On December 13, 2023, the US Securities and Exchange Commission (SEC) adopted rule amendments (Treasury Clearing Rules) designed to improve risk management in clearance and settlement and to facilitate additional central clearing for the US treasury market.

The SEC first proposed the amendments on September 14, 2022. On December 8, we released a blog post about the adoption meeting. The Treasury Clearing Rules are substantially similar to the original proposal, with certain differences detailed below.

Specifically, the SEC adopted amendments to the standards applicable to covered clearing agencies for US Department of the Treasury securities regarding their membership requirements and risk management. It also adopted amendments to Rule 15c3-3 under the Securities Exchange Act of 1934 (the Customer Protection Rule) regarding margin held at covered clearing agencies for US Treasury securities.

The Treasury Clearing Rules will

• require the Fixed Income Clearing Corporation (FICC), which is currently the only covered clearing agency for US Treasury securities, to have policies and procedures requiring its direct participants to submit for clearing certain eligible secondary market transactions (ESMTs);
• require that FICC have policies and procedures in place to calculate, collect, and hold margin for its direct participants’ proprietary transactions separately from transactions submitted on behalf of indirect participants;
• require FICC to have policies and procedures to ensure it has appropriate means in place to facilitate access to clearance and settlement services for all ESMTs, including those entered into by indirect participants; and
• amend the Customer Protection Rule to permit margin required and on deposit at FICC to be included as a debit item in the customer reserve formula, subject to certain conditions.

Under the Treasury Clearing Rules, ESMTs would include the following:

• All repurchase and reverse repurchase agreements collateralized by US Treasury securities to which a direct participant is a counterparty
• All purchase and sale transactions of US Treasury securities (cash transactions) for direct participants who are acting as interdealer brokers
• All cash transactions between a direct participant and any of a registered broker-dealer or a government securities dealer or broker (the adopted rules omit cash transactions between a direct participant and either a hedge fund or a leveraged account from inclusion in the definition of an ESMT)
• Instances in which one counterparty is a central bank, a sovereign entity, an international financial institution, and a natural person are excluded from the rule, as are repurchase and reverse repurchase agreements in which one counterparty is a state or local government. Repurchase and reverse repurchase agreements between a direct participant and an affiliated counterparty are also excluded so long as the affiliated counterparty submits for clearance and settlement all other repurchase and reverse repurchase agreements to which the affiliate is a party.

As mentioned in our December 8 blog post, the Treasury Clearing Rules adopted on December 13 will not be the end to the rulemaking process. Because FICC is a self-regulatory organization and will need to change its rules or otherwise implement policies and procedures to comply with the Treasury Clearing Rule, including imposing new margin requirements, it will be subject to the notice and comment requirements for its rulemakings under Section 19 of the Securities Exchange Act of 1934 and Rule 19b-4 thereunder.

Pursuant to the Treasury Clearing Rules, FICC must file proposed rule changes with the SEC as follows:

• Rules relating to the separation of house and customer margin, access to clearance and settlement services for ESMTs, and the Customer Protection Rule:
  • Proposed rules no later than 60 days following publication of the Treasury Clearing Rules in the Federal Register (Register Date)
  • Effectiveness of these rules no later than March 31, 2025.
• Rules relating to requirements to clear ESMTs and to monitor submission of those ESMTs:
  • Proposed rules no later than 150 days following the Register Date
  • Effectiveness of these rules no later than December 31, 2025 (for eligible cash transactions) and no later than June 30, 2026 (for eligible repurchase and reverse repurchase transactions).

Direct participants are required to clear eligible cash transactions by December 31, 2025, and clear eligible repurchase and reverse repurchase transactions by June 30, 2026.

The SEC still has to take action on a proposed rulemaking that would include certain proprietary trading firms within the definitions of a “dealer” and a “government securities dealer,” as we discussed separately in our Dealer Rulemaking report. It remains unclear as of yet what, if any, impact the Treasury Clearing Rules will have on the Dealer Rulemaking.

Finally, in January 2023 the Office of Financial Research (OFR) proposed to collect data on non-centrally cleared bilateral repurchase agreement transactions. Those rules have yet to be finalized and it is unclear what impact the SEC’s Treasury Clearing Rules will have on the OFR’s rulemaking given that substantially more bilateral transactions will be cleared, going forward. What is certain, however, is that affected direct and indirect participants in the Treasury market will need to monitor, and consider participating in, the FICC rulemaking process and examine their documentation and operational systems to be ready for December 2025 and June 2026.