In September 2022, the U.S. Securities and Exchange Commission (SEC) proposed expanding the scope of U.S. Treasury trade activity that must centrally clear through an SEC-regulated covered clearing agency. If implemented as recommended, the expansion is projected to increase daily Treasury Clearing activity by $1.63 trillion.
As the only SEC-regulated covered central counterparty for outright purchases, sales and repo transactions in U.S. Treasury securities, DTCC’s Fixed Income Clearing Corporation (FICC) has been working to understand the implications for its own operations, and working with market participants to help them prepare for the transition – especially given that a recent survey found many respondents do not understand FICC’s various access models and that most members are unsure which model to use.
As part of this market outreach, Laura Klimpel, DTCC Managing Director, General Manager of FICC & Head of SIFMU Business Development, spoke at Finadium’s Rates & Repo in North America conference in New York City on November 2.
During the panel on the potential expansion of mandatory clearing of Treasury transactions, participants discussed how the change could bolster market resilience by reducing leverage and mitigating risk.
“We can only manage risk that we can see,” explained Klimpel. “Often, one leg of the trade is conducted outside central clearing while the rest is centralized, which hampers visibility. If you bring the entire trade into central clearing, we eliminate that blind spot.”
Attendees posed key questions and flagged concerns about the transition, mainly around cost and operational complexity of transitioning to a centralized clearing model – especially for smaller market participants.
Klimpel noted that FICC has been focused on raising awareness of the company’s various access models, and pointed out that in many cases, cost may shrink if more of the trade is centralized.
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“We’ve seen intermediaries reduce their liquidity obligations by bringing more of the trade into central clearing,” she said. “Often, one leg of the trade is outside centralized clearing. By bringing the whole trade into central clearing, market participants can take advantage of netting, which can reduce liquidity obligations. We’ll also likely see customer positions and margins segregated for the first time, which will make Treasury clearing more like other central clearing in other asset classes.”
Asked if the new SEC requirements may simply drive more trades through sponsors, Klimpel responded, “I hope not. That would concentrate risk, which would be a suboptimal outcome for the market and for FICC, so we’re working with market participants to encourage greater use of FICC’s other access models beyond the Sponsored Service. We may even modify our direct access models to make them more readily available to market participants that might otherwise use an intermediary to clear.”
As FICC evaluates access models with an eye to ensuring they address the risk-reduction objective of expanded centralized clearing while also meeting the needs of market participants, it’s important to bear in mind making changes will not be a quick and easy process, as any new rules would have to be published and opened to public comment before being finalized.
But Klimpel’s message to the market is simple: “Don’t wait. Get informed and start preparing now. We’ve been focused on raising awareness and have launched a number of tools to help market participants understand the coming changes.”
Learn more about our efforts to strengthen the U.S. Treasury Market at USTClearing.com.