Executive Summary
On December 13, 2023, the U.S. Securities and Exchange Commission (“SEC” or “Commission”) adopted rules under the U.S. Securities Exchange Act of 1934 (the “Exchange Act”) to amend the standards applicable to covered clearing agencies for U.S. Treasury securities (“Treasury CCAs”). AIMA's full summary of the finalized rule can be found here.
The amendments require each Treasury CCA to have written policies and procedures reasonably designed to require that every direct participant of the Treasury CCA submit for clearance and settlement all eligible secondary market transactions (“ESMTs”) in U.S. Treasury securities to which it is a counterparty.
The Commission made additional amendments to Treasury CCA standards with respect to risk management that are designed to protect investors, reduce risk, and increase operational efficiency.
If you have any questions, please feel free to reach out to Joe Engelhard at [email protected], Daniel Austin at [email protected] or Nick Pernas at [email protected].
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Joe Engelhard
Head of Private Credit and Asset Management Policy, Americas
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Daniel Austin
Head of U.S. Markets Policy and Regulation
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Nick Pernas
US Policy & Regulation Analyst
U.S. Treasury Securities CCA Membership Requirements
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.
Timeline
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.
Clearing of repo transactions to begin | June 30, 2026 | **New** |
Clearing of cash Treasury transactions to begin | December 31, 2025 | **New** |
Treasury CCA rules to go into effect | March 31, 2025 | **New** |
AIMA summary published | December 15, 2023 | **New** |
Publication Date | December 13, 2023 | **New** |
AIMA supplemental response filed | October 20, 2023 | **New** |
Comment deadline for proposal | December 23, 2022 | |
AIMA response to proposal filed | December 22, 2022 | |
AIMA summary published | September 20, 2022 | |
Proposal published by SEC | September 14, 2022 |
Practical Considerations
For AIMA member firms, compliance with the new Treasury clearing mandate will pose significant operational challenges as firms will have to enter into or modify clearing arrangements either with their clearing member or via one of the other access options provided by FICC.
Although the SEC provided a lengthy, staged implementation timeline whereby central clearing is only required by December 31, 2025 for cash Treasury transactions or June 30, 2026 for repo and reverse repo transactions, it will also be very important for FICC to incorporate potential changes to its current rules to allow for greater cross-margining and clearance of done away trades prior to submitting its updated access and margin rules for SEC approval.
AIMA will engage with both FICC and the SEC to endeavour to secure changes that permit cross-margining and that prohibit FICC members from refusing to clear a trade merely because it was executed by an unaffiliated party.