The SEC adopted rule changes Dec. 13 that will expand the use of central clearing in the $26 trillion Treasury market, aiming to improve the market's resiliency.
"I am pleased to support these rules because they will help to make the Treasury market more efficient, competitive and resilient," SEC Chair Gary Gensler said in a news release.
The rules, originally proposed in September 2022, would mandate that covered clearing agencies have policies and procedures in place to require their members submit various transactions for clearing, according to an SEC fact sheet.
Those transactions include repurchase and reverse repurchase agreements, known as "repos," that are collateralized by Treasury securities and to which a member is a counterparty. They also include "all purchases and sales of U.S. Treasury securities by direct participants who are acting as inter-dealer brokers" and all purchases and sales between a member and a registered broker-dealer, government securities broker or government securities dealer, the fact sheet states.
There are exceptions for "transactions in which the counterparty is a central bank, sovereign entity, international financial institution or natural person," according to the SEC news release.
In addition, the final rule requires covered clearing agencies in the Treasury market to calculate, collect and hold margin for transactions of direct and indirect participants separately; and requires such agencies to have policies and procedures that ensure they have appropriate means to facilitate access to clearing, including for indirect participants. Separately, the rule allows margin required and on deposit at such an agency to be included as a debit in the customer reserve formula, subject to certain conditions.
The SEC adopted the rule in a 4-1 vote, as Republican Commissioner Hester M. Peirce voted against it.
At the Dec. 13 meeting, Peirce expressed concern the rule "would commit the market to what may be a reckless ride down the path to mandatory clearing with no brakes or off-ramps in the event that the market takes a bad turn." She recommended taking a more "incremental approach" to central clearing, rather than adopting the rule as is.
The Alternative Investment Management Association said while it appreciates the goal of the rule, the design of it slightly missed the mark.
"One of the design shortcomings of the final rule is its failure to require (Fixed Income Clearing Corp.) clearing members to clear customers' trades if executed with a separate counterparty," AIMA CEO Jack Inglis said in a statement Dec. 13. "This could result in a significant reduction of choice for many managers."
Fixed Income Clearing Corp. serves as a regulatory clearinghouse for fixed-income assets in the U.S.
The Managed Funds Association also said it supports the rule's intention, but it feels "disappointed that the SEC did not exclude triparty repo transactions from the clearing mandate, as counterparty risk is already mitigated and well regulated by banking entities," said Jennifer Han, executive vice president, chief counsel and head of global regulatory affairs for MFA, in a statement Dec. 13.
Investment Company Institute President and CEO Eric Pan said while the organization is still reviewing the rule, it appreciates that the SEC responded to many of its concerns with the original proposal.
"This includes adopting a phased implementation period to allow FICC to complete important and much-needed changes to its operating infrastructure," Pan said in a Dec. 13 statement, referencing the rule's three implementation dates, between March 2025 and June 2026, for different aspects of the rule.
Separately, the SEC on Dec. 13 approved a 2024 budget of $385 million for the Public Company Accounting Oversight Board in a 3-2 vote. Both Republican commissioners — Peirce and Mark T. Uyeda — voted against it.
