Trade Associations Criticize SEC Proposal on Central Clearing of Treasuries

Both sell-side and buy-side trade associations expressed significant reservations on the SEC's proposal to require covered clearing agencies that provide central counterparty services for Treasury securities to require members to centrally clear many of their repo transactions in Treasury securities.

In a Comment Letter, the Managed Funds Association ("MFA") urged the SEC to prioritize expanding the availability of central clearing for bilateral repo and reverse repo transactions. MFA said the proposal should not apply to triparty repo transactions. MFA expressed concern that imposing the clearing mandate on cash market transactions will cause institutions to incur significant costs with limited benefits. MFA also urged the SEC to adopted a phased implementation of any rule adoption.

In a joint Comment Letter, SIFMA and the Institute of International Bankers ("IIB") cautioned that the proposal may reduce liquidity in the Treasury markets and overconcentrate clearing activity at the Fixed Income Clearing Corporation. SIFMA and IIB encouraged the SEC to use incentives to promote central clearing in certain Treasury markets. SIFMA and IIB also recommended other approaches to promote central clearing such as (i) allowing broker-dealers to pass through customer margin to a Treasury central counterparty, (ii) requiring separate custody of customer positions from proprietary positions and (iii) allowing cross-margining of customer transactions between cash-market Treasuries and Treasury futures.

In a separate Comment Letter, SIFMA AMG expressed concern about the lack of evidence in support of the proposal. SIFMA AMG urged the SEC and other regulators to conduct additional studies of the U.S. Treasury market and consider all available market data before mandating changes to the Treasury market that will create significant compliance costs. SIFMA AMG also said that given the extensive changes, implementation of the proposal will take multiple years once finalized.