1. What is the U.S. Treasury clearing mandate?
In December 2023, the U.S. Securities and Exchange Commission (SEC) adopted rules requiring that most secondary market transactions in U.S. Treasury securities, including both cash trades and repos, must be cleared through an SEC-approved covered clearing agency (CCA). These rules are a response to concerns about systemic risk and aim to increase transparency and resilience in this globally important securities market.
Initially, the Fixed Income Clearing Corporation (FICC) was the only CCA for repo transactions, but more recently CME has received SEC approval for CME Securities Clearing Inc. (CMESC), and ICE received approval for ICE Clear Credit LLC (ICE Clear Credit).
Implementation is phased and the compliance timelines have been pushed out, but the extended deadlines are now fast approaching – see Section 3 below.
The rules are enforced through amendments to Rule 17ad-22 under the Securities Exchange Act of 1934. CCAs that provide central counterparty (CCP) services for U.S. Treasuries are required to:
- establish, implement, maintain, and enforce written policies and procedures that require every direct participant (i.e. certain dealers) to submit all eligible secondary market transactions in U.S. Treasuries for clearance and settlement
- monitor direct participants’ submission of transactions for clearing, and take action where required submissions are not made
- ensure that margin for direct participants’ proprietary transactions is held separately from margin submitted on behalf of indirect participants (i.e., clients), in line with the margin segregation requirements.
The SEC requires CCAs to have appropriate means to facilitate access to clearing for all eligible secondary market transactions, including those of indirect participants (i.e., buy-side clients), and to review these policies annually. The rule also obliges CCAs to monitor compliance and report on direct participants’ adherence to the clearing mandate.
2. Which transactions are in scope?
The mandate applies to “eligible secondary market transactions”, which include:
- repurchase and reverse repurchase transactions in U.S. Treasuries by a direct participant (repos); and
- certain outright purchases and sales of U.S. Treasuries involving a direct participant (cash transactions),
in each case, unless an exclusion applies.
A number of buy-side entities will likely be out of scope of the cash transactions clearing requirement on the basis of an exclusion for “private fund (hedge funds)”. The remainder of this article therefore focuses on the clearing mandate for repos. If you would like any further information on the clearing mandate, including any relevant exclusions, for cash transactions, please do contact us.
3. Key deadlines
At the time of writing:
- cash transactions: mandatory clearing by 31 December 2026
- repo transactions: mandatory clearing by 30 June 2027
These timelines reflect exemptions granted to allow the industry more time to prepare for operational, legal, and documentation challenges.
4. Extraterritorial impact
The mandate will apply to repos where at least one counterparty is a direct participant of a CCA, unless an exclusion applies.
It is worth noting that not all direct participants of CCAs such as FICC are U.S. entities, so there is already some extraterritorial impact, with non-U.S. direct participants of CCAs having to comply with the relevant requirements.
As things currently stand, all direct participants (whether U.S. or non-U.S.) of a CCA will need to comply even when they are facing non-U.S. clients.
However, the SEC is considering exemptive relief for otherwise in-scope repo transactions between direct participants that are “Non-U.S. Participants” and their “Non-U.S. Clients” – see Section 5.
5. Potential exemptive relief for non-U.S. direct participants facing non-U.S. clients
Earlier this year, the SEC consulted on potential exemptive relief from the trade submission requirement for eligible secondary market transactions between “Non-U.S. Participants” and “Non-U.S. Clients” (Non-U.S. Transactions)1 .
The exemption for Non-U.S. Transactions, if granted as set out in the consultation (and not taking into account any inter-affiliate exemption), would be as follows.
To view the full article please click here..
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
[View Source]
