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An Update on the Path to Clearing US Treasuries

Recorded live from SIFMA’s 2024 Operations Conference & Exhibition

New rules from the U.S. Securities Exchange Commission (SEC) will require most market participants to centrally clear cash and repo U.S. Treasuries, imposing significant changes to market structure. Treasury cash clearing is required to go into effect by the end of 2025, and repo clearing is required to go into effect by June 30, 2026.

In this episode of The SIFMA Podcast, we share a replay of the Treasury Clearing panel discussion at SIFMA’s recent Operations Conference & Exhibition. First, SIFMA’s Chief Operating Officer, Joseph Seidel, sits down with panel moderator Robert Toomey and SIFMA Asset Management Group’s Bill Thum to outline what firms need to be doing today to prepare for the SEC rules, SIFMA’s new documentation to allow market participants to meet their clearing documentation needs efficient, and next steps for the industry to meet the aggressive timeline for implementation.

Podcast guests:
  • Joseph Seidel, SIFMA
  • Robert Toomey, SIFMA
  • William Thum, SIFMA
Panelists:
  • Laura Klimpel, DTCC
  • Anthony Medici, BlackRock
  • Thomas Wipf, UBS
  • Nathaniel Wuerrffel, BNY
  • Moderated by: Robert Toomey, SIFMA

Transcript

Edited for clarity

Joe Seidel: Welcome to this episode of the SIFMA Podcast. My name is Joe Seidel, and I’m the Chief Operating Officer here at SIFMA. New rules from the U.S. Securities Exchange Commission will require most market participants to centrally clear cash in repo treasury securities, imposing significant changes to market structure. Treasury cash clearing is required to go into effect by the end of 2025, and repo clearing is required to go into effect by June 30, 2026.

The rule triggers a significant change in U .S. treasury market structure, a bedrock of the global financial system. Today there are 27 trillion of U.S. Treasury securities outstanding and an average of over 879 billion are traded every day. These rules will have material impact to market participants including broker-dealers, institutional investors, interdealer brokers, principal trading firms, and covered clearing agencies.

This was a key focus at SIFMA’s recent Operations Conference and Exhibition, which was held from September 15th to 18th in San Diego. We’re pleased today to bring you a replay of our main stage panel discussion that dug into perspectives around essential industry actions related to the rule and implementation plans. It included DTCC’s Laura Klimpel, BlackRock’s Anthony Medici, Credit Suisse’s Tom Wipf, and the Bank of New York’s Nate Wuerrffel and was moderated by SIFMA’s Rob Toomey.

But first, here with me today, I have Rob Toomey, who is head of capital markets at SIFMA, and Bill Thumb, managing director in SIFMA’s asset management group. They are leading SIFMA’s efforts to advance multiple work streams and short-term deliverables that will set the stage for long-term implementation. These include the development of market standard documentation, enhancements to market structure, further needed regulatory reforms, and an operations timeline. Rob, turning to you first. You were just back from the SIFMA Ops Conference where you moderated our main stage discussion. What did you hear on the ground while you were there?

Robert Toomey: Thanks, Joe. There was certainly a tremendous amount of discussion around Treasury clearing at the conference. There were a number of panels, some more granular than others. Our panel was looking at the main stage panel looked at the broad policy implications of this, how we got here, a little historical background, and the like. But we had many other panels that discussed very granular bits and pieces about how folks are going to get to the ultimate end game of the rule, which is in June 2026. It shouldn’t be terribly surprising that this is as important as the breadth of the discussion was at the Ops Conference. As you mentioned, Treasury market is the bedrock of the financial system, but also there is an aggressive timeline.

This is a big change and a big change that has to be implemented in a relatively short period of time with a number of way stops along the way. So first of all, I mean the key messages that people were bringing to the conference about how firms should be thinking about this is, one, you should be planning really as of yesterday. People kept talking now, but people kept talking, you know, this has been around since December of last year and people have been developing and thinking about it and you should be again to meet that aggressive timeline. What should you be doing specifically? Firms should be looking at and identify what transactions they do today that are not cleared but have come into scope and must be cleared. Then you must understand how they’re going to get cleared. How are you going to get access to the clearing house? Are you a clearing member? Are you not a clearing member? Do you have to go through another clearing member?

