FICC Proposes Rules to Implement SEC Clearing Mandate for Treasuries
Commentary by Steven Lofchie
The Fixed Income Clearing Corporation ("FICC") proposed rule amendments that are intended to make effective the SEC's recent adoption of requirements that members of a central clearing organization for US government securities clear certain repo and cash market trades in US governments. (See related coverage.)
Under the SEC's new rules, FICC must establish separate margin calculations and custodial requirements for FICC members' proprietary accounts and for the accounts of their customers. FICC proposed to modify its Government Securities Division ("GSD") rules to broaden access to its clearing services, especially for US Treasury securities. This includes streamlining the process for becoming an Agent Clearing Member, updating membership qualifications to ensure open access, and improving understanding of the GSD's available services.
Commentary
The custody rules around clearing are going to be very challenging for broker-dealers to implement.
There are a lot of questions that the SEC still has to resolve. For example, in a world where a broker-dealer's custodial requirements must be calculated daily (assuming Rule 15c3-3 is revised to require daily calculations), and the FICC demands margin from broker-dealers on a schedule that is inconsistent with the ability of broker-dealers to obtain margin from their customers, a broker-dealer will find it difficult to satisfy both its FICC margin requirements and its custodial requirements. It is even more difficult when one considers that most repos cleared through the FICC only have a term of a single day.
Related Articles
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The SEC adopted final rules on (i) the mandatory clearing of transactions in Treasury securities and (ii) the application of the broker-dealer customer protection rule to Treasury securities.
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The SEC adopted a rule that any SEC-registered central clearing agency that provides central clearing of U.S. Treasury securities ("USTs") shall require its members to centrally clear (i) most repurchase and reverse repurchase transactions in USTs to which it is a counterparty and (ii) certain cash market purchases and sales of USTs.
