Who is subject to the SEC’s rules? When do they go into effect? What are the margin implications? How will firms account for increased volumes? In this episode of The SIFMA Podcast, SIFMA’s COO, Joseph Seidel, sits down with EY’s Brendan Maher and SIFMA’s Steve Byron, William Thum, and Rob Toomey to answer these questions and more.

Joe Seidel: Thanks for joining us for this episode in SIFMA’s podcast series. I’m Joe Seidel, SIFMA’s Chief Operating Officer, and today we are here to talk about Treasury clearing. We will cover what SIFMA is doing to help the industry prepare for the new SEC rules, and as a part of that, we will walk through the new industry considerations report published by SIFMA and Ernst & Young. I’m joined today by Brendan Marr, a managing director with EY, a SIFMA premium associate member. I’m also joined by Steve Byron, the head of SIFMA’s Ops and Tech group, Rob Toomey, the head of our capital markets group, and Bill Thumb from SIFMA’s asset management group.

So it should go without saying that 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. Rob, can you walk us through the mandate, what it means for the industry, and the various work streams currently underway at SIFMA?

Robert Toomey: Certainly, Joe, thanks. And I think your opening remarks about the importance of the Treasury market also leads into the importance of firms thinking and what they should be thinking about now about the new Treasury mandate. But just to level set, folks, as many know, and I’m sure most of the listeners know, back in December, the SEC, back in December 2023, the SEC finalized its expanded mandate for central clearing in the Treasury market. It increased the scope of transactions that are required to be cleared in both the cash market and the repo market. And it’s set up what I would characterize as a somewhat aggressive timeline to get all that in and to get all the new market participants who have to be in, in.

So there’s a series of compliance dates that firms need to keep in mind. First, the first real one is March 2025. And that really applies to the clearing houses and how they manage risk and how they manage client assets and how they manage margin. That has to be in place by March 2025. That’s well-entrained at the clearing houses and how firms react to that is something firms need to be thinking about. At the end of 2025, the in-scope cash clearing transactions have to start clearing through the clearing houses. And then finally, to get to the end state, the repo mandate, which is rather extensive, that has to be in place by June 2025. So what firms need to be thinking about is really how they access clearing to the extent they haven’t or haven’t been clearing or haven’t been part of the ecosystem. What models they have to use. Each clearing house right now there’s only one, but there are others who announced they’re going to get into the market. each market participant has to analyze what the models look like at the clearinghouses and how they can interact with them and what’s the best for their sort of business model and approach.

A lot has to be done over the next year plus now to the deadline in 2026, but SIFMA has been working with a number of our constituencies to move forward and to try to create efficiencies in that process. Most significantly, we’ve been working with our lawyers groups to develop standard documentation, which will help onboard clients into the ecosystem. We published back in September documentation, clearing documentation, for “Done-With”. We’re working actively to clearing documentation for “Done-Away” style transactions. We’ve also worked with our members because as you can imagine, a rule this complex has a number of interpretive questions, both on the buy and the sell side, and we work with the SEC to try to develop solutions to those ambiguities and questions that market participants have. And then finally, some of the focus today will be on the SIFMA and EY report, but we’re working with our operations constituencies to understand what has to be done from an operational capability side to move this along.

Joe Seidel: So in terms of scope here, this will apply to the interdealer market, it will apply to the retail market, it will apply internationally. How would you scope this in terms of what’s being cleared today versus what will need to be done?

Robert Toomey: Yeah, I think, you know, as I said, it certainly expanded the class. In today’s environment, generally, again, FICC is the only clearer in town, but generally, the requirement is that a member of FICC has to clear all its transactions with FICC that are done with other clearing members. So, an FICC member with a non-clearing member, that does not have to be cleared, in many cases, it’s not, particularly with repo, I’ll just give a little caveat with cash, but with repo, it will include any counterparty of a FICC member. And to Joe’s last point, that certainly includes global counterparties. There are exclusions for central banks and for sovereigns and the like, but global counterparties that deal with FICC members are going to have to clear repo. Just a caveat on the cash side, it’s a little more limited. The basic rule is all cash transactions will have to be cleared that are done between two broker-dealers or government securities broker-dealers or between an interdealer broker of a member of FICC that acts as an interdealer broker and any other entity.

