On December 13, The Securities and Exchange Commission (SEC) today adopted rule changes to address risk management practices for central counterparties in the U.S. Treasury market and facilitate additional clearing of U.S. Treasury securities transactions. The rule changes update the membership standards required of covered clearing agencies for U.S. Treasury markets with respect to a member’s clearance and settlement of specified secondary market transactions. Additional rule changes are designed to address the risks faced by a clearing agency and incentivize and facilitate additional central clearing in the U.S. Treasury market. The Commission also approved the 2024 Final Budget and Accounting Support Fee for the Public Company Accounting Oversight Board.
SEC Chairman Gary Gensler, two Democrat Commissioners, Caroline Crenshaw and Jaime Lizarraga, and one Republican Commissioner, Mark Uyeda, supported the proposal, but Republican Commissioner, Hester Peirce, did not support the proposal.
Chairman Gary Gensler said, “Today’s adopting release addresses clearing of Treasury securities in two important ways. First, the final rules make changes to enhance customer clearing. Enhanced access to central clearing can facilitate all-to-all trading, competition, and resiliency in these markets. Foremost, when posting margin to the clearinghouse, members no longer will be able to net their customers’ positions against their own proprietary positions. This will better protect customers as well as the clearinghouse itself. Further, I think it could enhance competition as broker-dealers will no longer be able to use their customer positions to lower the margin they post to the clearinghouse. The final rules also will allow for customer margin collected by broker-dealers to be onward posted to the clearinghouse. Allowing such rehypothecation helps both protect customers and free up broker-dealers’ resources.”
Commissioner Hester Pierce said, “Additional central clearing in the U.S. Treasury market may be one way to strengthen the market to ensure that it can absorb the ever-increasing Treasury issuances, but how we get to increased central clearing matters. The recommendation that the Commission is considering today would commit the market to what may be a reckless ride down the path to mandatory clearing, with no brakes or off-ramps in the event the market takes a bad turn. Accordingly, I cannot support it.”
Commissioner Mark Uyeda said, “This rule adoption will entail substantial costs such as initial margin requirements, clearing fees, and onboarding customers for indirect central clearing. The Adopting Release describes the many steps needed to fully implement the changes. For example, FICC will need to ensure that it has sufficient clearing capacity to handle increased volumes and will need to implement its own rule changes for mandated clearing. Keeping an eye on how these may potentially be reduced or ameliorated as the rule is implemented will be important. Let’s not oversell the idea that today’s action will significantly lower overall systemic risk. While there will be some risk mitigation through central clearing, the prevention of a systemic crisis cannot be addressed through clearing agency regulations. Central clearing will not address broader effects that a rise in interest rates has on the value of fixed income instruments. Indeed, during a crisis, margin calls by a clearing agency may be pro-cyclical and further exacerbate the crisis. Moreover, concentration of activity in a single clearing agency raises other risks. Given the importance of the Treasury market and the possibility of unintended consequences, the need for proceeding with caution and deliberation cannot be overemphasized. I support this rule because of the potential incremental benefits to the Treasury market.”
Commissioner Jamie Lizárraga said, “By reducing risk and fostering liquidity, the rules the Commission is adopting today strengthen the Treasury market. This built-in resiliency will be useful in times of market stress. By bringing the benefits of central clearing to more Treasury transactions, both for cash and repos, the rules the Commission is adopting today are designed to reduce these risks and to prevent future market disruptions. Central clearing can increase market liquidity, reduce counterparty risk, and enhance transparency. By reducing the risk of delivery failures, decreased counterparty risk can also increase liquidity during periods of market stress.”
Commissioner Caroline Crenshaw said, “Today we are considering rule amendments that would bring the benefits of central clearing to more repo and cash transactions involving U.S. Treasury securities, which should lower overall risk in the market. Specifically, the anticipated range of benefits includes decreasing the overall amount of counterparty risk, reducing contagion risk to FICC, helping to avoid disorderly member defaults, and increasing multilateral netting of transactions, which should in turn reduce operational and liquidity risks. Because the benefits of central clearing are proportional to the number of participants, the higher the number of market participants that are clearing their transactions in U.S. Treasury securities, the greater the benefits of central clearing to the market.”
The amendments will go into effect in two phases, with the changes regarding the separation of house and customer margin, the broker-dealer customer protection rule, and access to central clearing required to be completed first, by March 31, 2025. After that time, the requirement to clear specific transactions would go into effect in two phases, with cash transactions being required to be cleared before repurchase transactions are required to be cleared. Compliance by the direct participants of a U.S. Treasury securities central clearing agencies with the requirement to clear eligible secondary market transactions would not be required until December 31, 2025, and June 30, 2026, respectively, for cash and repurchase transactions.