SEC adopts rules on central clearing for US Treasury market
14 December 2023 US
Image: MaxSafaniuk/stock.adobe.com
The Securities and Exchange Commission (SEC) has adopted rule changes to enhance risk management practices for central counterparties in the US Treasury market and to facilitate additional clearing of US Treasury securities transactions.
The rule changes provide an update to the membership standards required of covered clearing agencies for the US Treasury market, with respect to a member’s clearance and settlement of specified secondary market transactions.
According to the Commission, these rules are designed to reduce the risks faced by a clearing agency and “incentivise and facilitate” additional central clearing in this market.
Covered clearing agencies within the US Treasury market will now adopt policies and procedures that require their members to submit for clearing certain specified secondary market transactions.
These transactions include all repo and reverse repo agreements centralised by US Treasury securities entered into by a member of the covered clearing agency, unless, the SEC states, “the counterparty is a state or local government or another clearing organisation or the repurchase agreement is an inter-affiliate transaction”.
Additional transactions included in this rule are all purchase and sale transactions entered into by a member of the clearing agency that is an interdealer broker, or entered into between a clearing agency member and either a registered broker dealer, a government securities broker, or a government securities dealer.
The amendments permit broker-dealers to include customer margin required and on deposit at a clearing agency in the US Treasury market as a debit in the customer reserve formula. Furthermore, clearing agencies in-scope will be required to collect and calculate margin for house and customer transactions separately.
The final part of the new rule changes will ensure that the covered clearing agency has the appropriate means to facilitate access to clearing, including for indirect participants.
Exemptions for transactions apply where the counterpart is a central bank, sovereign entity, international financial institution, or “natural person”.
Changes regarding the separation of house and customer margin, the broker-dealer customer protection rule and access to central clearing are to take effect by 31 March 2025.
Following this, the requirement to clear specific transactions would come into effect in two phases, initially with a requirement to clear cash transactions and then a requirement to centrally clear repo transactions.
Compliance by the direct participants of a US Treasury securities central clearing agency, with the requirement to clear eligible secondary market transactions, would not be required until 31 December 2025, and 30 June 2026, respectively, for cash and repo transactions.
Commenting on the decision, SEC chair Gary Gensler says: “The US$26 trillion Treasury market — the deepest, most liquid market in the world — is the base upon which so much of our capital markets are built.
“Having such a significant portion of the Treasury markets uncleared — 70 to 80 per cent of the Treasury funding market and at least 80 per cent of the cash markets — increases system-wide risk.”
He adds: “The adopting release addresses clearing of Treasury securities in two important ways. First, the final rules make changes to enhance customer clearing. Second, the final rules broaden the scope of which transactions clearing house members must clear. I am pleased to support these rules because they will help to make the Treasury market more efficient, competitive and resilient.”
In response to the news, Ragu Raymond, director of collateral management business development and client success at Baton Systems, comments: “The market in 2024 needs more clarity as to what percentage of the US Treasury and repo trading book will be subject to mandatory clearing.
“If clearing becomes mandatory for certain trades but not all, there is a risk of creating a bifurcated market structure with different pools of liquidity for trades that are newly cleared versus those that remain bilateral, introducing previously unencountered costs and hurdles.”
Raymond indicates that firms will be forced to adhere to more restrictive collateral schedules “as most CCPs only accept high quality liquid assets (HQLA), whereas bi-lateral over-the-counter repo provides a greater degree of flexibility”.
“This has benefits from a transparency and market stability perspective, but you have to balance that out with higher costs on the collateral side, from CCP fees and an operational processes perspective,” he concludes.
The Depository Trust and Clearing Corporation (DTCC) says its Fixed Income Clearing Corporation (FICC) will take the necessary steps as required under the amendments to prepare for this significant initiative.
The firm adds: “DTCC remains committed to supporting the industry and providing solutions that enable compliance with the expanded treasury clearing rule. We are prepared for this significant undertaking and will continue to evolve our access models and enhance capital efficiency whenever possible to effectively support our clients.”
Marc Natale, global head of presales, marketing and GTM at Murex, says: “Mandatory clearing of US Treasuries and US Treasury repo will require market participants to post more collateral at CCPs, bringing with it greater operational work for sourcing and then posting the required collateral.
