Cross-product Netting Under the US Regulatory Capital Framework

Dated: April 8, 2025

Executive Summary

The International Swaps and Derivatives Association, Inc. (ISDA), FIA and the Securities Industry and Financial Markets Association (SIFMA) are publishing this discussion paper to: (I) provide an overview of cross-margining programs developed by clearing organizations and their importance in the context of implementing recent market reforms with respect to US Treasury securities clearing; (ii) describe cross-product netting arrangements with customers as a means to effectively reduce risk and their relation to cross-margining programs; (iii) describe the treatment of cross-product netting arrangements under the current US regulatory capital framework; and (iv) propose potential targeted changes to US regulatory capital rules to more appropriately reflect the economics of, and facilitate firms’ use of, cross-product netting arrangements with customers, particularly with respect to transactions based on US Treasury securities.

It will be critical for the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation (FDIC) and the Office of the Comptroller of the Currency (OCC) to consider revisions to the US regulatory capital framework that recognize the risk-reducing effects of cross-margining programs.

Introduction

The three associations and their members strongly support a regulatory capital framework that promotes the safety and soundness of banks and the efficiency of capital markets. Banks1 play a critical role in providing liquidity in important markets, including serving as primary dealers in the US Treasury market, as well as providing access to central clearing of derivatives and repurchase (repo) transactions for customers to manage risk, generate revenue and access financing to grow their businesses.

Banks play an essential role in the $29 trillion US Treasury market by acting as primary dealers that participate in auctions of new US Treasury issuances, serving as trading counterparties to the Federal Reserve Bank of New York and acting as secondary market intermediaries with banks and non-banks. These market intermediation activities include providing access to cleared US Treasury markets by acting as agents for clients, including via direct membership at the Government Securities Division of the Fixed Income Clearing Corporation (FICC).

Banks will need to enhance and expand these market intermediation activities to address the increased scope of US Treasury repo and cash transactions that will be required to be cleared following a rule issued by the US Securities and Exchange Commission (SEC). The SEC Treasury clearing final rule will have significant effects on the operation and structure of the US Treasury market and related financing markets – in particular, through increasing the scope and volume of US Treasury repo and cash transactions subject to mandatory clearing. In addition, the US Treasury futures market is instrumental to the efficiency and liquidity of US Treasury markets generally. Implementing the SEC Treasury clearing final rule successfully will require the US Treasury futures and US Treasury repo and cash markets to operate together in an efficient manner.