The US Securities and Exchange Commission (SEC) has approved a move to force a bigger slice of trades in the $26 trillion Treasury market to be cleared centrally, which would mean market participants have to stump up collateral to back those positions or cap the amount they can borrow in repo trades.
Ragu Raymond, director of Collateral Management Business Development and Client Success at Baton Systems, said in an emailed statement:
“The market in 2024 needs more clarity as to what percentage of the US Treasury and Repo trading book will be subject to mandatory clearing. If clearing becomes mandatory for certain trades but not all there is a risk of creating a bifurcated market structure with different pools of liquidity for trades that are newly cleared versus those that remain bi-lateral, introducing previously unencountered costs and hurdles.
“Firms will be forced to adhere to more restrictive collateral schedules as most CCPs only accept high quality liquid assets (HQLA), whereas bi-lateral OTC repo provides a greater degree of flexibility. This has benefits from a transparency and market stability perspective, but you have to balance that out with higher costs on the collateral side, from CCP fees and an operational processes perspective.”
Jo Burnham, Risk & Margining subject matter expert at OpenGamma, said in an emailed statement:
“This is bringing about a seismic change to the behemoth that is the US Treasury market. The move, while aimed at enhancing market transparency and mitigating systemic risks, introduces multiple challenges for various market participants. Due to the additional costs likely to be incurred, hedge funds traditionally favorable to the bilateral world may need to reallocate significant resources to implement the necessary infrastructure for centrally clearing more US treasuries.
“For those without the internal resources to optimize the way that they post collateral, there could be even bigger headaches just around the corner. Mandatory clearing often involves the use of collateral to secure trades. Therefore, many money market funds are likely to face issues around sourcing eligible collateral, not to mention monitoring collateral requirements to meet clearinghouse standards.”
Marc Natale, global head of presales and marketing at Murex, said in an emailed statement:
“Mandatory clearing of US Treasuries and US Treasury repo will require market participants to post more collateral at CCPs, bringing with it greater operational work for sourcing and then posting the required collateral. Those affected by the new rules will need collateral management systems that are flexible and agile in identifying what the most eligible collateral is across their desks and how they mobilize it for posting at CCPs.”
DTCC said in a statement:
“The SEC recently issued rule amendments around its 2022 expanded US treasury clearing proposal, bringing added regulatory clarity around the scope of the clearing requirements and implementation timelines. The final rules require a significantly larger portion of the US Treasury cash and repo markets – specifically certain eligible secondary market transactions – to be centrally cleared by December 31, 2025 for cash transactions and June 30, 2026 for repo transactions. As a covered clearing agency, FICC will take the necessary steps as required under the amendments to prepare for this significant initiative.
“DTCC remains committed to supporting the industry and providing solutions that enable compliance with the expanded treasury clearing rule. We are prepared for this significant undertaking and will continue to evolve our access models and enhance capital efficiency whenever possible to effectively support our clients. At the same time, we will continue to facilitate industry discussions and provide education and leadership around this important topic, as we work together towards a successful implementation.”