Joe Seidel: Quite the scope. Brendan, you and your team at EY co-authored this report. We’re grateful to have you with us today to share your expertise. Can you take us through the reasons behind doing the report and then its highlights?

Brendan Maher: Sure. In terms of the reasons, really all this started back when this was still a proposed rule from the SEC a little over two years ago. We started looking at this rule and its impacts and having conversations with market participants. I’d say that really picked up steam starting in the summer of 2023, when folks realized the SEC was really pushing ahead to finalize this rule and we were starting to hear a bit around the implementation timelines that were being discussed and realized just how much work needed to be done here. Once the rule was finalized, say a flurry of conversations, even late December last year, a lot of reading of hundreds of pages of regulatory texts between Christmas and New Year’s 2023. And, I’d say January of this year (2024) started off with a really pretty, aggressive, amount of conversations, really amongst everyone across the industry, thinking through what these roles would mean and what changes needed to be implemented.

In terms of EY’s relationship with SIFMA, we’re always looking for opportunities to collaborate. We’ve collaborated on a number of things in the past, and I think pretty logically in our conversations, we thought about what are the various ways that SIFMA is really trying to help the industry take this forward. And some of those conversations honed in on the T+1 implementation playbook that you all produced and what corollaries could we draw in preparing this report to help the industry take this forward. We called it a considerations report because in some ways this is a little bit different than T+1, where everyone was really marching towards the same objective, coming at it from different vantage points. There are elements of choose your own adventure on treasury clearing, and much of that will depend on what your construct is today, what products and services you plan to offer in the future. So that was a bit of how we thought about the report just in our conversations with you all and with SIFMA members in terms of what would be most valuable and most important. And I think through those conversations, through the workshops that we ran with you all and your members, we honed in on eight key themes that we thought were most important and really captured and reflected on what the industry was saying about some of the key changes and where some of those key challenges would be. I’ll highlight a few.

One is just the number of market participants that are going to need to obtain or expand access to clearing. Some of this has been published by FICC, but some of the estimates are north of 7,000 new participants at the clearing agency. So think that’s a very significant influx of new market participants, which would more than double their participant base. Changes to account structures at FICC. So, the way that banks, broker-dealers, and FCMs have their clearing relationship set up with the clearinghouse, firms need to implement changes there and those changes are coming quickly. March 2025 is the compliance date for those changes. Margin was a key theme in many of our conversations. What are the margin implications of these rules? How are firms going to change processing? How are firms potentially changing practices of when they collect margin and in what amount with their trading relationships?

Just a few more, I’d say “Done-Away” has been a really key theme in most industry conversations around treasury clearing. There are differences from a “Done-Away” standpoint when you think about cash markets versus repo. And I think the industry is really very much thinking about them and certainly in concert with one another, but potentially having different solutions to solve for a “Done-Away” trading. Really, the focus here is how do we account for all of the additional volume that’s going to come in for clearing? How do we enable that in as efficient of a way as possible? And I think that’s really the focal point from a “Done-Away” standpoint. It’s not something that’s required by the rule, but we hear just from industry participants for this to go smoothly “Done-Away” is hugely important. And really there is a critical path that needs to be undertaken to bring those new types of trading and trade processing models to life.

Maybe just a few more, the entrance of new covered clearing agencies. So there’s two market participants that have been very vocal in industry forums in their own press releases. So CME and ICE, have been very vocal about their plans to launch new covered clearing agencies. Certainly, we expect that those will be key considerations for firms to think about as to how to connect to those types of organizations. And then lastly, reference data. That’s certainly been a challenge that has been flagged. How do we know all of the different relationships that may or may not be subject to clearing? I think those are certainly key things that come up from some of our conversations.

Joe Seidel: So Brendan, we’re particularly interested in what you all were doing in maybe chapters 9, 10, and 11. Can you, without going too much in-depth, can you highlight, just a couple of the key hurdles and key issues that the industry will need to tackle and come up with solutions on as we move to the relatively quick go-live dates here in 2025 and 2026?