You have to understand the various access models that the only current clearer in the treasury market, FICC, has. You have to understand what they are and what they mean for your businesses. There are going to be significant changes in how margin are treated, how margin is segregated, how margin is protected, and the costs of margin. Who’s going to bear those costs? How are you going to implement that? How are you going to operationalize that are an important piece of it.

And then given that, there are many, many different work streams that have to come through. And this is across firms, accounting, legal, operations, trading. You have to have really a clear change management program in place with people processes and legal staffing. I’ve talked to a number of firms that are upping their legal staffing because there’s going to be significant negotiation going on over the coming months. So where firms need to get started as I said they need to scope what’s in for their firm they need to understand how they’re going to get those in they’re going to have to start reaching out to their counterparties one theme and I think Tom Wipf on my panel kept hitting this again reach out to your customers start that conversation now because it’s going to have to be negotiation who’s going to handle what and how are you going to do this and then the other piece and I keep coming back to this too on the legal side is documentation and I know, SIFMA has been working for some time to develop standardized documentation. We have published the first tranche of those documents, and these will help with firms and facilitate clearing across the industry as firms put in place what they need to do.

Joe Seidel: So Bill, you and Rob have been hard at work developing that industry documentation. Can you tell us a bit about it?

William Thum: Well, Joe, it’s been a big effort by SIFMA and all of SIFMA’s members on the buy and sell side have come together under the guidance of Cleary Gottlieb, our outside counsel, to develop the documentation that’s going to be needed to implement the clearing mandate. And what we have been working on first is the documentation for what I’ll refer to as the done-with model. So this is where market participants trade directly with their clearing member who then clears the trades on their behalf. The other approach in the market is the done-away model, which is where you trade across the street and have those trades given up to be cleared by your clearing member. So the predominant approach at present is the done-with model. So that’s where we started. So in the course of this effort, we will move through the done with documentation, the done away documentation, and then move on to a documentation system for the creation, negotiation, execution, and tracking of agreement terms.

SIFMA published the final version of the Master Treasury Securities Clearing Agreement for the done-with model. And this document will be familiar to many in the market in that it has a set of standard terms attached to which is a schedule where you make various elections that are presented in the standard terms, and then a series of modules that, within the context of the done with model, you elect as to what sort of approach or access to clearing you have with respect to FICC. This will be presented on the SIFMA website, and parties will have the opportunity to negotiate the terms according to their unique commercial, legal, and operational positions and needs.

Joe Seidel: The SIFMA website is www.sifma.org. So then Rob, there’s also an implementation roadmap in development. Can you tell us a bit about that?

Robert Toomey: Yeah, we’re putting together and working with our partners on this EY, putting together a roadmap timeline issues list that will allow members to take a look and understand, you know, what the questions they have to ask, what are the issues they have to address in order to implement this over time. In some ways, it’s modeled off what SIFMA did in T+1 and the playbook they did there.

But it’s meant to lay out all the things that have to happen in particular, you know, we will have chapters on margin, how you operationalize that, how you deal with that, chapters on what are the issues around done away that you have to address, and then as well looking at the access models, what do they mean for your business, how do you connect the pipes to the system. All of this we think collectively should help the industry plan appropriately and again plan during this relatively short timeline. We expect the final publication of this to be in early November. That’s our target for this and I think we’re on target to make that time frame.

Joe Seidel: Yes, and then once that’s out, we will engage on a sort of widespread education effort across the industry with Bill, Rob, and others answering questions and providing as much information as possible to members trying to get their arms around this. So in conclusion, I’d also note that this is an extraordinarily complex rulemaking and significant open questions still remain.

We at SIFMA are working closely with the SEC, U.S. Treasury, and other stakeholders to address them. The U.S. Treasury market underpins the global financial system, and it is critical that we do get this right. We will be posting all the materials to be discussed to SIFMA’s Treasury Clearing Resource Center, which again is available on sifma.org. Without further ado then, here is the discussion that happened recently on the main stage of our operations conference.

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Joseph Seidel is Chief Operating Officer of SIFMA. Robert Toomey is Head of Capital Markets/Managing Director and Associate General Counsel at SIFMA. William Thum is Managing Director and Associate General Counsel, Asset Management Group at SIFMA.

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