SEC Adopts Rules to Enhance Risk Management and Boost Central Clearing in U.S. Treasury Market

The Securities and Exchange Commission (SEC) announced the adoption of crucial rule changes today. The modifications target covered clearing agencies in the U.S. Treasury market and aim to update membership standards related to the clearance and settlement of specified secondary market transactions.

SEC Chair Gary Gensler emphasized the importance of these changes, citing the $26 trillion Treasury market as the bedrock of global capital markets. Gensler remarked, "Having such a significant portion of the Treasury markets uncleared increases system-wide risk. Today's adopting release addresses clearing of Treasury securities in two important ways, making the Treasury market more efficient, competitive, and resilient."

The final rules bring about key adjustments to enhance customer clearing and broaden the scope of transactions that clearinghouse members must clear in the U.S. Treasury market.

Key Amendments:

1. Submission Requirements: Covered clearing agencies are now mandated to adopt policies and procedures compelling their members to submit for clearing specific secondary market transactions. These include repurchase and reverse repurchase agreements collateralized by U.S. Treasury securities, interdealer broker transactions, and transactions between a clearing agency member and registered broker-dealers or government securities entities.
2. Customer Margin Inclusion: Broker-dealers are permitted to include customer margin required and on deposit at a clearing agency in the U.S. Treasury market as a debit in the customer reserve formula, subject to certain conditions.
3. Margin Segregation: Covered clearing agencies must collect and calculate margin for house and customer transactions separately, a measure designed to enhance transparency and risk management.
4. Access Facilitation: Policies and procedures are now required to ensure that covered clearing agencies have appropriate means to facilitate access to clearing, including for indirect participants. This is expected to encourage broader participation in the clearing process.
5. Exemptions: The amendments include exemptions for transactions involving central banks, sovereign entities, international financial institutions, or natural persons.

These rule changes mark a significant step towards making the Treasury market more robust and secure. By incentivizing additional central clearing, the SEC aims to mitigate systemic risks associated with the significant portion of the Treasury market that currently remains uncleared.

The SEC's comprehensive approach reflects its commitment to ensuring the efficiency, competitiveness, and resilience of the Treasury market, which plays a pivotal role in the global financial landscape. The new rules are set to have a lasting impact on risk management practices and are expected to further solidify the foundation of the U.S. capital markets.

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