SIFMA Urges SEC to Broaden Clearing Exemptions

SIFMA requested that the SEC grant exemptive relief from certain requirements under the Treasury clearing rule for inter-affiliate transactions.

In its letter to the agency, SIFMA seeks two specific forms of exemptive relief: expanded affiliated counterparty relief and 10 percent non-U.S. affiliate relief.

SIFMA explained that the clearing rule requires direct participants of a Treasury Clearing Agency to submit "Eligible Secondary Market Transactions," including U.S. Treasury repurchase transactions ("Repo Transactions") for central clearing. While the rule includes an "Inter-Affiliate Exemption," SIFMA argues that its current restrictions make it practically unusable for market participants. Currently, the exemption is limited to "Limited Covered Affiliates" (such as banks and broker-dealers) and requires those affiliates to centrally clear all of their outward-facing Repo Transactions, a requirement known as the "Outward-Facing Condition".

SIFMA argued that large financial institutions rely heavily on uncleared Repo Transactions to manage internal capital and liquidity needs, such as complying with the Basel III Liquidity Coverage Ratio and the Federal Reserve's Regulation W. Forcing these internal transactions into central clearing would cause operational delays, increase costs, and unnecessarily gross up a corporate group's overall risk exposure to the Treasury Clearing Agency.

SIFMA asked the SEC to expand the "Inter-Affiliate Exemption" to include any affiliate of a direct participant that is GAAP-consolidated and under common control. This would allow non-broker/bank entities, such as swap dealers and holding companies, to engage in uncleared repo transactions with their affiliated direct participants. The relief would exclude investment company affiliates (both registered investment companies and private funds) due to the SEC's concerns about risk transfers from "end users" taking market positions. Under the proposed relief, the "Outward-Facing Condition" would still apply to prevent firms from using back-to-back transactions to transfer external risk to a direct participant.

SIFMA also requested an exemption from the Outward-Facing Condition for repo transactions between non-U.S. affiliates and non-U.S. counterparties, including transactions between two non-U.S. affiliates. SIFMA argues this is necessary because non-U.S. counterparties are highly unlikely to join a U.S. Treasury Clearing Agency due to limited operating hours and jurisdictional restrictions, which would effectively cut off non-U.S. affiliates from using the Inter-Affiliate Exemption.

SIFMA stated that the volume of uncleared repo Transactions between non-U.S. affiliates and external non-U.S. counterparties must be less than 10 percent of the firm's total cleared Eligible Secondary Market Repo Transactions plus the uncleared non-U.S. transactions.