way to evade clearing requirements, one panellist indicated.
Furthering the discussion on the hot topics of the regulatory landscape, one panellist reviewed the current position of the US, Canada and Mexico as the three regions transition to T+1.
Canada is a ‘little behind’ in terms of industry testing, indicated one panellist. In the US, industry testing has already begun, with firms ‘up and running’ in terms of their connectivity to the Depository Trust and Clearing Corporation (DTCC), internal systems and workflows.
In Canada, industry testing is anticipated to begin in January 2024. Although Mexico currently has no testing time frame, panellists expect the region to begin testing in January 2024 also.
The US and Canada will transition to a T+1 settlement next year, with the US moving to the shortened settlement cycle on 28 May 2024 and Canada and Mexico adopting the settlement on 27 May 2024. The rule change will see the settlement cycle for most broker-dealer transitions in securities shorten from two business days after the trade date to one.
The final rule is designed to benefit investors and reduce the credit, market and liquidity risks in securities transactions faced by market participants. It has proven to be a topic of much discussion as firms prepare for system, operational and behavioural changes.
Although no date has been set, panellists indicated that Europe is aiming for a transition to T+1 in 2026, though it seems, from the attitude of one panellist, that the likelihood of this ‘goal post’ date remains unknown.
In recent news, the European Securities and Markets Authority (ESMA) annouced a call for evidence on the benefits and costs of transitioning to a shortened settlement cycle.
One panellist indicated that the most asked question in this transition is: what is the recall deadline?
There remains ‘a lot of confusion’ on the topic, said one panellist. The panellist believed that 3pm was ‘likely’ to be the deadline for recall issuance in the US.
Market participants were advised to look at the contractual agreements with their counterparties. This is to identify where the liability lies in terms of the deadlines participants set for underlying beneficial owners to transmit sell notifications, and also deadlines that firms set for their borrowing counterparties.
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RMA: Interoperability requires consensus as fears of fragmentation continue
RMA: Interoperability requires consensus as fears of fragmentation continue
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