Lynn Strongin Dodds examines whether the SEC year long extension of the Treasury and repo deadlines is enough time for firms to get ready.
Market participants were granted a reprieve when the US Securities and Exchange Commission (SEC) extended its compliance dates for the clearing of eligible cash Treasury and repo transactions by a year to 1 December 2026 and 30 June 2027 respectively.
The new rules are designed to curb systemic risk in the $28.5 trn US Treasury market by channelling more trades through clearinghouses. Given the scale of the task required, several Wall Street trade associations in January asked the SEC to give the industry more time to implement and validate operational changes.
These included the Securities Industry and Financial Markets Association (SIFMA), its Asset Management Group (SIFMA AMG), Managed Funds Association (MFA), Futures Industry Association (FIA), FIA Principal Traders Group (IA PTG), International Swaps and Derivatives Association (ISDA), Alternative Investment Management Association (AIMA) and the Institute of International Bankers (IIB).
Although these industry groups welcomed the delay, many voiced their concerns that the year extension still may not be sufficient.
This is because the checklist is long and detailed, if a report from BNP Paribas, is anything to go by. The French bank notes that market participants will not only have to identify the exact nature of the transactions but also engage with trading counterparties to determine the best-suited clearing access model they can facilitate – sponsored model or agent clearing. The former is based on open access and allows firms to access clearing via sponsorship while the latter, typically a bank provides them with support including facilitating margin payments and providing default fund contributions for transactions.
In addition, they will have to evaluate clearing access model requirements and the Fixed Income Clearing Corp’s (FICC) qualifying terms and conditions. The FICC, which is a subsidiary of DTCC, is the largest clearer of US Treasuries, currently handling daily average of $9 trn in total value and over 2,600 sponsored members active on the platform. (BNP link)
Firms will also have to assess trading counterparties’ margin requirements to ascertain if they will pay the margin or require funding. This will also influence the FICC margin account structure to be put in place. Moreover, legal documentation such as Master Treasury Securities Clearing Agreement and the corresponding Clearing Schedule will have to be reviewed to enable cleared transactions execution, clearing and post-trade processing.
Unsurprisingly the state of play of IT and operational processes will be under the spotlight while service providers on the post-trade side – middle office/trade management, collateral management, settlement, custody, reporting – will all need to be aligned.
The magnitude of the reforms perhaps help explains ISDA’s CEO, Scott O’Malia response to the SEC’s moves. He said, “it’s important to bear in mind that this is the absolute minimum extension that is necessary — several critical operational, regulatory and legal issues need to be resolved, and this will take time.”
He further highlighted ISDA’s specific concerns such as the new dealer documentation to be developed and agreed to among numerous counterparties as well as the potential revisions to capital and leverage rules. He also flagged finalising certain aspects of the Basel III rules and dealing with the US supplementary leverage ratio, which could limit banks’ abilities to act as intermediaries and offer client clearing. In addition, he pointed to the lack of a framework for cross-product netting across derivatives and repo trades for clearing members.
O’Malia added, “The need for an extension was never about avoiding these reforms, but rather about making sure there is sufficient time to complete the necessary preparations in a way that protects the integrity of this vital market. We know from our experience in derivatives clearing and margining of non-cleared derivatives that these things take time, particularly given the global reach of the rules. There are no short cuts.”
While firms are at different stages, the FICC is already working with the CME Group to expand an existing cross-margining arrangement that will allow both registered brokers and their clients to offset their margin exposure across the cash and futures markets. This is seen as an important step in improving capital efficiency and cut trading costs.
The proposed arrangement will see FICC designate cross-margin accounts, enabling eligible positions in the account to offset with eligible CME Group interest rate futures. Participants will also be enabled to direct futures to end-user cross-margin accounts throughout the day, making them available for offset in the cross-margin arrangement.
The firms added that ahead of the regulatory approvals, end-users can work to set up a new account, complete proper program legal documentation and test end-to-end workflows.
