U.S. Treasury Clearing: Impact on the Buy-Side
Key Takeaways:
- The new SEC rules involving central clearing of U.S. Treasury securities will affect buy-side participants across the financial services landscape, especially those with a global footprint and on cross-border trades.
- Firms should begin preparation by working with their clients to select the appropriate clearing models and look for new documentation regarding done-in and done-away trades.
- FICC has launched two public-facing calculators to help market participants estimate their margin and liquidity obligations.
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The mandate from the U.S. Securities and Exchange Commission (SEC) requiring central clearing of certain secondary market transactions involving U.S. Treasury securities is scheduled to go into effect in 2025 and 2026 — and the ripple of impacts will be felt by buy-side participants across the financial services landscape.
Jim Hraska, DTCC Managing Director, Head of Client Solutions, Agency Clearing Services, spoke with Mike Barrett, Partner, Banking & Markets Practice, Davies Group and Phil Cook, Director, Head of Post-Trade, Tonic Consultancy, about key dates, processes, and other impacts in an ISITC webinar on June 20, moderated by Eric Jiobu, Vice President, Collateral Product Manager, Northern Trust.
Accessing Treasury Clearing for the Buy-Side
The new rules require central clearing for U.S. Treasury cash and Repo trades. Presently, FICC is the only central counterparty available for Treasury clearing, and there are two ways to access U.S. Treasury clearing for these trades: as Direct Participants or as Indirect Participants.
Hraska noted that buy-side participants most likely come in as Indirect Participants. FICC’s open access approach, with several flexible membership types eligible for clearing, has contributed to the significant growth in the sponsored service model, from just $30 billion in 2017 to over $1 trillion currently — a number that is expected to continue to grow.
Related: Industry Pulse Check on the U.S. Treasury Clearing Mandate
The new rules have no cross-border exemption, explained Hraska. If one legal entity is an FICC member in a Repo transaction then the trade will need to be centrally cleared, even if the trade settles outside of the Federal Reserve’s jurisdiction. This part of the ruling will have a major impact on firms with a global footprint and on cross-border trades.
Key Dates and Next Steps
By March 31, 2025, FICC must have their rules updated with all technology in place –including, most notably, the ability to separate firm and customer activity. This is currently done in the sponsored model; however, it is not always done with the Agent Clearing Model (ACM). Cash transactions are required to begin clearing December 31, 2025, and Repo transactions will start June 30, 2026.
The mandate is expected to have a major impact on firms. Ongoing surveys are indicating that many firms are anticipating a substantial change to their business model with noticeable impact to collateral management, capital and balance sheet.
Panelists detailed the two key steps firms should take to prepare:
- Begin working with their clients to select the appropriate clearing models that work best for all parties. Factors to consider are margin, payment obligations, what happens if there is a fail or a default, and the impact on margin and collateral.
- Start working on documentation. In July, SIFMA is expected to release new documentation for done-with trades and documentation for done-away trades should be available later this summer.
Margin Calculations
FICC is looking to expand its current cross-margin program for direct members of FICC and CME to help create offset for clients. For firms that have highly correlated cash and futures portfolios, this can help to manage capital and incentivize margin posting where it may not be happening.
Firms need to take time to carefully think through models and treatment of margin to best manage transaction flow and capital draw on activity. To help clients and non-members alike and to increase transparency, FICC launched a public-facing Value at Risk (VaR) calculator, where users can simulate activity and calculate potential margin obligations on a simulated portfolio for given positions and market value using FICC’s VaR methodology.
Additionally, a new Capped Contingency Liquidity Facility (CCLF) public liquidity calculator was also made available for firms that wish to estimate their future Capped Contingency Liquidity Facility. With the new CCLF public calculator, which went live in May, market participants can input various risk scenarios of their current unique settlement activity into the calculator to estimate and understand the CCLF-related liquidity obligations that could arise from membership.
There is much innovation and activity occurring at FICC as the firm prepares for the changes ahead to support the SEC mandate; visit ustclearing.com to learn more.
