SEC announces US Treasury clearing Final Rule has been saved
Perspectives
SEC announces US Treasury clearing Final Rule
Market reforms aim to minimize volatility
New SEC regulatory updates include a Final Rule, requiring firms to centrally clear eligible Treasury trades by the end of 2025, and clear repo transactions by June 2026. The 2023 SEC rule amendments, introduced in Fall 2022, targets market volatility and liquidity issues as part of broader Treasury market reforms.
On December 13, 2023, the Securities and Exchange Commission (SEC) approved a Final Rule which will require firms to begin centrally clearing eligible trades in Treasury securities by the end of 2025 and repurchase agreement (repo) transactions by June 2026.1 The Proposed Rule was introduced in Fall 2022 to address risks associated with market volatility and liquidity problems, and SEC Chairman Gary Gensler stated that the new SEC regulation changes will “reduce risk across a vital part of our capital markets in normal times and stress times.”2 This rule is part of a package of reforms to the Treasury market that will have a significant impact.
Related insights
Insights you should know about the SEC rule changes
Covered clearing agencies (CCAs) must:
A. Adopt policies, & procedures that require members to submit specified secondary market transactions for clearing, including:
- all repurchase and reverse repurchase agreements collateralized by US Treasury securities entered into by a member of the covered clearing agency, unless the counterparty is a state or local government or another clearing organization or the repurchase agreement is an inter-affiliate transaction
- all purchase and sale transactions entered into by a member of the clearing agency that is an interdealer broker (IDB)
- and all purchase and sale transactions entered into between a clearing agency member and either a registered broker dealer, a government securities broker, a government securities dealer
B. Collect and calculate margin for house and customer transactions separately
C. Maintain and update policies and procedures to facilitate access to central clearing, including for indirect participants
15c3-3(a): To offset the increased margin requirements for direct and indirect CCA participants as a result of the Final Rule, the SEC has announced changes to the customer reserve formula outlined in SEC Rule 15c3-3(a). Broker-dealers must now include customer margin required and on deposit at a CCA in the US Treasury market as a debit in the customer reserve formula, subject to certain conditions, thereby freeing up the broker-dealer’s cash and securities to meet their margin obligations at the CCA.
Exemptions: While the SEC is implementing the Final Rule to increase the volume of Treasurys clearing and settling via central netting and novation, there will be a number of exemptions offered for transactions in which the counterparty is a central bank, sovereign entity, international financial institution, or natural person.
Implementation deadlines: These amendments will be phased and go into effect pursuant to the following dates:
- March 31, 2025: Changes regarding the separation of house and customer margin, the broker-dealer customer protection rule (15c3-3(a)), and access to central clearing required
- December 31, 2025: Submit eligible purchase and sale transactions
- June 30, 2026: Submit eligible repurchase and reverse repurchase agreements collateralized by US Treasury securities
Deloitte can help you get ahead of the curve
Making substantial changes to business practices and adopting supporting technology could be necessary in meeting new deadlines. Equipped with cutting-edge digital capabilities and real, hands-on industry experience, Deloitte can help you adjust your existing business strategy to better align with regulatory updates.
Considerations to evaluate as a result of 2023 SEC rule amendments
Firms will be required to handle customers margin for US Treasury Securities differently, resulting in a significant transformational effort for direct participants. CCAs must implement separate margin requirements for direct participants' proprietary positions, whose margin requirements are stricter for the clearing agency's own trades than transactions on behalf of indirect participants. However, the SEC recognizes the need for flexibility, allowing lower margin requirements for certain client trades to offset an expected increase elsewhere across the Treasury ecosystem.
Broker-dealers can now utilize margin deposited at a CCA as a debit item in the customer reserve calculation, freeing up cash and securities to meet these new obligations at CCAs. The SEC included this to lower the financial burden on participants who will be required to post additional margin and remains consistent with the treatment of the margin posted at other CCAs in the Customer Reserve Formula.
The required changes laid out in the Final Rule have staggered implementation deadlines, to allow firms to more effectively manage the transition, in lieu of one deadline for all in-scope transactions and changes as laid out in the rule.
CCAs will need to maintain policies and procedures to promote indirect participants submitting their trades for central clearing alongside the transactions of direct participants. This is not only a new procedural mandate for participants, but also a new financial burden for indirect participants to manage and factor into their operating costs as they may now need to establish relationships with direct participants to meet the new clearing mandate.
Direct participants must adapt their systems and processes to handle separate margin calculations and increased clearing activity. Indirect participants will need to prepare for submitting trades into clearing, which may be a new process for some market participants. While this is a significant burden for firms, these changes and an increase in trades submitted through clearing will decrease risk throughout the market for this important element of global capital markets.
Get in touch
Have questions? Contact us.
| George Black Principal Deloitte & Touche LLP geblack@deloitte.com |
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Peter Brown Senior Manager Deloitte & Touche LLP petebrown@deloitte.com |
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| Mara Gauger Senior Manager Deloitte & Touche LLP mgauger@deloitte.com |
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Alexander Tsusaki Manager Deloitte & Touche LLP atsusaki@deloitte.com |
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