SEC Clarifies Broker-Dealer's Custodial Obligations for Cleared Treasuries
“It is critical that the transition to clearing U.S. Treasury securities goes smoothly. ... Industry has raised a number of areas where the transition effort could benefit from further guidance, and today the staff made progress on providing clarification."
SEC Chair Paul S. Atkins
“It is critical that the transition to clearing U.S. Treasury securities goes smoothly. ... Industry has raised a number of areas where the transition effort could benefit from further guidance, and today the staff made progress on providing clarification."
SEC Chair Paul S. Atkins
The SEC Division of Trading and Markets (the "Division") issued guidance to broker-dealers on meeting the customer reserve and segregation obligations under the Customer Protection Rule formula for cleared US Treasury securities ("SEA Rule 15c3-3a").
In the new FAQs, the SEC clarified the following:
- Credit treatment for customer margin. Customer cash posted by a broker-dealer to meet Treasury clearing margin requirements should be credited in Item 1 of the Rule 15c3-3a customer reserve formula, while the market value of customer securities should be credited in Item 2.
- Prefunding margin with firm assets. Broker-dealers may use their own cash or Treasury securities to prefund a customer’s margin requirement, provided they meet specified conditions. The Division clarified that an Item 15 debit may be recorded on Day 1 of the prefunding, so long as customer collateral is delivered by the close of business on Day 2.
- Using customer securities for margin. Broker-dealers may deliver customer-owned fully paid or excess margin securities to meet Treasury margin requirements, provided the use complies with the conditions of Note H.
- Excess margin collateral treatment. The Division stated that broker-dealers may take an Item 15 debit only for the amount of required margin posted at a qualified clearing agency, not for excess margin.
- Variation margin payments from customers. Customer funds used to satisfy mark-to-market or variation margin payments are not required to be recorded as credits in the reserve formula.
- Customer borrowing against margin securities. The Division acknowledged that broker-dealers may extend credit to customers using margin securities as collateral and record both Item 10 and Item 15 debits in the reserve formula, provided all applicable conditions under Rule 15c3-3a are met.
- Application to PAB accounts. The FAQs apply to PAB account holders as well as to customers and may be reflected in the PAB reserve formula when relevant.
In a separate statement, Chair Paul S. Atkins highlighted the importance of a smooth transition to Treasury clearing and stated that Commissioner Mark T. Uyeda will take the lead on the agency’s ongoing work to advance central clearing for US Treasury markets.