September 26, 2023

Sia Partners Identifies Market Concerns Over SEC Central Clearing Proposal

Steven Lofchie Commentary by Steven Lofchie

Sia Partners, a global management consultancy, identified additional market participants' concerns on an SEC proposal to require central clearing of Treasury security transactions and repurchase agreements ("repos") (see previous coverage).

Findings from Sia Report

In a follow-up to an earlier study, Sia reported additional concerns raised by market participants in response to the SEC proposal and in light of the Federal Reserve Board's ("FRB") proposal to implement Basel standards and the CME/Fixed Income Clearing Corporation "Updated Cross Margining Agreement." Among the findings, Sia reported that market participants expect the clearing proposal to:

  • negatively impact broker-dealers' balance sheet, leverage and risk appetite and limit liquidity of smaller broker-dealers due to costs;
  • create obstacles for the expansion of the Fixed Income Clearing Corporation's sponsorship models regarding "capacity, costs, onboarding, and limited revenues from clients";
  • cause the increase in associated costs of large investment managers being required under the proposal to post margin at least twice per day to be passed down to the institutions' clients;
  • affect mid-sized broker-dealers and investors' ability to manage operational investments required under the proposal due to "leaner operations and risk capital availability"; and
  • reduce bilateral trading risks in connection with repo and Treasury trading, but increase other risks, such as liquidity and increasing contagion impacts.

Additionally, Sia said that market participants recommended that the SEC:

  • undertake a cost-benefit analysis and a "far higher level of scrutiny" regarding who will bear the costs associated with implementing the proposal;
  • take an incremental approach to implement the proposal to ensure market participants have sufficient time to comply with operational, legal and business requirements;
  • establish a standardized margin approach similar to the approach under Dodd-Frank for derivatives instruments;
  • establish a standard sponsorship agreement to create a "market wide template" for broker-dealer and client negotiations; and
  • expand the FRB's backstop to support the clearing requirement and reduce exposure and risk of market participants.


At a time when the U.S. debt is soaring and the costs of financing that debt are rising faster because of inflationary pressures, it is surprising that the SEC would implement rules that so many market participants, on both buy-side and sell-side, believe will increase the costs of participating in the market for U.S. government debt and will discourage participation. One would think that the SEC would not proceed with a rule impacting the market for U.S. government securities in the absence of fairly solid evidence that the rule would have a positive impact of financing costs. If the SEC has produced any evidence in that regard, it clearly has not persuaded market participants.  

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