As regulatory changes reshape the financial landscape, it's crucial for finance and compliance professionals to understand and adapt to new requirements affecting central clearing in the U.S. Treasury market.
The Securities and Exchange Commission in December 2023 adopted rule amendments that will require firms to centrally clear eligible Treasury trades by the end of 2025 and repo transactions by June 2026. This includes all repo and reverse repo transactions, all purchases and sales with registered broker-dealers and government securities dealers, and all purchases and sales when acting as an interdealer broker.
With those dates approaching, RSM and other organizations in an Oct. 10 webcast discussed how market participants need to be proactive to remain in compliance with the new SEC standards.
Treasury clearing implementation
As of the webcast, the Fixed Income Clearing Corp. (FICC)—a subsidiary of Depository Trust and Clearing Corp.—was the only currently covered centralized clearing provider for treasuries. During the webcast, a FICC panelist outlined three core modifications to the organization’s rulebook based on the new SEC standards:
- FICC must facilitate access to their clearing services. There is one direct access model and two indirect access models offered by FICC. Market participants will need to find an access model that works best for their organization, from a cost and operational perspective, by engaging directly with FICC or sponsorship through another organization.
- FICC must facilitate the proper margin separation as required by the SEC standard. Firm proprietary and customer margin must be segregated, which is fulfilled through FICC account structure, via the instruction of the market participant.
- FICC must facilitate trade submission for eligible secondary market treasury transactions. The eligible and exemption transactions are explained further within the webcast.
FICC has already filed the rule changes as summarized above with the SEC and is expecting to receive approval by the end of November. The rules will be effectively applied within their rule book likely by February 2025. However, compliance will not be enforced until the dates set forth by the SEC are reached, December 2025 or June 2026, the date in which is dependent based on the treasury transaction type.
Preparing for mandatory clearing
Registration via one of the FICC access models or through third-party sponsorship may take six months to a year to finalize. As such, market participants must act now and work through registration requirements to determine an access model that works best for their organization.
The rule change aims to make the Treasury market more resilient by enhancing transaction transparency and standardizing the transaction process, one panelist said. The update is also meant to reduce counterparty risk (of, for instance, default) by requiring a centralized clearing agency to guarantee the performance of the transaction contract.
Some sponsored repo programs are expected to see growth as they facilitate access to FICC for clearing on behalf of market participants, creating operational and cost efficiencies.
Organizations with such sponsorship services need to ensure their systems are resilient to accommodate for the increased amount of treasury activity.
Market participants may need to shift their operations and financial planning to accommodate the new clearing requirements, said another panelist. Some steps organizations can take in the coming months include:
- Ensuring customer assets are properly protected and segregated from house margin by March 31
- Establishing a clearing access model with a centralized clearing agency or a sponsorship model that works best for their organization
- Updating policies and procedures, specifically those related to risk management and transaction processing to ensure that transactions involving Treasury are cleared completely and accurately and margin requirements are managed accordingly.
- Communicating upcoming changes to both employees and clients to ensure both parties are aware of potential operational adjustments
For more information, watch the recorded webcast below.
