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The US Treasury market is the world’s biggest and most systemically important market. It’s the oil that keeps the wheels of the global financial system turning and is the primary means by which the US government raises funding. It’s therefore right that US policymakers focus on ensuring this market remains robust and resilient, and they’ve determined that mandatory clearing of US Treasury securities is part of the answer. We support clearing, but such a massive structural change to the US Treasury market can’t be introduced in isolation – several other important regulatory reforms will be fundamental to its success.
Last week, I had the opportunity to highlight the changes necessary in testimony to the US House of Representatives Committee on Financial Services. I drew attention to four key reforms that are required to ensure clearing is successful and the US Treasury market remains deep and liquid. Crucially, these issues must be resolved before the clearing mandates come into force, on December 31, 2026 for cash Treasury securities and June 30, 2027 for repos.
First, the supplementary leverage ratio (SLR) should be modified to ensure banks have the balance sheet capacity to provide intermediation and client clearing services in the US Treasury market, including during periods of stress. At the height of the global pandemic in April 2020, concerns about bank intermediation capacity prompted the Federal Reserve to temporarily exclude US Treasuries from the SLR calculation. That’s because the SLR serves as a non-risk-sensitive constraint on banks that can impede their ability to act as intermediaries, particularly in times of stress.
Last year, I sent a letter to US banking agencies requesting that this exemption be reintroduced on a permanent basis. The SLR is not part of the Basel III endgame package, so we would urge a separate consultation. We were pleased to hear Federal Reserve chair Jerome Powell recently acknowledge that changes are necessary, as well as comments by Treasury secretary Scott Bessent and Federal Reserve governor Michelle Bowman drawing attention to this issue.
Second, efficient clearing of US Treasuries by clients requires that the amount of margin posted and corresponding bank capital requirements reflect the actual risk of client exposures across their entire portfolios. To achieve this, margin offsets across US Treasury securities and futures transactions need to be extended to client positions, as they currently are for clearing members. The offsetting risks then need to be recognized when banks determine their exposure to clients under the US capital framework. Without this recognition, bank capital requirements will overstate the risk in a client’s portfolio.
Third, changes are necessary to the Basel III endgame proposal and the surcharge for global systemically important banks (G-SIBs). It has long been clear that these measures, as currently proposed, are inappropriately calibrated. Nowhere is this more evident than in clearing. Analysis has shown that the proposed US Basel III rules and the G-SIB surcharge would increase capital for US G-SIB client clearing businesses by more than 80%. This punitive tax is completely at odds with the policy objective to promote greater use of central clearing. It is not aligned with risk and would bring the economic viability of client clearing businesses into question at precisely the wrong time.
Finally, it is critical that the market can implement the clearing mandate in a safe and efficient manner. Good progress is being made in many areas. ISDA, for example, has published analyses of various clearing models, conducted multiple educational seminars and conferences and is collaborating with others – including the Securities Industry and Financial Markets Association – to develop appropriate client documentation. But clearing models and clearinghouse offerings are still under development and will require regulatory approvals and testing once they are finalized. Then, thousands of counterparties around the world will need to agree to them. We welcome a recent one-year implementation delay agreed by the Securities and Exchange Commission, but we need to continue to monitor timelines to ensure there is sufficient time to complete the necessary preparations and reforms in a way that protects the integrity of this vital market.
US Treasuries play a pivotal role in the derivatives and financial markets, so we need to make sure that capital rules support Treasury market liquidity, appropriately reflect risk and facilitate Treasury clearing. To ensure the effective implementation of the clearing mandate, as opposed to deterring additional clearing, we urge US banking agencies to address the necessary corrections. The smooth functioning of the US Treasury market depends on it.
