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Published: October 18, 2024
The US debt ceiling has been a recurring issue, with Congress frequently pushing it higher to accommodate the nation’s growing financial obligations. This constant adjustment is mirrored by the continuous issuance of US Treasury securities, which has significantly expanded the overall size of the market. As the US Treasury market swells to an impressive $27 trillion, concerns about systemic risks have intensified. The market’s stability is further complicated by a concentration of dealers and greater pressure on broker-dealers to provide necessary liquidity. This combination of factors raises alarms about the potential vulnerabilities within this crucial financial system.
In response to these growing concerns, the SEC has implemented two key regulations aimed at enhancing market stability and oversight.
The overarching objective of these SEC rules is to reduce systemic risk and increase operational efficiency, thereby fortifying the financial infrastructure and addressing the vulnerabilities within the US Treasury market:
Furthermore, the adoption of central clearing provides market participants with access to a broader range of counterparties, which can lead to tighter bid-ask spreads and lower transaction costs.
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SEC Rule 17ad-22 requires clearing agencies to adopt comprehensive risk management practices, ensuring the efficient clearance and settlement of transactions:
Each CCA needs to have written policies and procedures requiring direct participants to submit for clearance and settlement all eligible secondary market transactions to which it is counterparty. This applies to Cash, Repo and reverse repo.
Expanded Scope of Centrally Cleared Trades for Covered Clearing Agencies
SEC Rule 15c3-3a, known as the Customer Protection Rule, mandates that brokerage firms safeguard customer assets by maintaining a reserve of funds and securities. The 3a rule stipulates the need to segregate the client/agent accounts and margin and to give access to client to post directly into CCP.
Banks and Broker-Dealers: when involved in trading U.S. Treasury securities, they will need to adjust their processes to comply with the central clearing requirement. They may need to establish relationships with central counterparties (CCPs), renegotiate bilateral client agreements, and adapt their trading infrastructure to the changes.
Institutional investors, hedge funds, asset managers, and other buy side market participants trading U.S. Treasury securities: will need to familiarise themselves with the new central clearing requirements and adjust their trading strategies and operations accordingly.
Clearing houses: Central counterparties (CCPs) responsible for central clearing will see increased activity as more U.S. Treasury transactions are cleared through their platforms. They will need to ensure that their systems can handle the additional volume and manage associated risks effectively.
The rule has no geographical boundaries; it will apply cross border to all entities dealing in US Treasuries, repo and reverse repos.
Any transaction that does not involve a direct participant – between indirect participants only
Any Transaction between a direct participant and a hedge fund or leveraged account.
For Cash market : Transaction with a central bank, sovereign entity, a Supranational (ex EBRD) and a natural person
For Repo :
any transaction with another central counterparty (CME FICC) , a state or local government (this do not apply to pension plans)
Inter-affiliate Transactions are subject to finer rule requiring all transaction to be cleared in order to benefit from the exclusion
(currently the only CCP eligible to clear these transactions):
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This model allows firms to become direct members of the FICC, giving them full access to its clearing and settlement services. This is typically used by larger financial institutions.
FICC currently being the only Clearing agency able to clear such transactions, challenges should be assessed for all market players:
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The positive outcomes induced by the implementation of the new rule would reduce operational and market risks. These rules having no geographical boundaries, firms should assess their exposure to UST and Repos holistically, including balance sheet impacts of each decision.
First Derivative is eager to help you navigate through the Central Clearing journey and provide the support and expertise to comprehend the complexities and challenges that the implementation will require.
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With the rule change impacting various entities, systems and departments, a thorough PM/PMO structure with proven governance and control models would be required.
Our team comprises a diverse pool of experts, including seasoned Technical Experts, deep-dive Business Process and Functional specialists, experienced Project Managers, and dedicated Support professionals. This unique blend of talent enables us to deliver comprehensive solutions that address the multifaceted challenges faced by financial institutions. By combining technical proficiency with in-depth business understanding, we ensure successful project execution and ongoing support.
Elias Ghanem
Senior Leadership Team, First Derivative
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Barry McAleer
Practice Lead | Regulatory Solutions NAM
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Provides capital markets, programme management expertise to our industry-leading banking clients: MiFID II, SFTR, FATCA, SEC SBSD and CFTC.
Currently managing the SFTR Remediation at US Tier 1 IB.
Brings 20+ years’ experience and knowledge in Financial Services focused on regulatory change in capital markets. Trade and Transaction Reporting SME in EMIR and MiFID.
Seasoned experience as portfolio manager/Trader and client advisor coupled with project management skills. Provides an ability to manage and motivate big teams ensuring overall project delivery success across different streams such as Front to back, risk and regulatory frameworks.
Regulation and Change lead, delivering large programs of work and oversight with a primary focus on Data.
