SEC adopts Treasury clearing rules

Amid persistent industry concerns about the consequences of mandating more central clearing in the U.S. Treasury market, the U.S. Securities and Exchange Commission (SEC) voted to adopt new rules on clearing and settlement for that market.

The SEC endorsed rule changes that are intended to expand central clearing and bolster risk management practices for central counterparties in the Treasury market.

Among other things, the rules require central clearing for certain secondary market trades (including all trades by inter-dealer brokers, and trades between clearing members and various broker-dealers). They also revise margin requirements and require clearing agencies to implement certain policies and procedures.

The new rules make changes designed to enhance clearing while also broadening clearing obligations to “help make the Treasury market more efficient, competitive and resilient,” said SEC chairman Gary Gensler in a release.

“Having such a significant portion of the Treasury markets uncleared — 70% to 80% of the Treasury funding market and at least 80% of the cash markets — increases system-wide risk,” he said.

The new rules will be phased in, with certain changes slated to take effect by March 31, 2025, and others coming into force by Dec. 31, 2025, and June 30, 2026.

Industry trade groups continued to express concerns about the possible effects of the new rules.

“We are still reviewing the details of the final rule with our members, and, while the asset management community supports the expansion of clearing, we are concerned the implementation of a mandate … could inadvertently reduce market liquidity while at the same time exposing market participants to additional credit exposures and risks,” said William Thum, managing director and associate general counsel to the U.S. Securities Industry and Financial Markets Association’s (SIFMA) asset management group, in a statement.

“As a general matter, while we are supportive of enhancing market resiliency including through increasing central clearing, we continue to believe the commission should have adopted a staged approach to permit impact analysis to avoid introducing unnecessary risks to the Treasury market,” said Rob Toomey, managing director, associate general counsel and head of SIFMA’s capital markets practice.

In a statement, Eric Pan, president and CEO of the Investment Company Institute, said, “While we are still reviewing the rules adopted today by the SEC, we appreciate that the SEC has maintained its original position and agreed with ICI that funds’ cash Treasury transactions should not be subject to a central clearing mandate.”

He also welcomed the regulator’s phased implementation plan.

“It is important that federal policymakers consider additional ways to strengthen Treasury market liquidity and resiliency,” Pan said. “This includes creating more favourable market conditions for all-to-all trading and increased voluntary clearing.”

“Regulators should also consider how to increase dealer capacity, including reviewing the supplementary leverage ratio and other risk-based capital constraints that have affected market liquidity,” he added.