On December 13th, the Securities and Exchange Commission (SEC) made a significant move to enhance the stability of the $26 trillion Treasury market by adopting new rules that expand the scope of central clearing. This decision is set to fortify the market’s resilience, ensuring a more efficient, competitive, and reliable trading environment.
SEC Chair Gary Gensler expressed his support for these rules, emphasizing their role in elevating the Treasury market's efficiency and competitiveness. The rules, initially proposed in September 2022, obligate covered clearing agencies to implement policies and procedures that mandate their members to submit certain transactions for clearing. These include repurchase and reverse repurchase agreements (repos) backed by Treasury securities, transactions involving U.S. Treasury securities by inter-dealer brokers, and trades between members and registered broker-dealers or government securities brokers.
The SEC has carved out exceptions for transactions where the counterparty is a central bank, a sovereign entity, an international financial institution, or an individual.
Furthermore, the new rule mandates that covered clearing agencies in the Treasury market separately calculate, collect, and hold margin for direct and indirect participants' transactions. These agencies are also required to establish policies that facilitate access to clearing for indirect participants. In a significant move, the rule permits the inclusion of margin required and deposited at an agency as a debit in the customer reserve formula, albeit under specific conditions.
The SEC passed this rule with a 4-1 vote, with Commissioner Hester M. Peirce dissenting. At the meeting, Commissioner Peirce voiced concerns about the potential risks of mandatory clearing, suggesting a more gradual approach to central clearing implementation.
Industry responses have been mixed. The Alternative Investment Management Association (AIMA) acknowledged the rule's objectives but pointed out a design flaw: the failure to mandate Fixed Income Clearing Corp. (FICC) clearing members to clear customer trades executed with separate counterparties, potentially limiting managers' choices.
The Managed Funds Association (MFA) expressed support for the rule's intentions but disappointment over the exclusion of tri-party repo transactions from the clearing mandate, given the existing counterparty risk management by banking entities.
Meanwhile, the Investment Company Institute (ICI) is still reviewing the rule but appreciates the SEC's responsiveness to their initial concerns. This includes the adoption of a phased implementation period, allowing FICC to make vital changes to its infrastructure. The rule's implementation dates span from March 2025 to June 2026, covering different rule aspects.
In a separate decision on the same day, the SEC approved a 2024 budget of $385 million for the Public Company Accounting Oversight Board with a 3-2 vote, with both Republican commissioners, Peirce and Mark T. Uyeda, opposing the decision.
