SEC proposes to improve risk management in US Treasuries

Washington DC, September 14, 2022 —

The Securities and Exchange Commission today proposed rule changes that would improve risk management practices for central counterparties in the U.S. Treasury market and facilitate additional clearing of transactions in U.S. Treasury securities. The proposed rule changes would update the membership standards required of covered clearing agencies for the U.S. Treasury market with respect to clearing and settlement by a member of specified secondary market transactions. The proposed additional rule changes are designed to reduce the risks faced by a clearing agency and to incentivize and facilitate additional central clearing in the US Treasury market.

“The Securities and Exchange Commission plays a critical role in the operation of the Treasury market, including helping to ensure that these markets remain efficient, competitive and resilient,” SEC Chairman Gary Gensler said. “One aspect of that role is our oversight of Treasury securities clearinghouses. Although central clearing does not eliminate all risk, it certainly reduces it. In 2017, however, only 13% of Treasury cash transactions were cleared centrally. Thus, I think there is still work to be done in terms of the amount of Treasury activity that is centrally cleared. I believe these rules would reduce risk in a vital part of our capital markets in normal times and in times of crisis. This advances our three-part mission.

Specifically, the proposal would require US Treasury market clearing agencies to adopt policies and procedures to require their members to submit specified secondary market transactions for clearing. These transactions would include: all US Treasury-backed repurchase and reverse repurchase agreements entered into by a member of the clearing agency; all purchase and sale transactions entered into by a member of the clearing house who is an interprofessional broker; and all buy and sell transactions entered into between a member of a clearing agency and either a registered dealer, state stockbroker, state stockbroker, hedge fund, or type particular leveraged account.

With respect to client margin, the proposal would allow broker-dealers to include margin required and on deposit with a clearing agency in the US Treasury market as a debit in the client reserve formula, subject to certain terms. In addition, the proposal would require clearing agencies in this market to separately collect and calculate margin for internal and customer trades. Finally, the proposal would require policies and procedures designed to ensure that the clearing house has the appropriate means to facilitate access to clearing, including for indirect participants.

The proposed release will be posted on and in the Federal Register. The public comment period will remain open for 60 days after the proposal release is published in the Federal Register.

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