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The SEC’s U.S. Treasury Central Clearing Final Rule

Ahead of the implementation, here is what you need to know about the upcoming changes – and how Northern Trust is preparing.

 

Final Rule

On December 13, 2023, the U.S. Securities and Exchange Commission (SEC) adopted rule amendments that make it mandatory for Fixed Income Clearing Corporation members to clear U.S. Treasury securities and all repo and reverse repo trades involving U.S. Treasuries. The final rule, “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,” applies globally to anyone buying, selling or repurchasing in scope U.S. Treasuries, against a counterparty that is a FICC netting member. The SEC noted in its rule release that a central clearing model will help to increase transparency, lower counterparty risks, and enhance market stability. 

Implementation Deadlines1:

On February 25, 2025 SEC announced extension of compliance dates as “The U.S. Treasury market is critical piece of the global financial system.  New rules must be implemented properly, and any operational issues must be addressed.”

  • March 31, 2025 extended to September 30, 2025: Covered clearing agencies2 (CCAs) required to implement enhanced practices, including risk management, margin, and customer asset protection.
  • December 31, 2025 extended to December 31, 2026: Direct participants of CCAs required to clear eligible cash secondary market transactions.
  • June 31, 2026 extended to June 31, 2027: Direct participants of CCAs required to clear eligible Treasury repo transactions.

The new rule covers eligible secondary market transactions (ESMTs), including outright purchases, sales, repos, and reverse repos, where at least one party is a CCA netting member, such as a FICC netting member. The requirements have extraterritorial impact as anyone executing against an in-scope counterparty will be captured.

There are exemptions to this rule, as included below:

  • Any purchase or sale transactions or repo or reverse repo transactions between CCA direct participant and a central bank, a sovereign entity, an international financial institution, state government, local government, or a natural person.
  • Any repo or reverse repo transactions in which one counterparty is a CCA providing central counterparty services or a derivative clearing organization or is regulated as a central counterparty in its home jurisdiction.
  • Any repo and reverse repo transactions between direct participant and an affiliated counterparty3, provided that the affiliated counterparty submit for clearance and settlement all other repurchase or reverse repurchase agreements collateralized by U.S. Treasury securities to which the affiliate is a party.

The Fixed Income Clearing Corporation, abbreviated as FICC, is currently the only Central Clearing Agency (CCA) for Treasuries. It is a subsidiary of the Depository Trust & Clearing Corporation (DTCC) and has a Fitch Ratings and Standard & Poor’s AAA rating.  Other firms, such as the Chicago Mercantile Exchange (CME), Intercontinental Exchange, (ICE), and London Clearing House (LCH) have submitted SEC filings to act as a CCA in the U.S. market.  At the time of this writing, CME is awaiting SEC review and approval to expand its offerings beyond FICC.

Background

The U.S. Treasury market is valued at around $26 trillion USD, making it the world’s deepest and most liquid market. The U.S. Treasury Clearing rule aims to reduce market risk since a significant portion of the Treasury markets, around 70% to 80% of repos and 80% cash transactions, remains uncleared.

What Industry Issues Are Outstanding?

The Securities Industry and Financial Markets Association, or SIFMA, raised five crucial concerns that require formal guidance from regulators and other market participants to facilitate a smooth transition and avoid unnecessary disruptions. To achieve this, SIFMA is engaging with the regulators and other relevant industry bodies to encourage the SEC, Bank regulators, and FICC to address these issues4. These issues are outlined below:

  1. SEC needs to eliminate double margining for investment managers, as it risks reduced trading and liquidity.
  2. The SEC should clarify that mixed Committee on Uniform Securities Identification Procedures, or CUSIP, triparty repos are not subject to clearing.
  3. The SEC should revise the existing inter-affiliate exemption to eliminate the conditions decreasing its utility.
  4. Bank regulators need to adjust capital standards to accommodate repos.
  5. The FICC and its members should clarify documentation requirements to allow firms to focus on clearing changes rather than administrative burdens.

What is Northern Trust Doing?

Northern Trust has established an enterprise-wide program to assess the impacts to our clients and our business. The program’s framework consists of internal subject-matter experts from each of our Asset Servicing business lines, organized into various Working Groups, a Project Steering Group, and an Executive Steering Group.

These efforts allow us to incorporate industry recommendations and considerations into our program, ensuring our alignment with the industry in response to these changes.

