The first phase of the U.S. Securities and Exchange Commission’s (SEC’s) new rules that require central clearing of certain US Treasury transactions will begin to take effect in March 2025, when the Fixed Income Clearing Corporation (FICC), a DTCC subsidiary, must implement its proposed rules related to the mandate, including separation between “house” and “client” accounts.
While much of the focus for firms has been on the required clearing of Treasury cash transactions, which begins December 31, 2025, the required central clearing of Treasury repo transactions is not far behind, starting June 30, 2026.
Related: FICC's GSD Surpasses $10 Trillion in Daily Activity
The Importance of Done-Away Clearing
Part of the impetus for the mandate is regulators’ push for market participants to choose who they clear with after execution — also referred to as “done-away” trading — and is expected to significantly affect the way Treasury repo trades could migrate into central clearing.
Done-away trading is a common practice for other markets, including OTC derivatives, however, it is currently a very small part of the Treasury financing market. The central clearing mandate is expected to increase the number of done-away trades that move into central clearing.
Two Models, Many Execution Choices
FICC currently offers two indirect access models for clearing — the sponsored service and a new agency clearing service (ACS), which is a re-branding of FICC’s existing correspondent clearing model. The Sponsored service is commonly thought of as the “done-with” model, as it allows trade clearing and execution to be done by the same intermediary firm (the Sponsoring Member). At present, significantly more trades are done through the Sponsored done-with model due to the capital benefits offered in this model. However, both the Sponsored and the proposed ACS models offer the same execution choices, including the option of submitting both done-with and done-away clearing and optional segregation of margin.
The main difference between the Sponsored and ACS models is that in the Sponsored service, the client to the intermediary is an indirect participant of the CCP, has contractual privity to the CCP, and margin for its cleared transactions is calculated on a gross basis. For ACS, the client to the intermediary is not a participant of the CCP and the CCP can offer net or gross margin.
ACS was formerly known as the prime brokerage or correspondent clearing model, supporting firms that needed additional clearing services. Prior to the Treasury clearing mandate, demand was relatively low for this model as there were no huge capital drivers. Now firms are actively looking at both models and weighing their choices.
An Increased Focus on Margin
Prior to the regulatory Treasury clearing mandate, the majority of repo trades are not centrally cleared. One statistic from Finadium shows that only about 30% of the U.S. Treasury repo market is centrally cleared — although, again, according to Finadium’s analysis, this is expected to increase to 84% once the mandate goes live. This increase in activity will require a done-away model that is available at scale.
Cross-margin netting agreements are increasingly important to clients, and FICC is actively working to expand its cross-margin agreement with CME. While cross-margining is not mandated by the SEC’s Treasury clearing regulation, the margin reductions that may be offered by cross-margining, depending on the positions at each clearing agency, could potentially be up to 80%, making it much cheaper than posting to CME alone. FICC is seeing increased interest from the buyside for these offerings and is also working on other advances to help intermediaries save on margin.
Open Issues
FICC recognizes that there is not a one-size-fits-all model and ACS offers additional opportunities to net down margin. However, the issue of accounting treatment of agency status and whether done-with transactions under the ACS model are nettable for balance sheet reporting remains a major open item. If these questions are not resolved in a favorable manner, firms may face higher capital requirements when using that model.
An older legal opinion about agency status of client trades through a CCP addressed derivatives but not cash. FICC is actively working with outside counsel and SIFMA’s accounting team to obtain updated guidance that assures favorable accounting treatment for ACS transactions. The issue is also being reviewed by the SEC accounting staff and is a major focus for all concerned parties, as a favorable response will result in increased market capacity.
Improving Operational Efficiencies
A large part of the repo process today is still manual, with processes like voice trading still commonly used. This is in contrast to swaps, which is a low-touch business with a direct flow to the CCP. FICC is actively working with intermediaries and technology providers to replicate the process used to execute swaps in order to help pockets of the market, especially those supporting done-away style transactions to be done more efficiently.
Ultimately, increased central clearing will result in decreased risk in the Treasury markets. Firms should continue to price done-away service, whether through sponsored or ACS, and continue to work with FICC to onboard. Unlike the move to T+1, which was a market transition over a single weekend in May, the Treasury clearing mandate is not a “big bang” — FICC is already seeing increases in volume and activity and encourages this to continue as firms onboard clients into the models that make the most sense for the parties involved.