Participants raise concerns over SEC’s Treasury clearing mandates
19 November 2024 US
Image: Andrii_Yalanskyi/stock.adobe.com
Sell side firms have raised concerns over the Securities and Exchange Commission’s (SEC) Treasury and repo clearing mandates an Acuiti report has found.
These firms, which will provide clearing services under the SEC’s mandates, have highlighted the “economics of participation in the market” and the timeline for implementation as a worry.
The SEC has introduced mandates for centralised clearing of treasury and repo transactions to enhance transparency, stability, and resilience in the US$27 trillion Treasury market, which represents one of the most significant shifts in US capital markets for decades.
The report, produced in partnership with ION, interviewed senior executives at the major Future Commission Merchants (FCMs) and banks that will be active in the market.
FCMs expressed concern over the timeline and the economics of providing clearing services in treasuries and repos, with several questioning the capacity of the market to absorb the demand for clearing.
Ross Lancaster, head of research at Acuiti, says: “With just over a year until the introduction of the mandate begins, there remain significant uncertainties in how FCMs and repo desks will approach treasury and repo clearing.”
The deadline for the new mandated central clearing framework is set to 31 December 2025 for cash central clearing and 30 June 2026 for repo clearing, with central clearing houses still developing their access models.
There is an industry-wide uncertainty about the viability of current mandate deadlines, with 48 per cent of survey respondents noting that the repo deadline was unlikely or impossible, and 31 per cent saying the same for the cash deadline.
Lancaster continues: “Clarifications and potential additional regulatory activity around accounting treatment, capital requirements, and cross-asset margin offsets will ultimately indicate whether a dominant model will emerge, or the current sponsored model will co-exist with an agency clearing model.”
In addition, many FCMs are still uncertain about their approach to the market and the models they will offer clients from day one.
Around a third of respondents said that they were “critically concerned” over the overall level of returns from offering repo clearing in what is likely to be a capital-intensive, high-volume, low-margin business.
Francesco Margini, chief product officer for cleared derivatives at ION Markets, adds: “Despite the current uncertainties, what is clear today is that automation and scalability of the clearing process will be essential for firms to support the high-volume US Treasury cash and repo business.
“Big decisions lie ahead of sell side firms on the technology strategy in support of the clearing mandate. The expectation is that market standardisation brought by a centrally cleared business will enable software vendors like ION to play an important role in delivering solutions that meet the needs of our customers.”
These firms, which will provide clearing services under the SEC’s mandates, have highlighted the “economics of participation in the market” and the timeline for implementation as a worry.
The SEC has introduced mandates for centralised clearing of treasury and repo transactions to enhance transparency, stability, and resilience in the US$27 trillion Treasury market, which represents one of the most significant shifts in US capital markets for decades.
The report, produced in partnership with ION, interviewed senior executives at the major Future Commission Merchants (FCMs) and banks that will be active in the market.
FCMs expressed concern over the timeline and the economics of providing clearing services in treasuries and repos, with several questioning the capacity of the market to absorb the demand for clearing.
Ross Lancaster, head of research at Acuiti, says: “With just over a year until the introduction of the mandate begins, there remain significant uncertainties in how FCMs and repo desks will approach treasury and repo clearing.”
The deadline for the new mandated central clearing framework is set to 31 December 2025 for cash central clearing and 30 June 2026 for repo clearing, with central clearing houses still developing their access models.
There is an industry-wide uncertainty about the viability of current mandate deadlines, with 48 per cent of survey respondents noting that the repo deadline was unlikely or impossible, and 31 per cent saying the same for the cash deadline.
Lancaster continues: “Clarifications and potential additional regulatory activity around accounting treatment, capital requirements, and cross-asset margin offsets will ultimately indicate whether a dominant model will emerge, or the current sponsored model will co-exist with an agency clearing model.”
In addition, many FCMs are still uncertain about their approach to the market and the models they will offer clients from day one.
Around a third of respondents said that they were “critically concerned” over the overall level of returns from offering repo clearing in what is likely to be a capital-intensive, high-volume, low-margin business.
Francesco Margini, chief product officer for cleared derivatives at ION Markets, adds: “Despite the current uncertainties, what is clear today is that automation and scalability of the clearing process will be essential for firms to support the high-volume US Treasury cash and repo business.
“Big decisions lie ahead of sell side firms on the technology strategy in support of the clearing mandate. The expectation is that market standardisation brought by a centrally cleared business will enable software vendors like ION to play an important role in delivering solutions that meet the needs of our customers.”
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