Statement Summary
The SEC has adopted new rules to enhance the clearing of secondary market transactions in U.S. Treasury securities, reflecting the importance of this market for global financial stability. As over $1 trillion in Treasuries are traded daily, the rules aim to ensure transparency and reduce risks by mandating certain trades to be centrally cleared. The implementation process, initially aggressive in timelines, is now being adjusted to allow firms adequate preparation time, with compliance deadlines extended to 2026. Ongoing discussions involve clarifying inter-affiliate transaction exemptions and addressing cross-border clearing issues. The SEC emphasizes collaboration with market participants and other regulatory bodies to develop a resilient and efficient Treasury market while responding to industry feedback on necessary rule amendments.
Original Statement
Good afternoon, and thank you to the Federal Reserve Bank of New York for hosting this conference. Today, I will provide an update on the implementation of rules requiring the clearing of certain secondary market transactions in U.S. Treasury securities (the “Treasury Clearing Rules”). The SEC adopted these rules in December 2023. Since assuming leadership of the Commission, Chairman Paul Atkins has asked me to oversee our efforts to ensure that they are working as intended. Our objective is to effectively implement the Treasury Clearing Rules in a manner that removes regulatory ambiguities, addresses unanticipated issues, and resolves unnecessary frictions while maintaining the smooth functioning and operation of the Treasury market. In short: the U.S. Treasury market is the deepest and most liquid government securities market in the world — and we intend to keep it that way.
Over $1 trillion in Treasuries trade on average every day, and over $29 trillion are outstanding. More importantly, the U.S. Treasury market serves as the global benchmark for risk-free rates. It is the foundation for everything from mortgage pricing to corporate financing to central-bank reserves. The safety and soundness of the U.S. Treasury market provide credibility for the U.S. dollar, resilience of global liquidity, and the ability of the U.S. government to fund itself at reasonable cost.
Market Structure Impacts
The Commission’s decision to require increased central clearing for U.S. Treasury securities will have consequential market-structure impacts. Whether to require the central clearing of U.S. Treasury security transactions is a question that has been raised over the past two decades, particularly with the increased participation of principal trading firms. During President Trump’s first term, the U.S. Treasury Department recommended further study of clearing and settlement arrangements in the Treasury market.
Using a central counterparty can bring important benefits such as potentially reducing bilateral exposures and improving transparency. It allows for multilateral netting, more efficient margin management, and real-time visibility into counterparty exposures. The use of widespread netting could free up additional cash for market participants, which in turn could help reduce liquidity strains.
On the other hand, requiring more trades to be centrally cleared can concentrate risk in one place — namely, the central counterparty itself. For that reason, the SEC has implemented a system of overseeing and examining these types of entities. For example, all central counterparties registered with the SEC must meet the Covered Clearing Agency Standards. These rules impose specific obligations in 23 stated areas, including financial risk management (e.g. counterparty credit risk, margin, collateral and liquidity risk), operational risk, governance, and default management.
Implementation of Treasury Clearing Rules
Today, we are in the midst of implementing the Treasury Clearing Rules. These rules mandate that covered clearing agencies in the U.S. Treasury market adopt policies and procedures designed to require their members to submit for clearing certain specified secondary market transactions. Such transactions include:
- All repurchase and reverse repurchase agreements, for which U.S. Treasury securities serve as collateral, entered into by a member of the covered clearing agency, unless the counterparty is a state or local government or another clearing organization, or the repurchase agreement is an inter-affiliate transaction;
- All purchase and sale transactions entered into by a member of the clearing agency that is an interdealer broker and all purchase and sale transactions entered into between a clearing agency member and either a registered broker dealer, a government securities broker, or a government securities dealer.
Notably, transactions in which one counterparty is a central bank, a sovereign entity, an international financial institution, or a natural person are specifically excluded from the scope of the Treasury Clearing Rules.
Compliance Deadlines and Industry Engagement
Dealers, buy-side institutions, asset managers, clearing banks, and infrastructure providers have invested enormous amounts of time and resources preparing for compliance with the Treasury Clearing Rules. This is meaningful progress, but more work remains. The final rules were ambitious in their timing and scope, and questions emerged almost immediately after adoption about various aspects. It became readily apparent that the compliance deadlines were simply unworkable.
The current SEC has recognized these challenges and has taken important steps towards a more rational implementation that seeks to minimize potential friction and any lack of clarity. Thus, last February, the Commission approved a one-year extension of the compliance deadlines for the Treasury Clearing Rules to December 31, 2026, and June 30, 2027, for cash and repo transactions, respectively.
Importantly, the SEC staff have been engaging closely with market participants and industry working groups to understand the areas where clarity is needed. To date, the staff has issued guidance or provided feedback on the customer protection rules, the scope of the definition of an eligible secondary market transaction as it pertains to triparty repo transactions, and accounting for agent clearing members. These are practical issues that directly affect whether the system will function smoothly.
Outstanding Issues and Future Considerations
Even with this progress, outstanding issues remain. The scope of requirements for inter-affiliate transactions is among the most urgent questions in need of resolution. Many global firms transact heavily among various affiliates for liquidity, collateral management, and hedging purposes. When the Commission adopted the rule, it recognized that the benefits sought by the rule are not realized by subjecting such internal trades to the same requirements as external trades.
Another question is the extraterritorial scope of the Treasury Clearing Rules. Non-U.S. firms that trade with U.S. counterparties do not typically clear their trades in U.S. Treasury securities, and they may need to establish clearing arrangements with intermediaries or with central counterparties. Without further clarity, such firms have not been able to determine their options for clearing access or their costs.
In short, while a lot of progress has been made on the Treasury Clearing Rules, critical work remains to be completed. The Commission intends to do our part, by providing clarity, guidance, and where appropriate, exemptive relief or rule amendments, so that market participants can proceed with planning and deploying the resources needed to fully implement the Treasury Clearing Rules.
The SEC welcomes further engagement with market participants and industry working groups, particularly where data and proposed solutions can be offered to provide insight on possible paths forward. We also intend to maintain close collaborations with our colleagues at the U.S. Department of the Treasury, the Federal Reserve Board, the Commodity Futures Trading Commission, and other federal financial regulators.
The Commission has set up a dedicated Treasury Clearing implementation webpage on SEC.gov to consolidate, in one place, all Commission actions and staff guidance issued to date that are particularly relevant to the Treasury Clearing Rules. As the Commission or its staff address and resolve additional issues, this webpage will be updated.
We have broad consensus on our end goal: a U.S. Treasury market that remains deep, liquid, transparent, and resilient. While we collaborate to solve challenges along the way, we must keep that objective in sight.
