Federal Register Publishes SEC Rule on Mandatory Clearing of Government Securities

The SEC adopted 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.

As previously covered, the final rule amends Exchange Act Rule 17ad–22(e)(18), ("Standards for CCAs: Criteria for Participation"); Rule 17ad–22(e)(6)(i) ("Standards for CCAs: Margin Levels") and Rule 15c3–3a ("Customer protection-reserves and custody of securities").

The amendments to the Standards for CCAs Rule:

• require "written policies and procedures reasonably designed to ensure that every direct participant of the covered clearing agency submit for clearance and settlement all eligible secondary market transactions in U.S. Treasury securities to which it is a counterparty";
• require that CCA's monitor direct participants' submissions and address failures to submit transactions; and
• require CCA's to calculate, collect and hold margin amounts from a direct participant for its proprietary Treasury securities positions separately and independently from margin posted by the direct participant in connection with Treasury securities transactions by an indirect participant.

The amendments on the broker-dealer Customer Protection Rule:

• permit the inclusion of margin required and on deposit with covered clearing agencies for Treasury securities in the reserve formulas for customer and proprietary broker-dealer accounts ("PABs") subject to certain conditions; and
• require that applicable Treasury securities include repurchase or reverse repurchase agreements collateralized by U.S. Treasury securities and certain categories of cash purchase or sale transactions​​.

The amendments also address CCA risk management, transparency and the facilitation of access to clearance and settlement services, including for indirect participants. The SEC said that these "requirements are designed to protect investors, reduce risk, and increase operational efficiency."

The effective date is March 18, 2024. The compliance and implementation dates are discussed in Part III of the release​​.