On 13 December 2023, the U.S. Securities & Exchange Commission adopted the amendments to the Rule 17 CFR Parts 240 [Release No. 34-99149; File No. S7-23-22], RIN 3235-AN09 promoting central clearing of U.S. Treasury securities transactions designed to improve risk management practices, reinforce market stability and resilience.
About the U.S. Treasury securities Clearing regulation
The U.S. Treasury market is a key engine of the global financial system. It is a monetary policy tool for the U.S. Government and Federal Reserve as well as financing and liquidity provider for market participants across the globe. In June 2024, the U.S. Treasury market size was estimated at USD 27 trillion (in total value)[1] with approximately 70% of uncleared transactions. Having the largest market in the world dominated by bilateral transactions (i.e., uncleared) prompted the Securities & Exchange Commission to adopt the following Rule amendments:
- Updating policies and procedures of Covered Clearing Agencies[2] providing central counterparty services on U.S. Treasury securities transactions (including requirement to calculate, collect and hold margin distinguishing between direct participants proprietary and customer activities)
- Requiring Covered Clearing Agencies direct participants to submit for clearing and settlement all eligible secondary market U.S. Treasury securities transactions
- Reinforcing the broker-dealer customer protection rule 15c3-3 to permit margin required and on deposit with Covered Clearing Agencies to be included as a debit in the reserve formulas for accounts of customers and proprietary accounts of broker-dealers
All to address systemic risk concerns, protect investors, reduce exposure risk and promote market efficiency.
Scope and timeline of the U.S. Treasury securities Clearing regulation
The material scope of upcoming regulation is limited to U.S Treasury secondary market transactions executed as follows:
- All purchases and sales of U.S. Treasury securities (cash transactions) executed between direct participants who are acting as interdealer brokers; or such transactions executed between direct participants and a registered broker-dealer, a government securities dealer or broker
- All repurchase and reverse repurchase agreements (“repos”) collateralized by U.S. Treasury securities to which a direct participant is a counterparty
The Rule provides for number of exemptions. For example, eligible cash, repo and reverse repo transactions in which one counterparty is a central bank, a sovereign entity, an international financial institution, or a natural person. Further, eligible repo transactions between a direct participant and either a state or local government or another clearing organization or an affiliate. Last, securities lending transactions (under Master Securities Lending Agreement) and U.S. Treasury securities primary auctions are also excluded.
The U.S. Treasury securities Clearing regulation will be deployed in phases throughout 2025 and 2026. Eligible cash transactions mandatory clearing will be activated as of 31 December 2025, whereas eligible repo and reverse repo transactions clearing as of 30 June 2026.
Impacts of the U.S. Treasury securities Clearing regulation
Currently, the U.S. Treasury securities clearing landscape is dominated and supported by DTCC FICC[3] infrastructure. Latest DTCC report “The U.S. Treasury Clearing Mandate: An Industry Pulse Check”[4] highlights that as of June 2024 FICC clears daily an average of USD 7.5 trillion (in total value). This number is expected to grow by more than USD 4 trillion, fuelled by additional volumes from indirect participants and executing broker customers activities.
The Covered Clearing Agency arena may change in the future as some Clearing Houses publicly expressed their interest to obtain operating licenses from the regulators and be recognized as an alternative to DTCC FICC.
With respect to eligible counterparties, both sell-side and buy-side firms need to assess their trading patterns, connectivity to DTCC FICC and launch preparatory work to meet regulatory compliance. The qualifying standards for sell-side and buy-side firms vary and depend on DTCC FICC (or other eligible Clearing House) terms and conditions. All counterparties are encouraged to:
- Identify in-scope trades and their nature (e.g., done-with[5] or done-away[6] transactions)
- Determine clearing model needs (e.g., sponsored[7] or agent clearing[8] models)
- Assess qualifying requirements to access DTCC FICC ecosystem
- Arrange for ad hoc DTCC FICC account structure in support of clearing and margin segregation requirements
- Execute legal documentation covering U.S. Treasury securities cleared transactions lifecycle (supporting of pre and post trade processes)
- Align operating model across pre and post-trade activities (including with service providers in charge of middle office, collateral management and custody processes)
Considerations
The U.S. Treasury securities Clearing regulation is a step toward market integrity and avoidance of systemic event. Reducing overall exposure to bilateral transactions and implementing best practices are key objectives for the industry as whole.
BNP Paribas continues to follow closely this regulation as industry is expecting further clarifications from the regulators with respect to done-away transactions clearing and operating impacts.
Links
[1]Source: SIFMA Research August 2d, 2024
[2]Covered Clearing Agency is a Central Clearing Counterparty. In the U.S. sole recognized CCP to this date is DTCC FICC
[3]DTCC FICC – The Depository Trust and Clearing Corporation and it`s subsidiary The Fixed Income Clearing Corporation
[4]FICC_Industry_Pulse_Survey_Result_15Jul2024.pdf
[5]Done-with transactions executed and cleared by the same broker-dealer
[6]Done-away transactions executed by one broker-dealer and cleared by another broker-dealer
[7]Sponsored model – direct participant broker-dealer (i.e. Sponsoring member) provides indirect participant its counterparty (i.e. Sponsored member) with access to DTCC FICC for clearing purposes
[8]Agent clearing model – direct participant broker-dealer (i.e. Agent Clearing member) provides executing broker-dealer customer with access to DTCC FICC for clearing purposes