Brendan Maher: Sure, absolutely. We try to characterize this in terms of open questions, issues, and gaps in section 9 of the report. So where are there questions that need additional clarity? Where are there issues that need to be resolved? And where are there market structure gaps that would need to be implemented in order to lead to a smooth transition? Going back just on “Done-Away”, that’s certainly been a key focal point. Much of the conversation for direct participants at FICC to think about their “Done-Away” offerings starts with conversations around accounting treatment. And we know SIFMA and SIFMA’s accounting committee has set up a task force to focus on exploring some of the accounting questions. So that’s certainly been a focal point from an industry level and many institutions are very much looking to understand those implications.

I think for “Done-Away”, the front-to-back trade flows are very much front and center as well. So what types of pre-trade checks need to be pre-performed before executing a trade that might be different for cash versus repo? Certainly those are some conversations that come up. How does the connectivity work from execution venues into clearing houses? What types of middleware might be required to support trade processing? Much of that, sketching out and designing of the workflows is very much a focal point from an industry standpoint. And I think really, SIFMA is very involved in bringing about what the future might look like in those markets through many of its conversations.

Margin is certainly a big question on both the buy side and the sell side. So the timing of margin call issuances, how and when will folks process collateral movements to satisfy those margin calls? How do folks manage substitutions at the clearinghouse? All of those considerations are front and center, as well as how do folks support processing at FICC in potentially different margin accounts that they have today. And that gets it segregated versus non-segregated margin models that the clearing house is offering. Certainly, some of the commercial questions come up around what commercial models will institutions offer? What are some of the fee structures that firms might need to consider? Some of the domicile or fund type considerations, particularly in focus for the buy side in terms of how they’re going to get set up for clearing across all of the different funds or accounts that they manage globally. And lastly, certainly, some of the questions around new CCAs and how firms will connect once they understand what those models look like. Those were some of the key themes that came out of that section and of the report and distillation down of many of our working sessions over the last few months.

And then lastly, sections 10 and 11, we tried to compile based on input from SIFMA members and many of our working sessions, really just the work that needs to get done. The tick list of items that firms need to be thinking through as they implement these changes.

Joe Seidel: That’s a healthy list. So then turning to the asset managers, Bill, what is the buy side’s view of the new rules and how are they preparing for the change? And then can you walk us through the SIFMA documentation program?

William Thum: Sure Joe, and I think it’s important to point out and Brendan mentioned this, it sounds like there’s upwards of 7,000 new participants that need to come into the cleared space, which is a tremendous lift in the limited amount of time that we have. So, SIFMA has focused on several work streams. One is education. So, getting the word out that the clearing mandate is upon us. Also, determining what issues, what regulatory issues our members face in terms of their being able to access the clearing market and how can SIFMA play a role to resolve those regulatory issues. And then documentation. 7,000 members will need to sign up documents and start clearing. Existing participants will need to upgrade their documents to a market standard.

What SIFMA has done is to focus first on the existing model. So it’s a limited model in terms of its deployment to date, but the “Done-With” model, this is where a market participant does a trade with its clearing member and that clearing member then clears the trade. So we have published, as Rob pointed out in September, a market standard clearing agreement, which is composed of an agreement, a schedule to the agreement and then modules to that schedule, which highlight different modes of clearing. That was published in September. We’re also looking to publish an annex that applies the same approach in the master agreement and applies it to existing MRAs and JIMRAS. That can be used by market participants that are new to clearing but have those bilateral trading agreements at present to add a clearing component.

We’re also looking to publish an amendment agreement and that amendment agreement will be useful for those that are already clearing the 13% to 20% of the market that’s already clearing on the buy-side and to upgrade their contracts to be consistent with the new market standard clearing agreement that we published. So that’s with respect to “Done-With.” And I think it’s important to point out that in producing that market standard document, what we tried to do is address a balanced approach in the terms. So rather than have the agreement be one sided, either for the sell side or the buy side, where there are optional approaches that could be used, we’ve included those optional approaches in the schedule. And depending on parties’ commercial relationships, they can elect the appropriate approach for their contract. So all the different varieties of terms that would be appropriate due to commercial reasons are in the schedule to the master clearing agreement. So parties have a lot of transparency to use that balanced agreement.

