Major market players say the industry needs a breather to catch up to the regulator’s requirements.
The SEC’s decision to move key deadlines for its own rule requiring centralized clearing for U.S. Treasuries and Treasury-backed repurchase contracts that were formerly cleared bilaterally has been met with approval by major industry participants.
However, major market players acknowledge that the industry needs a breather to catch up to the regulator’s requirements.
In particular, the SEC extended the compliance dates “by one year to Dec. 31, 2026, for eligible cash market transactions, and June 30, 2027, for eligible repo market transactions,” according to the Feb. 25, 2025 announcement.
“Under the rule, a covered clearing agency that provides central counterparty services for U.S. Treasury securities must establish, implement, maintain, and enforce written policies and procedures reasonably designed to require that every direct participant of the covered clearing agency submit for clearance and settlement all eligible secondary market transactions in U.S. Treasury securities to which it is a counterparty,” the SEC says. “The rule also requires a covered clearing agency to identify and monitor its direct participants’ submissions of transactions for clearing, including how the covered clearing agency would address a failure to submit transactions.”
The SEC is also giving clearing agencies a temporary exemption from the policies and procedures requirement. “Under this temporary exemption, a U.S. Treasury securities covered clearing agency is not required to enforce its written policies and procedures … until Sept. 30, 2025, instead of the original March 31, 2025, compliance date,” according to the SEC.
The one-year extension on compliance “provides additional time to implement and validate operational changes,” says SEC Acting Chairman Mark T. Uyeda, in a prepared statement. “Direct participants will also have more time to implement important risk management changes to comply with U.S. Treasury covered clearing agency rules. The Commission stands ready to engage with market participants on issues associated with implementation.”
The engagement with the industry may go easier compared to other more contentious SEC efforts.
Kenneth E. Bentsen, Jr., president and CEO of industry association SIFMA, commended Uyeda and the SEC.
Kenneth E. Bentsen, Jr
“For the past year, we have been working with our members, both buy side and sell side, and other market participants to develop standardized documentation, policies, and procedures to facilitate the transition to mandated central clearing. While we have seen continued uptick in cleared cash and repo Treasuries, market participants have become increasingly concerned that the original implementation dates were overly aggressive and would add unnecessary risk to the nation’s and world’s most important asset market,” Bentsen says via a prepared statement.
The industry should not rest on laurels that have not been earned.
“While the action by the Commission is the most prudent course, no one should interpret this as the industry and the market stepping back from central clearing. The industry will continue to plow forward with our work to accomplish the mandate set out in the rule,” Bentsen says
Officials at the post-trade systems and services provider DTCC also want to plow ahead via the Fixed Income Clearing Corp. (FICC).
“Even with these changes to the various deadlines, we are ready to launch our enhanced access models and segregated customer margin capabilities in March and will proceed with offering those services to our clients as and when they are ready to use them,” according to the DTCC. “We will also work closely with our clients to address any challenges that drove the request for an extension.”
Securities operations provider Broadridge Financial Solutions also issued a statement that favors the reprieve.
“Treasury clearing fundamentally changes a firm’s trade processing workflows and the business processes. We would anticipate the analysis and design effort to take at least three months as firms decide on their target operating models. Once the target operating models are determined, the design phase will kick off a procurement process as firms line up the technical resources required in the future state, which could be lengthy. This would be followed by a development phase, which would take three to six months,” Broadridge says.
Broadridge also notes that the move requires “a thorough end-to-end test … more complex than the recent shortened settlement (T+1) initiative.” Broadridge also identified key areas that are likely to require attention:
- Time for Process Development and Maturation: “Done Away Processes: While sponsored processes have been operational for several years, the broader application to done away trades presents unique challenges. Firms would benefit from additional time to solidify these processes, ensuring robust compliance mechanisms and minimizing operational risk;”
- Technological Enhancements and Integration: “Credit Checks and Matching Platforms: No industry standards are currently in place for credit checks (done away) or trade matching (voice) for trades. The development, integration, and testing of these systems involve significant time and financial resources;”
- Technical Connectivity: “The interconnectivity between various applications — spanning from front office to back-office systems — is crucial for compliance. While the delay could allow firms to build integrations strategically, immediate efforts must begin to lay the groundwork for these connections to prevent a bottleneck closer to the new deadlines.”
- Strategic Opportunity: “The immediate focus is on tactical compliance with the rule, but the deadline extension enables firms to explore and implement comprehensive strategic solutions;” and
- Resource Allocation and Management: “Implementing current state remediations and target state updates concurrently can stretch resources thin. A delay allows for more efficient resource allocation, yet the magnitude of required changes underscores the necessity for immediate action in resource planning to ensure that teams are well-prepared to scale up efforts swiftly.”
Yesha Yadav
Beyond the operational and IT challenges, there are macroeconomic benefits and risks for this major change according to an academic paper slated to run in University of Chicago Law Review, and written by Yesha Yadav, an associate dean with Vanderbilt University’s Law School, and Josh Younger, a lecturer in law at Columbia University and a senior policy advisor at the Federal Reserve Bank of New York. Their paper is “Central Clearing in the US Treasury Market,” Vanderbilt Law Research Paper No. 25-01.
The authors note that central clearing will “set market standards, reduces the risk of non-performance, and mutualizes any potential losses arising from defaults, offers a more resilient market structure,” according to Yadav and Younger.
“On the plus side, central clearing should bring several gains: (i) fuller information, especially with respect to bilaterally traded Treasury-backed repos; (ii) reduced counterparty risk; and (iii) potentially greater flexibility for Treasuries traders to create balance sheet space through set-off and netting of trades,” according to the authors.
“That said, the mandate also threatens risks of unknown and unpredictable magnitude. First, as mainly a fix for counterparty default risk, central clearing is unlikely to cure Treasury’s market degraded liquidity, leaving the market exposed to periodic shortfalls and price dislocations,” the authors say. “Secondly, the mandate includes several exemptions — for example, where trades do not involve members of a clearinghouse on either side, or where a repo contract does not come with a fixed maturity. This leaves a swath of trades outside of central clearing. It can also motivate traders to evade the mandate by structuring transactions to try and avoid it.”
Josh Younger
The authors also note that “a Treasuries clearinghouse will represent a one-of-a-kind firm of immense importance. Its future governance and risk management raise complex questions about how best to ensure that such a firm can operate without jeopardizing the integrity of the financial system.”
The Yadav and Younger paper can be found here: https://shorturl.at/Xx7Vh
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