Introduction

The U.S. Securities and Exchange Commission issued its Final Rule mandating clearing of U.S. Treasury Securities in January 2024[1]. This rule will require secondary markets sales and purchases and repo transactions involving U.S. Treasury Securities to be centrally cleared. Although it is a U.S. regulation it has a global impact to all users of U.S. Treasury markets.

Below we highlight 10 key issues for financial institutions to consider.

1.      Will the changing political landscape challenge the implementation of the Final Rule?

The United States regulatory program is certainly in a period of flux and a number of regulatory initiatives are expected to be rolled back in line with the agenda of the incoming administration. However, this requirement is in the form of a Final Rule which is potentially difficult and time consuming to unwind. In February 2025 the Securities and Exchange Commission did confirm an extension of the deadlines following representations from the industry regarding the complexity and scale of effort required for implementation.

The background to these rules is that the U.S. Treasury Markets has been subject to a strain in recent years, with three shocks in particular: the 2014 ‘flash rally’, 2019 ‘repo trading shock’ and 2020’s COVID-19 shock. Each of these placed significant stress on pricing and liquidity in the financial markets and impacted the ‘real’ economy, requiring Federal Reserve interventions. The total value of U.S. Treasury securities[2] in issue is $28.3trn and growing and is a central element of central government funding. Notwithstanding the change in political leadership, the size and importance of this market means that the industry should continue to prepare for implementation.

2.      An American rule which will impacts U.K., European and other market participants

The new rule is not limited to U.S. entities but applies to those involved in the secondary market for purchases and sales of U.S. Treasuries and repo transactions involving U.S. Treasuries (defined as ‘eligible secondary market transactions’). An institution’s jurisdiction is not the qualifying factor. Rather it is buying or selling securities, or trading repo with, a direct participant in a covered clearing agency. These direct participants are also the sell-side institutions in these markets, which brings a significant amount of buy-side institutions who are their customers into scope[3].

Further, where an institution is a direct participant, its affiliates may also be deemed to be a direct participant. As such, as the customers of an affiliate of a direct participant would also be in-scope.

3.      As always, there are exemptions

A number of entities are out of scope or exempted from the regulations.

Central governments or agencies, central banks and monetary authorities and natural persons are excluded from the regulations, as are state and local government entities and certain specifically defined international financial institutions such as national development banks. Covered clearing agencies’ own transactions, transactions between affiliated entities, certain registered U.S. broker dealers, and clearing agency members all benefit from potential exemptions.

4.      The clearing model already exists

Clearing of U.S. Treasury securities already takes place, but in the minority of transactions[4]. There is currently one active clearing agent, the Fixed Income Clearing Corporation (FICC), which is part of the Depository Trust and Clearing Company (DTCC). Clearing involves the novation of a transaction between two parties to a clearing agency who will take on the risk of either party defaulting. The rule applies directly to clearing agencies, and their members will apply the rules to their customers.

An existing model is a major advantage in what is a considerable change in the industry, but that model will require substantive development to cater for the estimated number of in-scope transactions that be subject to the clearing requirement. It is expected that new participants will enter the market to offer clearing services in U.S. Treasury securities and provide capacity, choice and competition, such as the Intercontinental Exchange (ICE) and the CME Group.

The current model offers those who are not themselves members of FICC indirect clearing using a member as its clearing participant (they are known as ‘indirect participants’). Market participants should have the choice to clear transactions with the counterparty to their trade (known as ‘done with’) or with a different direct participant (‘done away’). The FICC currently has an estimated 3,500 indirect participants, which is expected to rise by a further 7,000 as a result of the rule’s implementation.

5.      The new rules present a significant challenge

Even with an existing clearing model on which to build, the new rule represents a significant legal, operational and compliance challenge for entities in-scope. It will require institutions to create the infrastructure – legal, technological, compliance – to post collateral to clearing agencies. From a competitive point of view, institutions who do not successfully meet the regulatory timelines risk being unable to trade eligible secondary market transactions.

The challenge includes on-boarding new institutions at clearing agencies, completing complex legal documentation and setting up clearing and collateral operations within the deadlines. SIFMA have emphasized the legal, technical and operational work to be done and noted that the deferred implementation date will mean the reform coincides with the transition to T+1 settlement in the U.K. and Europe.

There is a significant legal challenge as SIFMA leads efforts to develop industry standard documentation to supplement their existing Master Repurchase/Global Master Repurchase Agreement framework. Industry legal opinions will need to be obtained. Additionally, accountancy and tax treatments may have to be reviewed.

6.      We can learn from central clearing of derivatives

This challenge will be familiar to those involved in the European Union’s recent initiatives for the central clearing of derivatives. The derivatives industry had to design and implement new clearing structures to expand clearing to the buy-side for the first time. This involved multiple workstreams which will also be present in U.S. Treasury clearing: new legal documentation to be completed for each buy-side client, implementation of new collateral and margin management, regulatory reporting, new default processes and accounting treatments. On the legal side, jurisdictional issues will prompt the need for legal opinions (including netting treatment), contracts will need negotiation and regulatory compliance questions will require legal advice.