Northern Trust is actively engaged in relevant industry forums and working groups, such as those organized by the Association of Global Custodians (AGC), DTCC, Investment Company Institute (ICI), SIFMA and others. The program has set up an active communication strategy across our business and our clients, which will be distributed through established communication channels such as the Northern Trust website, client newsletters, and regulatory forums. With these efforts, Northern Trust will continue to actively progress to meet the extension dates of December 31st, 2026, and June 30th, 2027, compliance dates.

How Can Northern Trust Help You Navigate the New Regulation?

As a member of FICC, Northern Trust can sponsor asset owners, investment managers, and hedge funds to participate in centrally cleared Treasury markets5. Following the implementation of the U.S. Treasury Clearing rule, the daily volume of centrally cleared repo is expected to increase by $1.63 trillion6. The increased volume will enhance the value of accessing the FICC repo market, which is expected to benefit both cash investors who appreciate the safety of the largest cleared repo market with AAA rating and holders of Treasuries who are looking to borrow cash.

About FICC:

FICC-Sponsored Repo allows institutional investors to participate in the repo market through a sponsoring member who acts as an intermediary. This allows institutional investors to access a deep pool of liquidity, such as U.S. cash or U.S. Treasuries, on a daily basis and participate in secure repo transactions without the need for direct membership in the clearing corporation, thereby reducing counterparty risk and increasing operational efficiency.

Northern Trust’s FICC repo program currently sponsors entities (i.e., corporate entities, funds, insurance companies) domiciled in the U.S., Cayman Islands, and Ireland on behalf of institutional clients classified as Qualified Institutional Buyers (QIBs) as defined by SEC Rule 144A. Investment Managers to the sponsored entity can also be located in the UK and Hong Kong subject to meeting other eligibility requirements. Learn more at: FICC Sponsored Repo | Northern Trust.

What Should I Be Doing?

To prepare for the upcoming changes, market participants should start reviewing their current operating models to identify areas that need changes to support the central clearing of U.S. Treasuries. Clients may also benefit from reviewing the rule and SIFMA report published on November 13 2024, ‘US Treasury Central Clearing: Industry Considerations Report.’  In addition, your organization may want to consider the following themes:

  • Clearing model: Determine your preferred clearing access model (e.g. Sponsored Model or Agent Model7).  https://www.dtcc.com/ustclearing/access-central-clearing
  • Margin management: Consider clearing models and margin requirements.
  • Operational changes: Perform operational flow impact analysis with consideration to volume changes from uncleared to cleared transactions.
  • Standing Settlement Instructions (SSIs): Prepare for SSI updates to custodians where clients change broker designation.
  • Increased costs: Evaluate potential increased costs for cleared trades given central clearing costs incurred by sponsors or agents.
  • Repapering due to access model: Clients should remain aware that new legal agreements may be necessary if moving from one clearing model to another, or due to the introduction of industry standard legal agreements for certain clearing models.
  • Repo & Custodian pairing: Consider leveraging same repo and Custodian for straight-through-processing.
  • Explore the benefits of Northern Trust’s FICC Sponsored Repo product offering at NT Capital-Markets FICC-Sponsored-Repo.

Northern Trust continues to assess the client impacts and change requirements and will inform clients if they need to take action to address the U.S. Treasury Clearing transition in our products and services.

For more information, please contact your relationship manager, client service manager, or client service delivery manager. You can visit the U.S. Treasury Clearing | DTCC website for more information.

 

1 Implementation timelines postponement announcement by SEC on February 25, 2025: SEC.gov | SEC Extends Compliance Dates and Provides Temporary Exemption for Rule Related to Clearing of U.S. Treasury Securities  

2 As of this writing, FICC is the only approved CCA.

3 Affiliated counterparty is defined as Bank, Broker, Dealer or Futures commission which holds a majority ownership interest in either the direct participant or the direct participant holds a majority ownership interest in the counterparty, or a third party holds majority interest in both direct participant and the counterparty.

4 Urgent Action Required: 5 Unresolved Issues in Treasury Central Clearing Rules – SIFMA | Published December 10, 2024.

5Northern Trust | Central Clearing Required for U.S Treasury Market | October 17, 2024

6 DTCC | Market Participants Gather to Discuss Expanded Treasury Centralized Clearing | December 4, 2023

7 DTCC | U.S. Treasury Clearing

 

 

Reference Materials

 

 

The information in these materials is not intended to be and should not be treated as legal, investment, accounting or tax advice. Readers, including professionals, should not rely upon this information as a substitute for their own research or impact assessment or for obtaining specific legal, accounting or tax advice from their own counsel. This material is directed to professional clients only and is not intended for retail clients. For Asia-Pacific markets, it is directed to expert, institutional, professional and wholesale investors only and should not be relied upon by retail clients or investors.