14 December 2023

Explainer: The SEC’s new rules for Treasury Securities Clearing

The SEC has adopted new rules to strengthen risk management practices and expand access to central clearing for US Treasury securities. The amendments aim to reduce systemic risk and costs for market participants by increasing central clearing of Treasury cash and repo transactions.

MBK Search presents this high-level explainer of the new rule.

Clearing Agencies Must Expand Clearing Services

Covered clearing agencies providing central counterparty services for Treasuries must have policies and procedures to ensure direct participants submit all eligible secondary market transactions for clearing.

  • Eligible transactions include:
  • All interdealer broker trades
  • Repo agreements
  • Dealer trades with broker-dealers and government securities dealers.

This comprehensive clearing requirement will bring more Treasury trading activity into central clearing.

Separation of Proprietary and Customer Margins

Clearing agencies will be required to calculate, collect and hold margin for their direct participants’ proprietary Treasury positions separately from margins related to customer transactions.

The SEC says this will protect customer assets and prevents firm losses from impacting customer margin funds. It will also add safeguards to the clearing system.

Improved Access for Indirect Participants

The rules require covered clearing agencies to ensure they have appropriate means to facilitate access to clearing for all eligible transactions, including those executed by indirect participants. This expands access to central clearing beyond direct clearing members to a wider range of market participants.

Broker-Dealer Customer Protection Amendment

Finally, the SEC has amended the broker-dealer customer protection rule to allow Treasuries-related margin held at clearing agencies to count as a debit in the customer reserve formula. This frees up broker-dealer capital to meet clearing margin requirements. The change will also mean further support for the move to central clearing of Treasury securities.

The SEC wants these rules to strengthen risk management, protect customer funds, expand access to central clearing, and provide regulatory support for broader adoption of central clearing for the Treasury market.

The overlay of reforms marks a major step forward in providing resilience and efficiency in this critical market. Compliance timeframes phase in through 2025-2026.

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