Lessons from the derivative market experience included: start early with an analysis of the impact of the regulation on your institution; build on what you are already doing; agree your internal positions before engaging with your external counterparties; don’t underestimate the resources you will need; and focus on execution. The timely implementation of regulations becomes a competitive exercise since institutions want to continue to meet client needs without delays.

For many institutions the new U.S. Treasury clearing regulations will impact their current activities in the derivatives and stock lending markets, particularly in relation to the collateral triangle which exists between these three activities. Analysis of the impact of the new regulations will no doubt seep into a review of existing activities in these other markets.

7.      Despite the recent extension, time will move quickly

The principal deadlines are 31 December 2026 for clearing of secondary market cash transactions and 30 June 2027 for clearing of repo transactions. Starting early is a phrase repeated by many but not always heard by all. There is a lot of work to be done by regulators, industry associations and market participants and many open questions. In large-scale regulatory change projects, answers to questions can come late in the day, meaning that compliance projects are usually undertaken without an answer to all open questions. Where answers are not forthcoming, it falls to those in-scope to answer the questions themselves, often using external advisors.

Where large scale change occurs, resourcing should be considered early. Previous experience shows there is a lack of available personnel with specific legal, market, operational or technological experience, meaning that a plan is needed as to how the work will get done on time. Repo trading and documentation is still something of a niche activity meaning that experience can be a scare resource.

8.      What you should be doing now

As a first step, you should look at your current U.S. Treasury activities globally and map the business lines which are in-scope for the clearing requirements.

·       You should review the clearing models currently available and your preferred method of accessing clearing services. In addition, you should define your clearing requirements. For example, will you need multiple clearers, do you have preferred locations, will you operate ‘done with’ or ‘done away’ models?

·       Having defined your clearing requirements, you should review the onboarding requirements for each clearer and draw up a timetable to ensure you are onboarded in a timely manner, expecting that there will be many applications for each clearing agency to process.

·       You should review the legal documentation that will be required, such as the legal agreements that SIFMA are preparing. As part of this you will need to identify your counterparties in order to plan what could be a significant amount of legal documentation revisions. In the SIFMA clearing documentation set there are a number of elections which you will need to consider, adopt positions on and prepare for negotiation with your counterparties on these points.

·       You will need to plan operational and technological changes to accommodate the addition of clearing into your current trading or repo activities. New clearing counterparties in the transaction chain will impact delivery and notification times, contact details, dispute processes, tracking and reporting, and technology will need to be configured accordingly.

·       You will need to review the collateral requirements that the new regulations will impact. Which pools of collateral will you deliver to clearers and how will this new element interact with your current collateral management?

9.      Are there any benefits from U.S. Treasury clearing?

The main aim of the new regulations is to ensure market resilience. The SEC points to a number of additional benefits including additional balance sheet capacity for market participants, operational efficiency and reduced funding costs. Participants who use more than one clearer may gain from cost transparency and competition. Those wishing to provide clearing services to the market will also see the opportunity the new regulation presents.

10.  How can Temple Consulting help?

Temple Consulting is a consultancy of experts in EU and UK law and regulation. Our depth of knowledge and experience is such, that we understand not only how our clients work but also their commercial objectives and imperatives, which invariably are budget and time sensitive. This is why each mandate necessarily is costed according both to the nature of the work to be undertaken, and your desired outcome as well as the time frame and budget within which delivery is required. We provide an experienced and trusted talent pool from which they select the best fit for each project. In relation to our talent pool, we partner with bankers, accountants and lawyers - only those with whom we have worked previously and successfully. Temple Square Chambers can provide legal advice to supplement your project requirements.

Keith Blizzard is a financial markets lawyer with over 20 years’ experience, including trading, clearing, document negotiation (particularly GMRA, ISDA, GMSLA) and large-scale regulatory projects.  

[1] Securities and Exchanges Commission Final Rule: 17 CFR Parts 240

[2] US Treasury Securities Statistics - SIFMA - US Treasury Securities Statistics - SIFMA

[3] Note that for purchases and sales, the direct participant must also be either a party which brings together multiple buyers or sellers (such as in a limit order book) or a direct participant who is transacting with registered broker-dealers, government securities dealers or brokers or certain qualifying hedge funds. For repo transactions, there is no additional requirement other than the customer is dealing with a repo counterparty who is a direct participant in a clearing agency.

[4] The SEC estimated that in 2017 only 13% of transactions were cleared, whilst 19% involved clearing of only one leg of a transaction. Source: SEC Release No. 34-99149; File No. S7-23-22 on Standards for Covered Clearing Agencies for U.S. Treasury Securities and Application of the Broker-Dealer Customer Protection Rule with Respect to U.S. Treasury Securities.