SEC Alert! SEC Proposes Rules to Improve Risk Management in Clearance and Settlement and to Facilitate Additional Central Clearing for the U.S. Treasury Market


Proposed Rule

Specifically, the proposal would require that clearing agencies in the U.S. 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 and reverse repurchase agreements collateralized by U.S. 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.

Statement on Proposed Rules Regarding Treasury Clearing - Chair Gary Gensler

Today’s proposal concerns expanded central clearing in the Treasury cash and repo markets, which have transaction volumes averaging $3 trillion weekly in the cash markets and approaching an average of $4 trillion daily in the repo markets.[3] Broadly speaking, the proposal would put forward changes in two areas: the scope of what is cleared, and a set of reforms related to customer clearing.

First, the proposal would require clearinghouses in this market to require their members to bring in both sides of all of their repo transactions and certain cash transactions. Importantly, this would include cash trades with respect to participants serving as IDBs; participants trading with counterparties such as registered broker-dealers and government securities broker-dealers; hedge funds; and levered accounts held by broker-dealers.

Next, the proposal includes three changes with regard to the customer clearing side.

First, the proposal would strengthen the Commission’s rules for clearinghouses transacting trades in Treasuries, particularly with regards to gross and net margining. Through such rules, members of a clearinghouse would no longer be able to net their customers’ margin against their own proprietary trading (also known as the house’s trading). This would promote greater competition and resiliency in the system by helping ensure that customers’ trades do not depend on their broker-dealers.

Second, the proposal would change the broker-dealer customer protection rules to allow the customer margin that they collect to be onward posted to the clearinghouse, a process known as rehypothecation. These rules would help free up broker-dealers’ resources, which could contribute to added liquidity in the Treasury markets. These rules also would enhance competition throughout the Treasury markets.

We have experience with similar rules regarding gross margining and rehypothecation in the swaps, options clearing, and derivatives markets.

Finally, the proposal would require clearinghouses to have policies and procedures designed to ensure they facilitate access to clearing services for all eligible transactions, including for indirect participants, such as through the use of sponsored clearing. This should promote clearinghouses establishing new models to bring in indirect participants’ trades for clearing in a way that increases access to clearing and settlement services in the Treasury markets.

This is the latest in a number of rules designed to enhance the Treasury markets. We look forward to public comment on all aspects of this proposal.

Statement on Standards for Covered Clearing Agencies for U.S. Treasury Securities and Application of the Broker-Dealer Customer Protection Rule With Respect to U.S. Treasury Securities - Commissioner Mark T. Uyeda

With these proposed amendments, the Commission takes an important step in seeking an improved regulatory framework for the central clearing of Treasury securities. Increasing access to central clearing may result in additional transparency, provide more comprehensive data on trading, and in certain instances, promote sounder risk management practices.

Statement on Treasury Clearing - Commissioner Jaime Lizárraga

First, clearing agencies would be required to direct participants to centrally clear all repo and certain cash transactions in Treasuries in which they are counterparties. Second, the proposal will require clearing agencies to collect margin separately for house and customer transactions in Treasuries. Taken together, both elements may increase transparency, reduce systemic risk, and incentivize more central clearing.

Third, clearing agencies will also be required to take steps to facilitate access to central clearing for additional market participants like pension funds and asset managers. And also for indirect participants like investment advisers and registered investment companies. These steps should reinforce the other elements of the proposal and further incentivize more central clearing.

Fourth, the proposal permits margin required and deposited with a clearing agency to be included as a debit in reserve formula calculations. This amendment should increase liquidity while maintaining customer protection objectives in current SEC rules.

Treasury Clearing Standards for Membership Requirements and Risk Management - Commissioner Hester M. Peirce

I support today’s proposal because it seeks comment on how to address problems we have observed in the Treasury market, not because I necessarily embrace the solution that we are proposing.

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