SIFMA Urges Reforms to Prudential Rules on Treasury Market Netting

SIFMA’s Head of Capital Policy, Dr. Guowei Zhang, argued that recognizing cross-product netting under U.S. capital rules would free up bank resources, strengthen liquidity, and reduce systemic risk—all of which are vital as Treasury clearing volumes increase under the SEC’s new rules.

In a SIFMA blog post, Dr. Zhang considered the limited recognition of cross-product netting in Treasury securities clearing - the subject of a joint discussion paper prepared by SIFMA, the International Swaps and Derivatives Association ("ISDA"), and the Futures Industry Association ("FIA").  In an earlier blog post, Dr. Guowei Zhang drew on that paper to examine shortcomings in the capital treatment of cross-margining. (See previous coverage.) On cross-product netting, Mr. Zhang argued that U.S. rules still fail to account for its risk-reducing benefits in Treasury markets.

Dr. Zhang cautioned that by ignoring cross-product netting, current capital requirements effectively penalize banks for adopting practices that actually reduce portfolio risk. He explained that when repos and derivatives are assessed individually, rather than on a netted basis, banks face inflated exposure amounts and higher capital charges, even though their overall risk profile is lower. He warned that this "overcalibration" could deter banks from providing liquidity in Treasury markets as clearing mandates expand. 

To address the gap, Dr. Zhang pointed to the industry-backed recommendation of extending the Standardized Approach for Counterparty Credit Risk to repos. He argued that treating repos as forward-settling interest rate derivatives would allow netting benefits to be properly recognized within an existing regulatory framework. He argued that this adjustment would align capital requirements more closely with actual risk while avoiding duplicative charges that discourage participation in cleared Treasury markets.

Dr. Zhang asserted that recognizing cross-product netting is not a minor technical fix but a necessary step for market stability. He stated that updating the capital framework is key to efficiency, liquidity, and stability in Treasury markets.