SEC Grants Exemption to Ease Private Fund Access to Treasury Clearing

The SEC issued an exemptive order providing conditional relief from the U.S. Treasury securities central clearing mandate for certain inter-affiliate repurchase agreement transactions.

The relief responds to requests from the Managed Funds Association and SIFMA, which argued that a specific condition within the existing Inter-Affiliate Exclusion - requiring an affiliated counterparty to be a bank, broker-dealer, or futures commission merchant ("FCM") - was effectively blocking private funds from accessing central clearing on a cost-effective basis.

The exemption targets a structure increasingly used by private funds: the establishment of a wholly-owned subsidiary known as a Captive Clearing Subsidiary, that serves as a direct participant in a U.S. Treasury securities clearing agency. Under this arrangement, the Captive Clearing Sub enters into repo transactions with third parties on behalf of the private fund, channeling the economic and risk-management benefits of central clearing - including netting, margining, and default management - back to the fund. The SEC found that the existing bank/BD/FCM condition rendered this structure practically unavailable, as private funds themselves do not meet that classification.

The SEC said the Captive Clearing Sub's outward-facing transactions with third parties remain subject to the clearing mandate. The SEC concluded therefore that the contagion risk the mandate was designed to address is still effectively managed. Additionally, the SEC said that having private funds self-fund their margin requirements through their Captive Clearing Subs - rather than relying on unaffiliated third-party direct participants - could free up capacity for those third parties to sponsor other market participants into clearing, thereby potentially broadening access to central clearing across the Treasury market and reducing systemic risk overall.