ISDA CEO Advocates for Client Cross-Margining in Treasury Clearing
Commentary by Steven Lofchie and Sebastian Souchet
ISDA CEO Scott O'Malia urged regulators to extend cross-margining benefits to clients before the date the clearing mandate for government securities becomes effective. He also emphasized the necessity of updating capital rules to ensure a cost-effective transition to the clearing mandate.
In comments on ISDA's derivatiViews blog, Mr. O’Malia supported recent proposals by the CFTC and SEC (see here and here) to extend the existing FICC and CME Group cross-margining arrangement to clients, describing them as vital for implementing the mandate efficiently. He explained that, currently, only clearing members utilize risk offsets between Treasury cash or repo transactions and futures. Extending this to clients would allow a "much wider universe of market participants" to benefit, he said, adding that this change would significantly reduce initial margin requirements by aligning "margin more closely with actual risk," thereby lowering costs and making clearing more efficient.
Mr. O'Malia also urged regulators to finalize the changes "well in advance" of the clearing mandate, which begins taking effect for certain cash transactions on December 31. He warned that market participants need sufficient time to complete account setup, legal arrangements, and end-to-end testing to operationalize client cross-margining. Mr. O'Malia emphasized that these complex preparations "cannot be achieved in days or weeks" and must be settled before mandatory requirements begin.
Further, Mr. O'Malia called on U.S. prudential regulators to modify capital rules to "recognize the risk-reducing benefits of netting across products" under the standardized approach to counterparty credit risk. He warned that without these modifications; banks could face a "hefty increase in capital requirements" that would reduce balance sheet capacity just as cleared trade volumes rise. With the Treasury market exceeding $30 trillion, Mr. O'Malia expressed hope that revised Basel III proposals would address this issue to ensure the regulatory framework does not hamper market liquidity or intermediation services.
Commentary
Ultimately, the parties that are really at risk if the Treasury Clearing mandate increases the costs of funding U.S. government securities, or results in a reduction in the liquidity of the market, are the U.S. Government and taxpayers, who will bear the increased costs of funding the U.S. Government's debt.
It is absolutely remarkable (and not in a good way) that the U.S. Government, under the prior Administration, failed to realize or to take account that the clearing mandate as originally adopted would have negative and material impacts on the market. It is thus incumbent on the current Administration to correct, insofar as is possible, this failure. Not doing so will raise the cost of funding the U.S. Government.
Commentary
The current U.S. prudential regulatory capital framework only permits a banking organization to recognize the risk-reducing benefits of qualifying cross-product netting arrangements when such banking organization is using the Internal Models Methodology (IMM) to calculate its binding capital requirements, subject to rigorous regulatory approval. However, only the largest banking organizations (i.e., Category I and Category II banking organizations) are subject to the advanced approaches/IMM calculations, and most banking organizations' (including the largest banking organizations) binding capital requirements are under the standardized approach which does not recognize cross-product netting.
Accordingly, as ISDA, SIFMA, and the FIA noted extensively in their August 2025 comment letter regarding the U.S. prudential regulators' eSLR reforms, without expanding the existing standardized approach for counterparty credit risk (SA-CCR) to incorporate recognition of cross-product netting between securities financing transactions and derivatives exposures, U.S. Treasury market intermediation may be negatively impacted. The ISDA/SIFMA/FIA comment letter states: “Recognizing the risk-mitigating effects of these netting agreements reduces otherwise excessive capital requirements and expands the capacity of banks to intermediate in capital markets—not just in the U.S. Treasury market but also across, for example, sovereigns, agencies, TBAs, and equity markets" (at p. 14). Absent such revisions to the SA-CCR methodology, banks will be faced with tough decisions as to the extent of their liquidity provision in the U.S. Treasury market and the viability of certain Treasury repo clearing business models.
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The Fixed Income Clearing Corporation proposed rule changes to expand the availability of its "Cross-Margining Arrangement" with the Chicago Mercantile Exchange Inc. "to positions cleared and carried for customers by a dually registered broker-dealer and futures commission merchant."