“Those affected by the new rules will need collateral management systems that are flexible and agile in identifying what the most eligible collateral is across their desks and how they mobilise it for posting at CCPs.”
The rule changes provide an update to the membership standards required of covered clearing agencies for the US Treasury market, with respect to a member’s clearance and settlement of specified secondary market transactions.
According to the Commission, these rules are designed to reduce the risks faced by a clearing agency and “incentivise and facilitate” additional central clearing in this market.
Covered clearing agencies within the US Treasury market will now adopt policies and procedures that require their members to submit for clearing certain specified secondary market transactions.
These transactions include all repo and reverse repo agreements centralised by US Treasury securities entered into by a member of the covered clearing agency, unless, the SEC states, “the counterparty is a state or local government or another clearing organisation or the repurchase agreement is an inter-affiliate transaction”.
Additional transactions included in this rule are all purchase and sale transactions entered into by a member of the clearing agency that is an interdealer broker, or entered into between a clearing agency member and either a registered broker dealer, a government securities broker, or a government securities dealer.
The amendments permit broker-dealers to include customer margin required and on deposit at a clearing agency in the US Treasury market as a debit in the customer reserve formula. Furthermore, clearing agencies in-scope will be required to collect and calculate margin for house and customer transactions separately.
The final part of the new rule changes will ensure that the covered clearing agency has the appropriate means to facilitate access to clearing, including for indirect participants.
Exemptions for transactions apply where the counterpart is a central bank, sovereign entity, international financial institution, or “natural person”.
Changes regarding the separation of house and customer margin, the broker-dealer customer protection rule and access to central clearing are to take effect by 31 March 2025.
Following this, the requirement to clear specific transactions would come into effect in two phases, initially with a requirement to clear cash transactions and then a requirement to centrally clear repo transactions.
Compliance by the direct participants of a US Treasury securities central clearing agency, with the requirement to clear eligible secondary market transactions, would not be required until 31 December 2025, and 30 June 2026, respectively, for cash and repo transactions.
Commenting on the decision, SEC chair Gary Gensler says: “The US$26 trillion Treasury market — the deepest, most liquid market in the world — is the base upon which so much of our capital markets are built.
“Having such a significant portion of the Treasury markets uncleared — 70 to 80 per cent of the Treasury funding market and at least 80 per cent of the cash markets — increases system-wide risk.”
He adds: “The adopting release addresses clearing of Treasury securities in two important ways. First, the final rules make changes to enhance customer clearing. Second, the final rules broaden the scope of which transactions clearing house members must clear. I am pleased to support these rules because they will help to make the Treasury market more efficient, competitive and resilient.”
In response to the news, Ragu Raymond, director of collateral management business development and client success at Baton Systems, comments: “The market in 2024 needs more clarity as to what percentage of the US Treasury and repo trading book will be subject to mandatory clearing.
“If clearing becomes mandatory for certain trades but not all, there is a risk of creating a bifurcated market structure with different pools of liquidity for trades that are newly cleared versus those that remain bilateral, introducing previously unencountered costs and hurdles.”
Raymond indicates that firms will be forced to adhere to more restrictive collateral schedules “as most CCPs only accept high quality liquid assets (HQLA), whereas bi-lateral over-the-counter repo provides a greater degree of flexibility”.
“This has benefits from a transparency and market stability perspective, but you have to balance that out with higher costs on the collateral side, from CCP fees and an operational processes perspective,” he concludes.
The Depository Trust and Clearing Corporation (DTCC) says its Fixed Income Clearing Corporation (FICC) will take the necessary steps as required under the amendments to prepare for this significant initiative.
The firm adds: “DTCC remains committed to supporting the industry and providing solutions that enable compliance with the expanded treasury clearing rule. We are prepared for this significant undertaking and will continue to evolve our access models and enhance capital efficiency whenever possible to effectively support our clients.”
Marc Natale, global head of presales, marketing and GTM at Murex, says: “Mandatory clearing of US Treasuries and US Treasury repo will require market participants to post more collateral at CCPs, bringing with it greater operational work for sourcing and then posting the required collateral.
“Those affected by the new rules will need collateral management systems that are flexible and agile in identifying what the most eligible collateral is across their desks and how they mobilise it for posting at CCPs.”
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