RMA: US Treasury Clearing proposal to increase costs
13 October 2023 US
Image: SFT
The anticipated US Treasury Clearing proposal has caused concern for some firms, which indicate that the costs of its implementation will outweigh the benefits, according to a panel at the Risk Management Association (RMA) Securities Finance and Collateral Management Conference.
The Challenges and Economic Considerations in Cash Collateral, Fixed Income and Repo panel engaged in a comprehensive analysis of the challenges faced by market participants, including the outlook for interest rates, credit risk, regulatory constraints and market volatility.
Panellists explored how these economic factors shape decision-making, investment strategies and risk management practices in securities finance.
The discussion continued previous conversations relating to the U.S. Securities and Exchange Commission’s (SEC’s) US Treasury clearing proposal.
The proposal, released last year, requires mandatory clearing for cash Treasury transactions, as well as Treasury repo transactions.
Securities lending activity is not explicitly included within this proposal. However, one panellist indicated that it could be scoped in at some point.
The Commission is forcing all transactions to go through a central counterparty (CCP). The repo market, a panellist commented, would face the largest impact of this.
Although the SEC proposal does provide both benefits and costs, said one panellist, the ‘costs outweigh the benefits’.
The panellist relayed that the benefits of the proposal included further resiliency to the overall Treasury market structure, a reduction in the impact of any single counterparty default, as well as ‘some’ netting benefits across dealers.
However, the costs of the proposal included higher haircuts, which are mandatory and are required for any repo transaction. This will therefore increase the cost of doing business, a cost that can be significant, the panellist argued.
Hedge fund clients worry that, if the proposal is brought into the market, they could be doing ‘less of a trade for more of a spread’.
This means, a panellist explained, that the hedge fund client would not be able to ‘get as much leverage’ due to the higher haircut requirements, but they would still be demanding ‘the same amount of compensation’ that they are earning today. The panellist argued that spreads will need to widen.
This means dislocations — circumstances in which financial markets, operating under stressful conditions, cease to price assets correctly on an absolute and relative basis — are likely to increase in the Treasury and repo market, the panel heard.
Firms are facing questions from their clients regarding when the clearing proposal will go into effect. A panellist confirmed that the answer to this question is currently unknown.
Some market participants speculate that the SEC proposal will ‘be out soon’ with rumours indicating an October release and a short implementation timeline, though this has not been confirmed.
The panel heard from State Street Global Advisors’ Karyn Corridan, head of US securities lending cash collateral strategies within the fixed income, cash and currency (FICC) team.
Other panellists included BlackRock’s Eric Hiatt, US head of cash portfolio management; Invesco’s Ripal Tilara, senior portfolio manager for Invesco Fixed Income; Bank of America Securities’ Mark Cabana, head of US rates strategy; and BNY Mellon’s Michael Evan, senior portfolio manager.
The Challenges and Economic Considerations in Cash Collateral, Fixed Income and Repo panel engaged in a comprehensive analysis of the challenges faced by market participants, including the outlook for interest rates, credit risk, regulatory constraints and market volatility.
Panellists explored how these economic factors shape decision-making, investment strategies and risk management practices in securities finance.
The discussion continued previous conversations relating to the U.S. Securities and Exchange Commission’s (SEC’s) US Treasury clearing proposal.
The proposal, released last year, requires mandatory clearing for cash Treasury transactions, as well as Treasury repo transactions.
Securities lending activity is not explicitly included within this proposal. However, one panellist indicated that it could be scoped in at some point.
The Commission is forcing all transactions to go through a central counterparty (CCP). The repo market, a panellist commented, would face the largest impact of this.
Although the SEC proposal does provide both benefits and costs, said one panellist, the ‘costs outweigh the benefits’.
The panellist relayed that the benefits of the proposal included further resiliency to the overall Treasury market structure, a reduction in the impact of any single counterparty default, as well as ‘some’ netting benefits across dealers.
However, the costs of the proposal included higher haircuts, which are mandatory and are required for any repo transaction. This will therefore increase the cost of doing business, a cost that can be significant, the panellist argued.
Hedge fund clients worry that, if the proposal is brought into the market, they could be doing ‘less of a trade for more of a spread’.
This means, a panellist explained, that the hedge fund client would not be able to ‘get as much leverage’ due to the higher haircut requirements, but they would still be demanding ‘the same amount of compensation’ that they are earning today. The panellist argued that spreads will need to widen.
This means dislocations — circumstances in which financial markets, operating under stressful conditions, cease to price assets correctly on an absolute and relative basis — are likely to increase in the Treasury and repo market, the panel heard.
Firms are facing questions from their clients regarding when the clearing proposal will go into effect. A panellist confirmed that the answer to this question is currently unknown.
Some market participants speculate that the SEC proposal will ‘be out soon’ with rumours indicating an October release and a short implementation timeline, though this has not been confirmed.
The panel heard from State Street Global Advisors’ Karyn Corridan, head of US securities lending cash collateral strategies within the fixed income, cash and currency (FICC) team.
Other panellists included BlackRock’s Eric Hiatt, US head of cash portfolio management; Invesco’s Ripal Tilara, senior portfolio manager for Invesco Fixed Income; Bank of America Securities’ Mark Cabana, head of US rates strategy; and BNY Mellon’s Michael Evan, senior portfolio manager.
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