Lynn Strongin Dodds looks at DTCC’s report card on the impact the new Treasury clearing mandate will have on volumes, access models, margin and liquidity
Treasury clearing activity is expected to increase by more than $4 trn each day, bringing the total to over $11.5 trn in daily volume, according to a progress report from the Depository Trust & Clearing Corporation (DTCC) – The U.S. Treasury Clearing Mandate: An Industry Pulse Check.
DTCC’s Fixed Income Clearing Corp (FICC), which currently processes an average of over $7.5 trn a day across all government securities division (GSD) activity, polled 83 sell-side firms to assess the volume of transactions required to be submitted for central clearing. It also reviewed the planned usage of FICC’s various access models, and the impact on margin and liquidity risk management resources.
The new forecast is a significant increase from last year’s $1.63 trn estimate with around 58% attributing the rise to indirect participant repo activity clearing on the back of the Securities and Exchange Commission (SEC) final treasury clearing mandate. Published last year, it requires the clearing of certain cash US Treasury security transactions by the end of 2025 and repos by the middle of 2026.
Currently trades are cleared through the FICC or directly between the counterparties. The rule change is aimed at routing those bilateral transactions through central clearing. Banks and brokers that are FICC members now tend to bundle execution and clearing for their clients in a so-called “done with” trading model, where the trade is conducted with a bank that uses its FICC membership to give clients access to the central clearing agency.
It is not surprising that the new regime will impact firm’s approaches. For example, the report also found that 74% of respondents preferred FICC’s sponsored service as the access model although 43% showed an interest in the agent clearing member (ACM) service. FICC also expects to set up 7,000+ new intermediary-indirect participant relationships.
This is a marked difference from its 2023 Treasury Clearing Survey results which was conducted before the Treasury clearing mandate was finalised. It revealed 77% of firms were “not familiar” or only “somewhat familiar” with this service but there is growing awareness of the service, which allows for indirect access in a futures commission merchant (FCM) style cleared model.
The DTCC report card also noted growing adoption of a done-away clearing model which involve transactions executed by an indirect participant with a counterparty other than its clearing intermediary. Many buy-side firms believe this route will offer maximum flexibility for both execution and clearing of Treasury securities.
Margin is also expected to grow but in proportionate to the additional volume of activity. This translates into Treasury repo and buy/sell activity escalating in aggregate margin (VaR) for the respondents’ portfolios of approximately $58.4 bn with roughly $27 bn or 46% of the aggregate incremental VaR representing segregated indirect participant margin. It said the results underscore FICC’s current efforts to provide margin efficiency through expanded end-user customer cross-margining opportunities.
As for liquidity, survey results indicate a potential maximum daily need of $84.5 bn which it said would point to a total Capped Contingency Liquidity Facility size of $109.9 bn under current parameters and the outlined assumptions. The CCLF is a rules-based liquidity resource facility that offers FICC additional liquid financial resources to meet its cash settlement requirements in the event of a default of the largest GSD family of affiliated netting members. It has ranged between $71 bn and $128.4 bn since 2021.
FICC believes the CCLF facility will be appropriately sized to meet its commitments. This is in light of the increases in GSD volumes already observed ahead of the mandate implementation and the expected continuation of this trend along with the estimated liquidity needs indicated by survey responses, and the number of facilities resets in the run up to the new rules. However, it noted that if large spikes in liquidity needs driven by increased clearing activity are experienced immediately after the go-live dates, it is able reset the facility on an ad hoc basis under the GSD rules.
The FICC said that overall, the survey’s finding demonstrated the industry’s level of understanding and preparedness for the new mandate but there is still more work to be done. Many firms are continuing to digest the impact on their businesses and working to crystalise their strategies and business plans.
See related news and articles on Treasury.
