SEC proposes new central clearing rules for US Treasury market

Dan Barnes
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US market regulator, the Securities and Exchange Commission (SEC) has proposed rule changes to enhance risk management practices for central counterparties in the US Treasury market and facilitate additional clearing of US Treasury securities transactions.

The proposed rule changes would update the membership standards required of covered clearing agencies for the US Treasury market with respect to a member’s clearance and settlement of specified secondary market transactions. Additional proposed 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.

“The Securities and Exchange Commission plays a critical role in how the Treasury market functions, including to help ensure that these markets stay efficient, competitive, and resilient,” said SEC chair Gary Gensler. “One aspect of that role is our oversight of clearinghouses for Treasury securities. While central clearing does not eliminate all risk, it certainly does lower it. In 2017, however, only 13% of Treasury cash transactions were centrally cleared. Thus, I think there is more work to be done with respect to the amount of Treasury activity that is centrally cleared. I think that these rules would reduce risk across a vital part of our capital markets in both normal and stress times. This advances our three-part mission.”

Specifically, the proposal would require that clearing agencies in the US Treasury market adopt policies and procedures designed to require their members to submit for clearing certain specified secondary market transactions. These transactions would include: all repurchase (repo) and reverse repurchase (reverse repo) agreements collateralised by US Treasury securities entered into by a member of the clearing agency; all purchase and sale transactions entered into by a member of the clearing agency that is an interdealer broker; and all purchase and sale transactions entered into between a clearing agency member and either a registered broker-dealer, a government securities broker, a government securities dealer, a hedge fund, or a particular type of leveraged account.

With respect to customer margin, the proposal would permit broker-dealers to include margin required and on deposit at a clearing agency in the U.S. Treasury market as a debit in the customer reserve formula, subject to certain conditions. In addition, the proposal would require clearing agencies in this market to collect and calculate margin for house and customer transactions separately. Finally, the proposal would require policies and procedures designed to ensure that the clearing agency has appropriate means to facilitate access to clearing, including for indirect participants.

A public comment period is open for feedback on the proposal.