SEC Expands Guidance for Treasury Clearing
Commentary by Steven Lofchie
The SEC issued new guidance to assist broker-dealers and other market participants with the implementation of the Treasury clearing rules. The SEC reminded participants that the rule changes were adopted in December 2023 and that compliance dates were extended to December 2026 for cash transactions and June 2027 for repo transactions.
In new FAQs, the SEC's Division of Trading and Markets ("Division") addressed whether a general collateral triparty repo becomes an "eligible secondary market transaction" if U.S. Treasury securities are included on a collateral eligibility schedule and later allocated at settlement. The Division explained that it does not, since the application of the mandatory clearing requirement depends on whether the trade was specifically structured to include Treasuries at execution, as shown by objective indicators such as the collateral type selected through a matching CUSIP. The Division clarified that selecting a non-Treasury security at execution means a later allocation of Treasuries from an eligibility collateral schedule does not make the trade subject to mandatory clearing.
The SEC also announced a new dedicated webpage on Treasury clearing implementation that provides access to staff statements, frequently asked questions, and related regulatory materials.
Commissioner Mark T. Uyeda highlighted guidance provided on the clearing rules to date, including information on accounting treatment for cleared repos, FAQs concerning Rule 15c3-3a (permitting broker-dealers to pre-fund segregated margin with cash), and FAQs concerning mixed CUSIP triparty repos. He also outlined outstanding issues under review, including (i) expanding the interaffiliate exemption, (ii) clarifying extraterritorial scope, (iii) addressing "double margining" for registered funds, (iv) facilitating cross-margining, (v) guidance on failed trades or clearing outages, and (vi) gross vs. net margin treatment. He added that the SEC is reviewing new clearing agency applications as well.
Commentary
The SEC is applying common sense to the scope of the clearing mandate; i.e., as to the exclusion from the mandate of repos that may include U.S. Governments. Nonetheless, the ultimate economic impact of the mandate on the costs of funding U.S. Government debt is inherently uncertain. Given that uncertainty, it seems prudent for the SEC to exclude non-U.S. transactions from the mandate; or at least delay the application until the market has absorbed the impact of imposing the requirement on domestic transactions.