The Securities and Exchange Commission (SEC) has adopted major rule changes for the $26 trillion US Treasury market requiring more trades to be centrally cleared.
The US watchdog is looking to bolster risk management practices for central counterparties in the US Treasury market and facilitate additional clearing of US treasury securities transactions through forcing some cash Treasury and repos to be centrally cleared.
The SEC stated that additional rule changes are designed to reduce the risks faced by a clearing agency and incentivise and facilitate additional central clearing in the US treasury market.
“Today’s adopting release addresses clearing of treasury securities in two important ways,” said Gary Gensler, SEC chair.
“First, the final rules make changes to enhance customer clearing. Second, the final rules broaden the scope of which transactions clearinghouse members must clear. I am pleased to support these rules because they will help to make the treasury market more efficient, competitive, and resilient.”
New amendments from the SEC also 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, subject to certain conditions.
Elsewhere, the amendments require covered clearing agencies in this market to collect and calculate margin for house and customer transactions separately.
Policies and procedures designed to ensure that the covered clearing agency has appropriate means to facilitate access to clearing are also required as part of the amendments, including for indirect participants.
Kevin McPartland, head of market structure and technology research at Coalition Greenwich noted in a social media post that “finally [there is] some clarity from the SEC on Treasury and repo clearing. Bottom line: most repo must be cleared; Treasury trades between dealers must be cleared; dealer and customer margin must be kept separate.”
The SEC stated that the amendments also include an exemption for transactions in which the counterparty is a central bank, sovereign entity, international financial institution, or natural person.
“DTCC remains committed to supporting the industry and providing solutions that enable compliance with the expanded treasury clearing rule,” the firm said in an issued statement.
“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. At the same time, we will continue to facilitate industry discussions and provide education and leadership around this important topic, as we work together towards a successful implementation.”
BNY Mellon’s head of market structure, Nathaniel Wuerffel, labelled the development as the most important day for the structure of ‘the world’s most important market in decades’, in a social media post.
“In finalising the rule the commission made key adjustments from the proposal that narrow the scope in the cash market and allow for inter-affiliate transactions,” he said. “Importantly, cash market transactions will have two years for implementation and repo will have two and a half years. This is better than expected and important for a smooth transition.”