Yesterday, the US Securities and Exchange Commission (SEC) announced it would delay the implementation of mandatory clearing for US Treasury securities by one year. That means eligible cash transactions will now need to be cleared by December 31, 2026, with repos following from June 30, 2027. This is a very welcome extension that ISDA and other industry groups had been advocating for and we’d like to thank the SEC for taking this crucial step. But it’s important to bear in mind that this is the absolute minimum extension that is necessary – several critical operational, regulatory and legal issues need to be resolved, and this will take time.
In granting the extension, the SEC recognized that the US Treasury market is a critical component of the global financial system. With outstanding issuance of nearly $30 trillion, it’s the world’s most systemically important market, and its deep liquidity and resilience attracts investors around the world. It underpins the secured dollar funding market globally and serves as collateral for a significant volume of derivatives transactions.
The need for an extension was never about avoiding these reforms, but rather about making sure there is sufficient time to complete the necessary preparations in a way that protects the integrity of this vital market. We know from our experience in derivatives clearing and margining of non-cleared derivatives that these things take time, particularly given the global reach of the rules. There are no short cuts.
In fact, significant progress has been made to prepare for clearing. The Fixed Income Clearing Corporation (FICC) has published proposed changes to its rule book, while CME Group has published proposals for a new clearing service. ICE has also announced it will launch a Treasury clearing service. The Securities Industry and Financial Markets Association is leading an industry group to develop appropriate client documentation and is making good progress, but this documentation needs to reflect the various clearing models and rule books that are still being developed.
Once finalized, dealers will then need to execute the new documents with thousands of counterparties, as well as obtain netting opinions to ensure efficient capital treatment. This will be a huge amount of work that was at risk of being rushed within the original time frame.
The additional time also provides an opportunity for policymakers to address important regulatory and capital issues that could hinder the efficient implementation of Treasury clearing. For example, FICC and CME Group offer cross-margining at the clearing-member level to enable initial margin efficiencies from offsetting trades in a portfolio of cash, repo and futures transactions. These firms have announced their intention to extend cross-margining to client transactions, subject to approval by the SEC and the Commodity Futures Trading Commission. But there is no recognition in the proposed US capital framework for corresponding cross-product netting across derivatives and repo trades. Unless this is resolved, it will constrain bank balance sheets and limit their ability to offer US Treasury clearing to their clients.
Another issue that needs to be addressed is the US supplementary leverage ratio, which acts as a non-risk-sensitive binding constraint on banks that can impede their ability to act as intermediaries, including their capacity to offer client clearing. Federal Reserve chair Jerome Powell recently acknowledged in testimony to the House Committee on Financial Services that changes are necessary, so we would urge prudential regulators to start working on proposals without delay.
Adjustments are also needed to the Basel III endgame rules and the surcharge for global systemically important banks to avoid punitive and unnecessary increases in capital for client clearing businesses.
We now have 22 months until the first clearing mandate will be introduced. This will be a transformational change to a systemically important market, so we thank the SEC for taking this step and granting the additional time. Now the hard work must continue. Issues like cross-product netting and the SLR must be addressed in quick order to give clearing the best chance of success and to maintain the depth and liquidity of the US Treasury market. Given its importance, we must do this right.