For the “Done-Away” contract, it’s a little more complex because we really don’t have a “Done-Away” market in cleared repos at this point. So in addition to thinking about how the documentation will be structured, we have to address things like how market structure will work. Brendan mentioned how the trading mechanics will work, and SIFMA has been pulling together clearinghouses, trading venues, middleware suppliers, and buy and sell-side to talk about how ideally going forward the market structure will function. Once we get that clarified, that in addition to several regulatory issues that we have to address, then we can move forward with the documentation for “Done-Away”.  And buy-side market participants are particularly interested in this because it will allow them to trade with a variety of counterparties and then have those trades cleared with their clearing members. They no longer have to only trade with their clearing member. They can trade across the street. Assuming we can address all of those different topics and resolve them and get started on the “Done-Away” documentation, which will be based on the “Done-With” documentation, we’re hoping we can publish a “Done-Away” form in the spring. And that will allow those 7,000 market participants to have their choice between “Done-With” and “Done-Away”, get their documentation in place, and start to build liquidity within the system.

Joe Seidel: So Bill, one of the things that I think is underappreciated sometimes on the regulatory side is the so-called papering or repapering exercise that is going to have to be done with this documentation. Could you maybe explain the scope of what’s going to be necessary in that regard, both for the March and December dates next year (2025) and just sort of give a little bit of color on what that entails as well as what the lift might be for the industry in order to achieve that in those time frames?

William Thum: Right, and some would say it’s an impossible lift to achieve in that timeframe, but we’re doing everything we can to try to accommodate that timeframe. So as I said, the documentation will be published. We’re also looking into systems, documentation systems where parties can build their own agreement and negotiate the agreement online, have the terms checked and approvals recorded for variations to their preferred standard terms. And then once the agreement is concluded, the terms will be recorded in a database that can be used to drive their margin management systems, can be available to the front office and to risk teams. So this is a much more dynamic way of looking at the documentation. And we hope and believe that it will be a much more efficient way.

In the past, even signing up an MRA could take anywhere from 6 months to 18 months. We just don’t have that time at this point. So we’re really trying to create not only standard documentation to make it more efficient, but also a more efficient way to get the job done. So parties can build their own documents, reach an agreement, get them signed, get those terms in their systems to drive all their different functions, and then move ahead with clearing. But it’s a big task. We’ve got the “Done-With” done at this point, and we’re moving into the “Done-Away.” Unfortunately, we’re running multiple work streams that should have been sequenced ideally. Ideally, we’d have the regulatory issues resolved, then we’d address market structure, and then we’d do the documentation. We’ve had to do it all at once, and they all are interrelated. But we’re doing the best we can, and I think certainly for the “Done-With”, market participants are well set to get those documents started now, and with “Done-Away,” we should be ready to go in the spring.

Joe Seidel: Thank you. Steve, let’s bring you in here. The operations professionals had a heavy lift leading up to the move to T+1, which was completed just 6 months ago. How are they preparing for the coming effective dates of the rule with the first being just a few months away? What is the most meaningful part of the report for them?

Stephen Byron: Sure, and that’s right, Joe. There are a couple of differences I would call out from the recent T+1 migration that the industry just went through. Firstly, the consensus from our members is that the treasury clearing implementation is more complex than the T+1. It touches many parts of the firm’s infrastructure from re-documenting clients, new accounts set up, trade execution through margin and settlement. So unlike T+1 though, this will not be a big bang implementation. So we expect volume to move to clearing in advance of the implementation days as and when firms are ready.

Now, whilst the implementation is spread over 3 delivery dates from March 2025 through mid-2026, we recommend that firms start work immediately if they haven’t already. Given the scope of the regulation, firms need to understand the impact of the changes to their business, clients, and affiliates, starting with the March implementation. Now, the report includes input and subject matter analysis, which was received from over 200 market participants, representing 70 firms on both the buy-side and the sell-side. That information was gathered from eight informational work streams hosted with SIFMA member firms and focused on key areas of change. Secondly, we gathered information for a survey that was issued to SIFMA member firms. And thirdly, there were a number of bilateral and smaller group conversations with market participants. So this report is a great starting point for firms as they assess the impact of the changes to them.

