The final rule directs FICC to adopt written policies and procedures that require every direct participant (i.e., a FICC clearing member) to submit for clearance and settlement all ESMTs to which it is a counterparty.  The Commission adopted the proposed definition of ESMTs but with some modifications.   

As proposed, all repo and reverse repo transactions in which a direct participant is a party are included within the definition of ESMT and, therefore, must be submitted for clearance and settlement.  However, repo and reverse repo transactions that involve a direct participant and either (i) certain affiliates of the direct participant, (ii) other clearinghouses, or (iii) a state or local government are excluded from the definition of ESMT and are not required to be submitted for clearance and settlement. 

The final rule makes two changes to the proposed scope of cash Treasury transactions that qualify as ESMTs.  First, cash Treasury transactions entered into by a direct participant and a hedge fund are not included in the definition of ESMT.  Second, cash Treasury transactions entered into by a direct participant and certain leveraged accounts (described further below) are not included within the definition of ESMT.  Accordingly, these two types of transactions will not be required to be submitted to FICC for clearance and settlement.  However, the Commission indicated that it was taking an incremental approach and may reconsider whether to require the clearing of cash Treasury transactions in the future.  

As proposed, any purchases and sales entered into by a direct participant and any counterparty if the direct participant (i) brings together multiple buyers and sellers using a trading facility (such as a limit order book) and (ii) is a counterparty to both the buyer and seller in two separate transactions (i.e., interdealer broker transactions) are included within the definition of ESMT.  Therefore, all cash Treasury transactions that meet these criteria are required to be submitted to FICC for clearance and settlement. 

Additional Changes to CCA Standards

The Adopting Release requires CCAs to have policies and procedures in place to separate the calculation, collection and holding of margin for clearing members’ own proprietary positions from any margin posted by its indirect participant (i.e., hedge fund clients). 

However, the SEC rejected arguments in favor of taking steps in this rule to establish greater cross-margining for indirect participants.  The SEC indicated that the current cross-margining agreement between FICC and the CME is part of FICC’s current rulebook and that FICC would have to propose such a change for the SEC to review and approve.  The Commission did, however, indicate that it historically has supported cross-margining in other contexts and encouraged FICC to adopt rules that would permit cross-margining by indirect participants. 

The Commission finalized as proposed Rule 17ad-22(e)(18)(iv)(C), which requires a Treasury CCA to establish, implement, maintain and enforce written policies and procedures reasonably designed to ensure that it has appropriate means to facilitate access to clearance and settlement of all ESMTs.  The Commission rejected requests to make changes to Treasury CCA access models that would prevent direct participants from refusing to clear trades merely because they were executed by unrelated parties.  However, the Adopting Release acknowledged the importance of finding a workable solution to allow for the clearing of done away trades and encouraged FICC to propose changes to its rules that would better facilitate the clearance of done away trades.   

Amendments to Rule 15c3-3a

Finally, the Commission amended the broker-dealer customer protection rule to permit margin required and on deposit with Treasury CCAs to be included as a debit in the reserve formulas for accounts of customers and proprietary accounts of broker-dealers (“PAB”), subject to certain conditions.

AIMA has categorized this proposal as Medium Priority/Medium Impact and it is therefore represented in mid-dark blue in the AIMA Regulatory Horizon Scan gantt chart.

For AIMA member firms, compliance with the new Treasury clearing mandate will pose significant operational and/or repapering challenges as firms will have to enter into or modify clearing arrangements either with their clearing member(s) or via one of the other access options provided by FICC.  Members will also need to make the necessary determinations regarding margin segregation from that of their clearing member(s) by September 30, 2025.