Various trade associations (the “Associations”), including the Securities Industry and Financial Markets Association (SIFMA), Managed Funds Association (MFA), Futures Industry Association (FIA), International Swaps and Derivatives Association (ISDA), Alternative Investment Management Association (AIMA) and The Institute of International Bankers (IIB), among others, published a letter dated January 24, 2025, to Acting Chairman Mark T. Uyeda of the US Securities and Exchange Commission, highlighting industry concerns regarding implementation of the SEC’s rule on the clearing of cash transactions and repurchase agreements (“repos”) involving US Treasury securities (the “Clearing Rule”). As described in the adopting release, the Clearing Rule requires covered clearing agencies to have policies to clear eligible secondary market transactions involving US Treasury securities.
Clearing agencies mitigate counterparty risk by acting as the buyer to every seller and the seller to every buyer. The Clearing Rule is targeted at improving the stability and efficiency of the US Treasury market by ensuring that cash transactions and repos are centrally cleared. The Clearing Rule is subject to phased implementation, with the first compliance date being March 31, 2025.
The Associations note that implementation will significantly increase the volume of transactions to be cleared and require substantial legal, operational, and business infrastructure development. In particular, the Associations identified nine “critical issues” that require clarification in order for market participants to implement the rule, including:
- Rule clarifications with respect to treatment of mixed CUSIP tri-party transactions;
- Rule clarifications as to the scope of the inter-affiliate exemption, including, in particular, expanding the exemption to allow for internal liquidity and collateral management;
- SEC-registered fund rules that effectively require “double margining” for cleared repos;
- Rule clarifications with respect to the ability of firms to pre-fund customer segregated margin with US dollars (and not only US Treasury securities);
- Rule clarifications with respect to the ability of firms to take debit in the formula, even if client does not pay margin back within 24 hours;
- Rule clarifications as to the overall extraterritorial scope of the rule, and necessary SEC engagement with overseas regulators to ensure the ability of global participants to clear cash and repo transactions;
- SEC to seek public comment and consider the clearing application of the CME Group, as well as ICE and other clearing houses, and the availability of the cross-margining model to facilitate cross-product netting between repos and futures;
- Development and finalization of standard documentation and supporting legal opinions for the efficient customer on-boarding and development of robust liquidity in cleared Treasury markets; and
- Bank capital issues under the existing capital framework need to be resolved to develop the “done-away” market structure to confirm similar treatment currently applicable to the “done-with” market structure.
The Associations also highlight that the current timeline is shorter than previous industry reforms such as the LIBOR transition and uncleared margin rules, and therefore would not allow adequate time to resolve critical operational and interpretation hurdles to implementation. The Associations request that the SEC extend the implementation timeline by at least one year. Read the full text of the letter.