The Depository Trust & Clearing Corporation (DTCC) issued a new white paper, Making the US Treasury Market Safer for All Participants: How FICC’s Open Access Model Promotes Central Clearing, that explores how to advance central clearing around US Treasury transactions.
The latest paper from DTCC’s subsidiary, Fixed Income Clearing Corporation (FICC), describes how FICC’s long-standing “open-access” approach provides the flexibility necessary to allow a wide variety of market participants to access central clearing, while also ensuring impartiality and fairness. It also compares and contrasts key differences between the cleared US Treasury market and the cleared swaps market, as well as important considerations for implementing a possible clearing mandate.
The paper suggests that it is important to consider the significant differences between markets when developing market regulation. For example, several market participants who do not engage in the swaps market are critical liquidity providers to the US Treasury market.
The systemic risk mitigation objectives of a clearing mandate will not be achieved if those market participants cannot effectively access clearing. The paper details the variety of client clearing models for US Treasury cash and repo transactions, including correspondent clearing, prime broker clearing and sponsored clearing via FICC’s Sponsored Service, to allow market participants to select the model that best addresses their needs.
Murray Pozmanter, head of Clearing Agency Services and Global Business Operations at DTCC, said in a statement: “The benefits of such a move are significant, including a reduction in settlement and counterparty risk, lowering the risk of market disorder and fire sales and enhancing market access and liquidity. However, in order for such an effort to be implemented effectively and deliver upon risk management objectives, considerations must be given to current market practices and approaches as mandates are developed. We look forward to working with regulators and the industry on this important effort.”
To advance this critical initiative, DTCC will continue its work with the industry to ensure that all firms looking to access clearing, either on a voluntary or on a potentially mandatory basis, can do so in an impartial and fair way.
Speaking at an analyst briefing, Laura Klimpel, general manager of FICC and head of SIFMU Business Development at DTCC, said that the post-trade services provider is open to changing its models, pointing to a current proposal in the works to enhance its existing cross-margining capabilities with CME Clearing . This would be expected to, for example, “allow more margin efficiencies between market participants repo’ing in cash positions versus interest rate derivatives positions,” she explained.
The paper also looks at the implications of a “give-up” model, in which the clearing member is underwriting the risk of its client to FICC for transactions executed between the client and a third-party market participant that is either itself a FICC clearing member or a client of another FICC clearing member. In other words, the clearing firm is a conduit that gets compensated by fees to take on the credit exposure of the client to the CCP. This model accounts for the vast majority of the $80+ billion of daily clearing and settling activity via FICC’s correspondent clearing and prime broker clearing models.
“The challenge you have when you look at the diverse array of market participants that we have in the Treasury market, whether it be money market funds, beneficial owners, mutual funds, (they) will really struggle in that modality because all of their cash gets invested. They don’t have cash sitting around idle to cover margin calls, to cover mark to market fees,” Klimpel explained. “It’s not going to be one size fits all, we really need all of these models to make sure that everybody that either wants to come in voluntarily or potentially has to come in for a mandate can come in in a way that is fit for purpose for them.”