SIFMA Urges SEC to Provide Immediate Guidance on Treasury Market Clearing Mandate
Commentary by Steven Lofchie
SIFMA argued that the SEC must take "urgent action" to resolve outstanding issues concerning the implementation of Treasury Central Clearing Rules.
In a detailed blog post, SIFMA warned that the first deadline for implementation nears, and that "there are several significant open questions requiring formal guidance from regulators and other market participants[.]"
To "avoid unnecessary disruption in the Treasury market," SIFMA urged the SEC to address the following issues:
- Eliminating double margining for investment managers. SIFMA asserted that the requirement that both sides to a repo post margin to FICC increases costs. SIFMA urged the SEC to reconsider this requirement for cleared transactions involving registered funds acting as lenders.
- Clarifying that mixed-CUSIP triparty repos are not subject to clearing. SIFMA said the SEC mandate requires all triparty transactions, including any Treasury securities, be cleared. SIFMA noted that repos financing non-Treasury assets may include small amounts of Treasury securities to fill out collateral pools. SIFMA argued this unintended outcome could increase costs in markets like mortgage-backed securities and urged the SEC to clarify that such mixed-CUSIP repos are exempt from clearing when the intent is to finance non-Treasuries.
- Revising the inter-affiliate exemption. SIFMA argued that the SEC exemption for inter-affiliate transactions includes conditions that limit its utility. SIFMA suggested revising the rule to: (i) eliminate conditions for treasury, liquidity, or collateral management within corporate groups, and (ii) exempt non-US affiliates engaging in limited uncleared Treasury repos with third parties.
- Adjusting bank capital standards to accommodate repos. SIFMA emphasized that capital treatment for repos must align with the centrally cleared market structure to preserve liquidity. SIFMA pointed out that the US Basel III Endgame proposal could materially raise the capital requirement for repos by eliminating the ability to engage in cross-product netting for capital purposes.
- Clarifying FICC documentation requirements. SIFMA reasserted that firms face uncertainty over whether clearing rule changes will require them to repaper clients. SIFMA said this possibility would create administrative burdens. SIFMA called on the FICC to clarify requirements and streamline processes to minimize administrative disruptions ahead of the March implementation deadline.
Commentary
How to deal with the mandate to clear treasury securities may be the incoming SEC's most immediate challenge. They will have to decide quickly how to move forward.
It is not obvious that the mandate provides any meaningful benefit, other than an accounting benefit that is not based on any reduction in actual credit risk. It is clear, however, that the mandate will raise costs and create operational difficulties—a fairly big negative as the US Government's debt grows. While the rule may not be sensible, many market participants feel that they have put enormous effort into preparing for implementation. As a result, they may not want to throw it out.
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In a new guide for sell-side and buy-side market participants, SIFMA and EY offered both insights and practical considerations to prepare for upcoming SEC Treasury Clearing Rule compliance dates.