Back to News

Urgent Action Required: 5 Unresolved Issues in Treasury Central Clearing Rules

The U.S. Securities and Exchange Commission (SEC) finalized its expanded mandate for central clearing in the U.S. Treasury market in December 2023. It increases the scope of transactions that are required to be cleared in both the cash market and the repo market. The compliance dates for this new mandate are:

  • March 31, 2025: Covered clearing agencies (CCAs) must implement enhanced practices, including risk management, margin, and customer asset protection.
  • December 31, 2025: Direct participants of CCAs must clear eligible cash secondary market transactions.
  • June 30, 2026: Direct participants of CCAs must clear eligible Treasury repo transactions.

SIFMA is working with the industry to help prepare for the transition. The rule’s timeline for implementation is aggressive, and as we near the first deadline, there are several significant open questions requiring formal guidance from regulators and other market participants to ensure a smooth transition to avoid unnecessary disruption in the Treasury market. We are engaging with the regulators and other relevant industry bodies to encourage them to address these issues.

An immediate response is needed on the following:

#1: The SEC needs to eliminate double margining for investment managers, as it risks reduced trading and liquidity.

Existing SEC rules requiring repo transactions to be fully collateralized have not been reconsidered in the context of the clearing mandate. At this point, the result looks to be that the borrower will continue to have to transfer 102% of securities to the lender, while at the same time, the lender will have to post margin to the clearing house. This would greatly increase the costs to buyside lenders, making their participation increasingly uneconomic and as a result would depress liquidity. SIFMA believes the SEC should reconsider the fully collateralized requirement for cleared transactions with registered funds acting as lenders.

#2: The SEC should clarify that mixed CUSIP triparty repos are not subject to clearing.

Generally, the SEC rule requires that all triparty transactions that include Treasury securities must be cleared.  However, this does not take into consideration that some triparty repo transactions which are meant to finance—and are priced to finance—non-Treasuries may contain varying amounts of Treasury securities in order to fill out the pool of securities subject to the transaction.  Thus, additional classes of securities, most prominently mortgage-backed securities, may be pulled into the scope of the mandate.  This is beyond the policy goals of addressing issues specific to the Treasury market and could raise costs in, for example, the market for certain mortgage securities.We believe that this could not have been the intent of the approach to triparty arrangements and could be addressed by relief that would recognize the intent of the seller and the buyer when that intent is to finance non-Treasury securities, even if Treasury securities end up becoming a part of the pool of collateral in order to complete the transaction.

#3: The SEC should revise the existing inter-affiliate exemption to eliminate the conditions decreasing its utility.

SIFMA had specifically advocated for an exemption from the clearing requirement for inter-affiliate transactions and the SEC included one in the final rule but added significant conditions that make the usefulness of the exemption difficult. It is important that firms be able to manage their collateral and risk efficiently within a corporate group. While the SEC included an inter-affiliate exemption, it is conditional—the affiliate that is on the other side of the trade must clear all other repos it engages in if it wants to make use of the exemption—and we believe the condition makes this important exemption difficult to operationalize and implement. It should be adjusted to: (1) eliminate certain conditions for treasury, liquidity or collateral management purposes within a group, and (2) eliminate the conditions when the aggregate notional amount of uncleared Treasury transactions between non-U.S. affiliates and non-U.S. third parties does not exceed a particular percentage of the aggregate notional amount of all of a firm’s cleared repo activity.

#4: Bank regulators need to adjust capital standards to accommodate repos.

Determining the impact on regulatory capital of moving bilateral activity to centrally cleared, internal business-driven decisions and market-wide considerations will need to be taken into account. Cleared repos in the “done-with” space developed primarily due to the favorable balance sheet and accounting treatment for cleared vs. uncleared repos.  The favorable treatment for cleared trades allows for greater liquidity than in the uncleared space.  It is very important that the “done-away” market structure receives similar favorable outcomes from an accounting and balance sheet perspective.Repos are not currently classified as derivatives by bank regulators, but this classification will need to be changed in order for repos to be eligible for cross-product netting under the standardized approach of the regulatory capital standards in order to ensure broker-dealer’s market making and liquidity provision capacity is not unnecessarily constrained, especially during market stress conditions. Note that cross-product netting is allowed under the current internal models approach, but the U.S. Basel 3 Endgame proposal would eliminate the internal models approach.

#5: The FICC and its members should clarify documentation requirements to allow firms to focus on clearing changes rather than administrative burdens.

There remains uncertainty with regards to whether clearing firms will need to repaper clients due to the changes in clearing house rules made in preparation of central clearing. If required, this is a sizeable administrative undertaking. The Fixed Income Clearing Corporation (FICC) should look to provide additional clarity and enable ways for firms to streamline this process if required, removing the need for a months-long administrative task of getting executed letters for existing clearing clients in advance of the March implementation.

—

Treasury securities play a key role in the U.S. and world economies. SIFMA has long supported efforts to make the Treasury market more resilient. At the same time, we recognize the need to ensure liquidity is not negatively impacted. The Treasury clearing rule change triggers a significant change in U.S. Treasury market structure and will have material impacts on the market as well as market participants including broker-dealers, institutional investors, interdealer brokers, principal trading firms, and covered clearing agencies. It is important that the transition to more large-scale clearing does not create disruptions in this market. Guidance from regulators and other market participants ahead of the very compressed compliance timeline is essential as we quickly approach the first deadline of the new rule so firms can plan appropriately.

Author

Kenneth E. Bentsen, Jr. is President and CEO of SIFMA. From 1995 to 2003, he served as a Member of the United States House of Representatives from Texas. Prior to his service in Congress, Mr. Bentsen was an investment banker specializing in municipal and housing finance.

Related Resources

More News