Now, Joe, I did want to take a moment just to summarize the primary objectives of the report. So the first objective of the report is really to provide the industry with an implementation blueprint that industry participants can follow and understand what their implementation priorities should be. It will help firms identify the key steps to operationalize change across different clearing access models. It will surface the key issues that Brendan worked through. It will raise open questions and gaps in market structure and provide recommendations on the path to resolution. It will also provide insights on implementation dependencies across work efforts where possible. And we hope it will serve as a good educational resource on the rule and its implementations. Now, as members digest this report and move to the implementation phase, SIFMA stands ready to help firms address any shared industry-wide concerns that emerge from this.

Joe Seidel: So Steve, in terms of your experience and as an operations professional, you would sort of expect that your counterparts at the firms, any firm who’s sort of involved in this, involved in Treasury repo in what will be covered by the clearing, you would expect that the operations professionals should have, if they haven’t already, have relatively material budget sort of allocated for this as they prepare for 2025. I mean, in terms of the lift they’ll have to do and the size of it, something that probably may or may not have been expected.

Stephen Byron: Yeah, absolutely, Joe. I think that, from a budget perspective, it’s going to hit in multiple, it will help firms in multiple places from obviously the technology budget for the actual technical implementation, but also from an operations perspective in terms of if there is, if a firm does, is required to go out and repay per clients, there’s obviously a large lift there from both an operations perspective, but also potentially from a legal perspective in terms of working through that documentation element. I’d certainly think, as firms also look through the changes that may occur to them from a margin perspective, there could be changes that are required systematically to margin systems. So firms should also be working with their clearing firms to understand how their margin will be structured under the new rules and working on resolution there.

Joe Seidel: And presumably this will be alongside several other regulatory projects the firms are already budgeting for.

Stephen Byron: That’s right. And obviously there continues to be a heavy regulatory ask of firms across the board. So, this is one that the firms we’ll need to prioritize amongst that.

Joe Seidel: Thank you. So then, before we conclude, any overall takeaways that anyone in the group would like to add or everyone in the group would like to add?

Robert Toomey: Well, one thing I’d want to add, Joe, and just kind of underscore what’s been communicated, I think, thus far is that conversations, market participants need to be having conversations with their customers and counterparties now to dimension this. And you’d be surprised how many folks that are participants in the Treasury market are either unaware or unaware of how this might affect them. So I think those conversations, in order to meet these deadlines for firms that are in the know, they’re going to have to make sure their counterparties who are not in the know, know. And I think those conversations have to be happening now.

William Thum: Yeah, I would underline that, Rob. I think it’s a great point. The reality is, even with efficient documentation and understanding how things work, and a desire to get it done for 7,000 new market participants, let alone the existing ones, to upgrade their documentation and get everything in place, there are a limited amount of people in the seats on the sell side that can handle this. There is a limited pipeline that can get through. The earlier you get involved in these discussions, the earlier that you start to work on the documentation and get the plumbing in place, and the more likely it is that you will not be left out in the cold should the existing mandate dates stand. So get started now.

Joe Seidel: All right. Well, thank you, Brendan, Rob, Bill, and Steve for this discussion, and thank you all for listening in today. To read the report and to learn more about SIFMA and our work to promote effective and resilient capital markets, please visit us at www.sifma.org. Thank you.

–

Joseph Seidel is Chief Operating Officer of SIFMA. 

Brendan Maher is Managing Director, Financial Services Consulting at Ernst & Young LLP

Robert Toomey is Head of Capital Markets/Managing Director and Associate General Counsel at SIFMA.

Stephen Byron is Managing Director, Head of Technology, Operations and Business Continuity at SIFMA

William Thum is Managing Director and Associate General Counsel, Asset Management Group at SIFMA. 

Related Resources

• Report

  US Treasury Central Clearing: Industry Considerations Report

• Industry Briefing Replay

  Industry Briefing: US Treasury Clearing Report