On December 13, 2023, the Securities and Exchange Commission (SEC) made a landmark decision by voting to adopt significant rule changes mandating central clearing of certain secondary market transactions within the U.S. Treasury market.
These transactions include repurchases (repos), reverse repurchases (reverse repos) and U.S. Treasury securities. The rule change, one of the most substantial reforms in decades, aims to reduce risk and increase efficiency in the U.S. Treasury markets by introducing a clearinghouse to facilitate transactions between buyers and sellers.
Changing Treasury Market Regulations
According to an SEC press release, The Treasury Market, valued at $26 trillion, serves as the backbone of our capital markets. However, only a small portion—20% of repos, 30% of reverse repos, and 13% of Treasury cash transactions—are centrally cleared via the Fixed Income Clearing Corporation (FICC), the only Covered Clearing Agency (CCA) offering clearing services for such transactions.
Covered Clearing Agencies (CCA) act as an intermediary between buyers and sellers, ensuring efficient transaction settlement by netting transactions on behalf of each counterparty and requiring margin from both parties to mitigate the risk of default. The low percentage of Treasury securities cleared through CCAs underscores significant industry-wide risk, which centralized clearing requirements aim to mitigate.
To support the migration, the Fixed Income Clearing Corporation (FICC) must:
- Establish policies and procedures outlining how participants will clear all eligible transactions.
- Develop policies and procedures to calculate, collect, and hold a participant’s margin, separating proprietary and customer transactions.
- Implement policies and procedures to facilitate access to clearance and settlement services.
- Propose rule amendments for Rule 15c3-3 (the Customer Protection Rule) to permit margin required and on deposit to be included as a debit in the customer reserve formula.
Important Compliance Dates
The SEC will enforce the new requirements using a phased approach:
- By March 31, 2025, the FICC must propose necessary rule changes regarding the separation of house and customer margin, the broker-dealer customer protection rule, and access to central clearing.
- By December 31, 2025, direct participants must clear eligible cash transactions through a CCA.
- By June 30, 2026, direct participants must clear eligible repurchase and reverse repurchase transactions through a CCA.
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