Central Clearing Of U.S. Treasuries & Repo

On September 14th 2022, the Securities and Exchange Commission (SEC) proposed rules which would require the majority of participants in the US Treasury and Repo Markets to centrally clear secondary market transactions through a clearinghouse. This change would be industry wide, with few exceptions. This proposed rulemaking stemmed from recent events including the October 2014 Flash Rally, 2019 Repo Disruptions and Covid related financial challenges in 2020, in which the SEC and other US regulators felt that the US Treasury and Repo Markets needed additional support to enhance market resilience.  The requirements for central clearing will mandate that all transactions must clear through a clearinghouse. Since the FICC serves as the sole Central Clearing House (CCP) for the market for these products firms will need to either register directly with them or clear through a sponsored entity. To be registered, entities include hedge funds, private trading firms, asset managers banks and related financial institutions. While there is no official rulemaking yet, it is critical that firms begin to prepare for the infrastructure lift that comes with this proposal.

Sia Partners undertook a major review and participant based study of the SEC’s initiative on clearing. Our report was the result of a detailed and comprehensive set of discussions held with a diverse group of over 50 industry leading experts, inclusive of Primary Dealers and Investors, to identify the key challenges and concerns identified by the market and recommendations for the path forward.

Our report focused on three sections drawn from our series of interview questions. Our report covered the implications of the SEC proposal focusing on the operational and infrastructure challenges, risk trade-offs and the potential resultant liquidity results from the proposed mandate and how this will impact the strategic direction of market making firms and their clients. The report also considered the variety of business obstacles that institutions will encounter with this proposal and the immense operational and infrastructure issues including Sponsorship that participants will encounter as they are challenged with the eventual implementation of the SEC proposal.

Sia Partners performed a follow up review on market developments: challenges and considerations for the way forward in centrally clearing U.S. Treasuries & Repos.

For this report, Sia Partners engaged in discussions with numerous participants, including discussions with the SEC, NY and DC Federal Reserve, FSOC, Treasury, CFTC and FICC.