At its next open meeting on December 13, 2023, the US Securities and Exchange Commission (SEC) is expected to adopt rules (the Treasury Clearing Rules) to improve risk management in clearance and settlement and facilitate additional central clearing for the US treasury market. More specifically, the SEC is scheduled to consider whether to adopt amendments to the standards applicable to covered clearing agencies for US Treasury securities regarding their membership requirements and risk management.
The Commission is also set to consider whether to adopt amendments to the Customer Protection Rule, Rule 15c3-3 under the Securities Exchange Act of 1934 (Exchange Act), regarding margin held at covered clearing agencies for US Treasury securities.
Proposed Rules
The SEC originally proposed the Treasury Clearing Rules on September 14, 2022. As proposed, the rules would
- require covered clearing agencies that provide central counterparty services for US Treasury securities (Treasury CCPs) to have policies and procedures to require their direct participants to submit for clearing certain eligible secondary market transactions (ESMTs);
- require Treasury CCPs to have policies and procedures in place to calculate, collect, and hold margin for their direct participants’ proprietary transactions separately from transactions submitted on behalf of indirect participants;
- require Treasury CCPs to have policies and procedures in place to ensure that they have appropriate means to facilitate access to clearance and settlement services of all ESMTs, including those of indirect participants; and
- amend the Customer Protection Rule to permit margin required and on deposit at a Treasury CCP to be included as a debit item in the customer reserve formula, subject to certain conditions (including collecting such margin on a gross basis).
Under the proposal, ESMTs would include
- all repurchase and reverse repurchase agreements collateralized by US Treasury securities to which a direct participant is a counterparty;
- all purchase and sale transactions of US Treasury securities for direct participants who are acting as interdealer brokers (this occurs when the participant brings together multiple buyers and sellers using a trading facility and is a counterparty to both the buyer and seller in two separate transactions); and
- all purchases and sales of US Treasury securities between a direct participant and (1) a registered broker-dealer, government securities dealer, or government securities broker; (2) a hedge fund; and (3) a levered account.
What Comes Next
While some press reports suggested that final Treasury Clearing Rules were slated for a mid-November 2023 timeframe and lobbying efforts had pushed a final vote to the first quarter of 2024, it appears that the SEC chair may have the requisite number of votes to move these rules forward.
Given the significant number of comments provided on the proposal, we will be reviewing what changes, if any, the final rules have from their proposed form. That said, we note that any final rules adopted on December 13 will likely not be the end to this rulemaking.
Because Treasury CCPs are self-regulatory organizations, to the extent they have to change their rules to comply with any new requirements, including the imposition of margin requirements, they will be subject to the notice and comment requirements for their rulemakings under Section 19 of the Exchange Act and Rule 19b-4 thereunder.
We also note that the SEC still has to take action on a proposed rulemaking that would include certain proprietary trading firms within the definitions of a “dealer” and a “government securities dealer” as we discuss here (Dealer Rulemaking). It is unclear what, if any, impact the Treasury Clearing Rules will have on the Dealer Rulemaking.
Finally, we note that in January 2023 the Office of Financial Research (OFR) proposed to collect data on non-centrally cleared bilateral repurchase agreement transactions. Those rules have yet to be finalized, and it is unclear what impact the SEC’s Treasury Clearing Rules will have on OFR’s rulemaking.