Mandatory central clearing for US treasuries

U.S. Treasury central clearing: preparing for profound structural market change

U.S. Treasury clearing: how market participants can prepare for the new mandate. Learn more.
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The SEC’s rule on central clearing for treasury cash purchases and sales trades and repo transactions signals a new chapter for US capital markets. Understanding and preparing for these changes is paramount. As we approach the implementation deadlines, we encourage market participants to familiarize themselves and consider the insights contained within the report. We invite you to explore the full report [U.S. Treasury Central Clearing] on the SIFMA website, to help equip your organization with the knowledge that is essential to prepare for a transition to the new regulatory framework.

The U.S. Treasury Central Clearing Industry Considerations Report is designed to capture and organize the various considerations and activities that market participants should evaluate while assessing and completing preparations for the upcoming SEC rule compliance dates. It includes input and subject-matter analysis from market participants on both the buy-side and sell-side gathered 1) via a survey issued to SIFMA member firms by SIFMA and EY US, 2) from information workshops hosted with SIFMA member firms, and 3) from bilateral conversations with market participants.

This report is intended to be utilized by sell-side and buy-side market participants as a guide while they implement changes in response to the USTC requirements. The primary objectives of this report are to:

Provide an implementation blueprint for industry participants on implementation priorities.
Identify the key steps to operationalize change across different clearing access models.
Surface key issues, open questions and gaps in market structure and provide recommendations on the path to resolution.
Provide views on the target-state transaction lifecycle from execution through margin processing, including proposed high-level transaction flows.
Provide insights on implementation dependencies across work efforts where possible.
Serve as an educational resource on the rule and its implications.

Implementation themes

As the financial industry braces for the implementation of U.S. Treasury clearing, a set of common themes has emerged, highlighting the key adjustments that market participants need to undertake. The comprehensive report provides additional details on these themes, with the following summary offering a strategic guide:

1. Market participants will need to obtain or expand access to clearing:

A significant amount of activity in the U.S. Treasury markets is not centrally cleared today. Firms engaging in these activities must now secure or broaden their clearing access to satisfy customer or business capacity needs.

2. Certain Netting Members will need to change their FICC account structures by February 2025:

As per the FICC proposed rulebook updates redefining their account structures and intended activity, by February 2025, certain Netting Members will need to bifurcate proprietary activity and customer (or affiliate) activity into separate FICC accounts.

3. Market participants need to decide on the approach and methods for margining customer activity:

Direct participants should consider the operational, funding and balance sheet implications posed by segregated and non-segregated margin, and work with customers to determine a margin model that is best suited for client and business needs.

4. Segregated customer margin flows need to be designed in accordance with FICC timelines and limitations:

Institutions opting to collect customer margin for posting to the FICC segregated margin accounts will need to tailor existing margin operations, processes and systems to integrate smoothly with the FICC Clearing Fund’s timelines and meet the specific requirements of the FICC's framework.

5. Adequate industry access to clearing for cash purchases and sales is critical to avoid negative impacts on market liquidity and volatility:

Ensuring sufficient clearing capacity for cash transactions in U.S. Treasuries is vital to prevent liquidity and volatility disruptions. Since approximately 50% of U.S. Treasury cash purchases and sales is uncleared today, facilitating a seamless shift to mandatory clearing for cash purchases and sales will be critical to safeguard market liquidity and stability.

6. Adoption of a done-away model requires expansion of existing platforms, technologies and commercial buy-in from direct participants:

Many market participants view the adoption of done-away model to be critical to the transition of U.S. Treasury clearing, as this model enables buy-side entities to clear transactions while maintaining existing broker relationships. This shift necessitates new technological solutions to address current market infrastructure gaps.

7. New entrant covered clearing agencies (CCAs) will require industry-wide structure changes:

Multiple firms have indicated their intent to register as CCAs for U.S. Treasury clearing. As emerging CCAs prepare to disclose their services and rules, market participants must proactively assess the impact on their operations within a multi-CCA landscape.

8. Industry practices may be needed to provide reference data for identifying in-scope activity:

The establishment of industry-wide practices (e.g., self-disclosing process, standard industry data source) to identify legal entities subject to mandatory clearing may be necessary to help market participants obtain accurate identification of activity in scope for mandatory clearing.

For tailored guidance and strategic advice, we encourage you to contact our EY professionals, who are ready to assist your organization in navigating this regulatory-driven transformation.