A proposal by the US Securities and Exchange Commission (SEC) to adopt an expanded central clearing regime to enhance the stability and resilience of the US treasury market will increase treasury clearing activity by US$1.63 trillion daily, a new study finds.
This incremental indirect participant treasury activity includes US$500 billion of repo, US$520 billion of reverse repo, and US$605 billion of cash trades, according to DTCC, which published the industry paper exploring the possible impacts of the SEC proposal.
The SEC plan, first announced in September 2022, aims to provide market-wide benefits such as standardized risk management, reduced settlement risk, centralized default management, and increased transparency, especially in the wake of heightened market volatility. Under the proposal, clearing agencies that provide central counterparty services for transactions in treasury securities will have to require their direct participants to submit for clearing all eligible secondary market transactions in treasury securities.
Currently, transactions in the US treasury market, which exceed US$1.5 quadrillion or US$1,500 trillion annually, are cleared through DTCC’s Fixed Income Clearing Corporation (FICC). However, as of 2017, only 13% of treasury cash transactions were centrally cleared.
The DTCC study finds that, based on the responses of surveyed global market participants, FICC's various central clearing access models and available services are not broadly understood, and a majority of FICC members remain unsure which models or services they want to use for indirect participant activity.
Specifically, 52% indicated they were unsure as it relates to treasury reverse repo and treasury repo activity, and 58% indicated they were unsure as it relates to indirect participant treasury cash activity.
The FICC expects that the incremental indirect participant treasury volume could result in a corresponding increase in value-at-risk (VaR) margin, which it conservatively estimates at US$26.6 billion across the FICC Government Securities Division membership.
However, these estimates assume that all incremental indirect participant activity clears through one of FICC’s gross margin access models. The estimates could potentially decrease if the activity were cleared through one of FICC’s net margin models.
Survey respondents suggested a variety of risk-focused and operations-focused enhancements to FICC’s offerings and services in connection with the potential expansion of central clearing of treasury activity, such as improved cross-margining opportunities, increasing transparency of margin and liquidity facility calculations, enhanced reporting tools related to FICC’s risk management processes, and operational enhancements to FICC’s novation processes and timelines.
“It is clear from industry feedback and our data analysis that the impact of the SEC’s treasury clearing proposal could be significant,” says Laura Klimpel, FICC general manager and head of SIFMU (Systemically Important Financial Market Utility) business development at DTCC. “We are committed to continuing to work with our members, their clients, the broader market, and our public sector stakeholders to raise awareness regarding FICC’s various central clearing access models and services.”