With the expansion of central clearing in U.S. Treasuries on the horizon, FICC stands at the center of a monumental industry initiative.
The Securities and Exchange Commission (SEC) has published rules that will require the clearing of certain cash U.S. Treasury security transactions by the end of 2025 and U.S. Treasury repos by the middle of 2026, as well as facilitate access to client clearing. I had the chance to discuss the opportunities and challenges surrounding this initiative as part of the Preparing for SEC Rules panel at the ISDA/SIFMA Treasury Forum in New York on June 5.
As we prepare for the upcoming mandate, FICC has now submitted three regulatory filings prescribed under the SEC’s Treasury Clearing rule, including the filing implementing the clearing requirement into FICC’s Government Securities Division (GSD) rule book. Based on industry feedback, we plan to also roll out other rule changes for service enhancements to accommodate different types of activity, including the introduction of cross-margining between FICC and CME for end-user clients.
Industry Feedback
FICC conducted an industry survey throughout April and May, the purpose of which was to further build out the industry’s collective understanding of the implications of the SEC’s final Treasury Clearing rules to expand central clearing activity in the U.S. Treasury Market This included a more refined estimate of the increased volumes of transactions required to be submitted for central clearing and other important aspects of how margin and risk management resources may be impacted.
Through our findings, we now estimate a daily increase in Treasury volumes by $4 trillion — on top of the average $7 trillion FICC already clears on a daily basis. The survey also found that almost 30% of sell-side institutions responded that they plan to facilitate cleared U.S. Treasury activity out of their Prime Brokerage, Agency Clearing, or Futures Commission Merchant business lines, all of which traditionally offer “done-away” execution as part of their core client clearing services.
We are developing a report to the industry to share the details on these and other findings of the survey in the coming weeks.
New Calculator Tools
FICC just launched a public-facing Capped Contingency Liquidity Facility (CCLF) Calculator in May to simulate estimated default liquidity obligations associated with FICC GSD Netting membership. Market participants can input their current unique settlement activity into the calculator to estimate and understand the CCLF-related default liquidity obligations that could arise from Netting membership.
A public Value-at-Risk (VaR) margin calculator is also planned for release at the end of June. What makes these two tools different from anything DTCC has done before, however, is that these calculators are not just for the exclusive use of members, they are public. This means that as firms consider their best path forward to access central clearing to comply with the SEC’s Treasury Clearing rules, these risk tools can provide the necessary transparency and support as firms evaluate the different types of membership and models with GSD.
Customer Segregation Regime
The new margin segregation rules will be the first to go into effect by no later than March 31, 2025. Customer related margin and house related margin will need to be separated, both physically and legally. While this is common among other asset classes, this is a new concept for the Treasury market.
Customer posting of margin will be optional and not required. However, if a customer does post margin, FICC will need to segregate customer related position-keeping accounts and related customer margin. This change presents an opportunity for market transformation and the ability to create a state-of-the-art customer protection regime, including the ability to cross margin. Adding more products to cross-margin with CME provides increased efficiency and the ability to offset costs. FICC and CME are working closely to bring this new type of margin efficiency to the market in time for the clearing mandate, subject to regulatory approval.
Top Areas of Focus
Looking at the current landscape, we still have several key questions to sort out regarding accounting, liquidity and workflow that must be emphasized, including:
- What is the exact accounting treatment for each of the access models? This is critical because the accounting treatment used will impact capital, drive capacity, and ultimately, impact pricing.
- What are the impacts of a firm’s trading activity on default liquidity obligations? Done-away activity, in particular, can attract default liquidity obligations because it is typically street-facing activity where the CCP could have a liquidity obligation in the event of a default of the clearing intermediary.
These two areas can provide needed focus to crystalize pricing for Treasury Clearing activity, particularly for done-away activity.
- What will be the workflow for “done-away” activity in Treasury clearing? Workflow needs will vary among intermediaries, with the needs of FCMs facilitating done-away activity being significantly different than those facilitating “done-with” principal activity – there is a critical need for the industry including the relevant vendors to come together and design the workflow so that the CCP’s transaction processing can be adjusted as needed.
The implementation of the changes to the GSD Rules begins March 31, 2025, and the final rule changes must be implemented in full no later than June 30, 2026. As the industry moves closer to these deadlines, success will require full participation and collaboration given the complex level of lift for legal and documentation work.
We will continue our role of moving the industry forward with weekly office hours, webinars and client engagement. More information is available at ustclearing.com.